Budget 2019 Tax Analysis
Modi ji always surprises everyone with his decisions despite of all criticism he faced for responses against it. This time he surprised us by handing over the most crucial ministry i.e. Finance Minister (hereinafter referred as FM) chair to ex Defense Minister Nirmala Sitharaman. The day she was appointed on this post, she swamped with N no. of suggestions from every nook and corner. Going beyond the economists, corporates for Budget, she went directly to common people to ask for suggestion. Let’s raise the curtains and see how good Sitharaman manages in her maiden budget to make justice among all those suggestions while keeping one eye on fiscal deficit.
There are 68 amendments made in Income Tax in this budget, I am classifying and analyzing few important amendments hereunder:
More Compliance for Common People and No Return Gifts:
A. Filing of Income Tax Return extended to certain Persons
Currently a person other than a Company and Firm whose total Income without giving effect to deductions under Chapter-VIA (i.e. 80C, 80D etc)and exempt income on sale of equity shares Section 10(38) is below Slab Rate (i.e. Rs.2,50,000) then he is not require to furnish the Income Tax Return. However in case if person is claiming other deductions mentioned in the act specifically pertaining to Capital Gain exemption then he was not supposed to file the ITR if he has no other Income. For an example, if a person sold a residential property for Rs.50 Lakhs and purchased another residential property to obtain deduction under Section 54 then he is not mandatorily required to file the ITR if he has no other Income.
FM now amended the provisions of Section 139(1) and prescribed that a person who is claiming such rollover benefits on investment in a house or a bond or other assets, under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB of the Act, shall necessarily be required to furnish a return, if before claim of the rollover benefits, his total income is more than the Basic Exemption Limit (Slab).
FM also provided certain circumstances in which a person has to mandatorily file the Income Tax Return:
|If more than 1 Crore is deposited in one or more current Account in Bank.|
|If more than 2 Lakh expended on for yourself or any other person for foreign trip.|
|If more than 1 Lakh paid towards Electricity Bill.|
|If person fulfill any other conditions as may be prescribed.|
B. Deduction of TDS on any personal payment to Contractors and Professional (Section 194M)
In every Budget government is bringing various transactions under the ambit of deduction of TDS by Common Man also. In last budget TDS on rent payment exceeding Rs.50,000/- Per Month by Individual/HUF brings for deduction at rate of 5%.
Now in this Budget FM proposes to make it mandatory for Individual and HUF’s to deduct TDS @ 5% on any payment exceeding Rs.50 Lakh per annum to contractors/professional. So now if you are paying any amount for construction of your house or for any work or to any single contractor for any wedding function keep this section in mind. However in order to provide certain relaxation it is provided that they are not required to obtain TAN no. for payment of such taxes.
My View: It is good that government is bringing more measures to widen the tax base, however on the same side FM should realize how smoothly provision can be bring in which common man does not hesitate to follow. I would like to compare it with the provisions of Section 194C and 194J which cast similar obligation for deduction of TDS on Individual and HUF whose books are required to get audited. I am reproducing excerpts of Section 194J (Proviso part which ensure that when TDS is not required to be deducted)
“Provided that no deduction shall be made under this section—
(B) where the amount of such sum or, as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed—
(i) thirty thousand rupees, in the case of fees for professional services referred to in clause (a), or
Now I am reproducing excerpts of Proposed Section 194M:
“Provided that no such deduction under this section shall be made if such sum or, as the case may be, aggregate of such sums, credited or paid to a resident during a financial year does not exceed fifty lakh rupees”
On combine reading of both proviso to sections you would found that word “likely to be credited” is missing in later one. Now let us understand how this 3 words going to impact. Under Section 194J if the Individual pays a sum of Rs.20,000/- to Mr. XYZ on 01.05.2019 and later 15,000/- again to Mr. XYZ for additional work on 01.02.2020 then he was not supposed to deduct TDS from payment made to Mr. XYZ on 01.05.2019 because he was not sure that amount likely to be credited will exceed Rs.30,000/- Slab u/s 194J. Later due to some additional work if threshold limit exceeded , then he is required to deduct TDS on whole cumulative amount i.e. Rs.3500 (10% of 35,000) that too on 01.02.2020. It is important to note that in this case he is deducting TDS when actually the amount paid is crossing the threshold limit.
Now coming to the proposed provision Section 194M wherein obligation is casted on Individual to deduct TDS on each and every payment made if payment or aggregate of payment exceeded Rs.50 Lakhs per annum. Now if the assessee was not sure whether his payment would exceed 50 Lakhs or not then What will he do? In any case if suppose due to extension of any work requirement contract exceeded Rs.50 Lakhs on later date then he will end up paying Interest on TDS required to be deducted on all those payment which he made earlier presuming that contract will not exceed Rs.50 Lakhs. FM could have cast this obligation of deducting TDS on last payment or on finalization of Bill, but that could have been more simpler for common man which is never been a intent of government . Such kind of small mistakes while making law always lead to long litigation wherein always common people gets hurt.
C. Inter-changeability of PAN & Aadhaar and mandatory quoting in prescribed transactions.
In order to widen the tax base FM amended Section 139A (PAN) to provide for inter changeability of PAN with the Aadhar No. So person who were denying retailers or specified persons stating that they don’t have PAN now have to furnish the Aadhar No. Person receiving such document has to authenticate the Aadhar also in prescribed manner.
D. Increase in Surcharge (Super Rich Tax)
Surcharge is a tax levy on an above normal tax calculated as per act. In order to collect more taxes consistently government is increasing burden of surcharge since the wealth tax got abolished. Surcharge is levy on people whose income are above 50 Lakhs. Below presented the comparative chart of Surcharge rate in previous year and in proposed budget. After Increasing the surcharge now the effective highest Income Tax Rate in Country is 42.74% (30% Tax+37% Surcharge on Income Tax+ 4% Health and Education Cess) which is even higher then US economy (40%).
|Income above 50 Lakhs – up to 1 Crore||10% of Income Tax|
|Income above 1 crore||15% of Income Tax|
|Income above 50 Lakhs – up to 1 Crore||10% of Income Tax|
|Income above 1 crore – up to 2 Crore||15% of Income Tax|
|Income above 2 crore – up to 5 Crore||25% of Income Tax|
|Income above 5 Crore||37% of Income Tax|
E. Proposed Benefits for National Pension Scheme:
1. Presently under NPS scheme, one can withdraw 60% of corpus sum on closure/retirement and balance 40% compulsorily used to buy annuity plan. Payment from NPS trust on opting out of scheme or closure of account presently exempt up to 40% of total amount payable and balance 20% is remains taxable. This limit is proposed to extend up to 60% and make it completely exempt. However, annuity part still remains taxable in the year it will get received.
2. Under the provisions of Section 80CCD, Employer contribution (by Central Government or by any other employer) to the extent of 10% of Salary allowed as deduction in Income. FM proposed to enhance the limit to 14% of Salary for Employer contribution made by Central Government. It is pertinent to note that Employer Contribution by any other employer is still 10%.
3. Central Government employee can now also claim deduction towards contribution made by them in NPS Tier-II account under Section 80C.
F. Additional Deduction on Interest on Housing Loan (Section 80EEA)
In order to promote government objective of HOUSING FOR ALL, FM introduced this new section to provide additional deduction of Interest on Home Loans. At present Interest on Loan taken to purchase residential home up to 2 Lakh is eligible for deduction under Section 24(1) of the Act. However, if someone is paying interest beyond 2 Lakhs then remaining amount gets carry forwarded as loss in next years. FM proposes to provide deduction (Max. up to Rs.1,50,000) for that balance interest which assessee couldn’t claim on certain conditions which are mentioned here as under:
a. Loan is sanctioned between 01.04.2019-31.03.2020.
b. Stamp Duty Value of house property does not exceed 45 Lakhs.
c. Assessee does not own any residential property on the date of sanction of loan.
My Calculation shows that, this clause will not help any one unless they have taken loan more than 20 Lakhs for 20 years at prevailing Home Loan rate of SBI. Anything below this will result in Annual Interest of less than 2 Lakhs only which is already allowed for deduction in present law. Unlike similar kind of deductions introduced in past, this time no specific condition for Maximum Loan Amount sanction is provided in proposed section.
G. Tax Incentive for Electric Vehicles
India is shifting towards taking initiatives in Budget which helps in creating India beautiful place to live. This time in order to reduce vehicle pollution and improving environment FM announces deduction on interest paid (Max. up to Rs.1,50,000) on purchase of Electric Vehicle subject to below conditions:
a. Loan is sanctioned between 01.04.2019-31.03.2023
b. Assessee does not own any electric vehicle on the date of sanction of Loan.
This is first time any deduction is introduced for interest on purchase of automobile loan. I really appreciate such kind of welcome steps by FM towards healthy environment. However little subsidy on electric vehicle could have helped in much better way for common people.
H. Custom duty on Gold increased from 10% to 12.5% and Excise duty on Petrol Increased by Rs.1/- per Ltr.
Amendments in TDS Provisions
1. Section 194DA prescribes that Insurance Companies has to deduct TDS @ 1% on any sum paid to a resident under a life insurance policy if the said amount is not exempt under section 10(10D). This was creating problem at the end of receiver as high deduction and at the end of department also for determination of actual income, because TDS was required to be deducted on Gross amount and not on Net Income earned by the recipient i.e. (Maturity Amount Less Premium Paid).
FM now amended the Section 194DA to deduct TDS @ 5% on Net Income of the assessee i.e (Maturity Amount paid less Premium Paid).
2. Consideration for the purpose of Section 194-IA (TDS on Consideration of Immovable Property) now includes all charges of the nature of club membership fee, car parking fee, electricity or water facility fee, maintenance fee, advance fee or any other charges of similar nature, which are incidental to transfer of the immovable property.
3. Section 194M (Discussed in earlier part)
4. Section 194N: In order to discourage Cash Transaction FM proposes to levy TDS @ 2% on any cash withdrawal exceeding Rs. 1 Crore in aggregate during the year. It is important to note that unlike other provisions of TDS sections these one applies on AMOUNT EXCEEDING Rs.1 CRORE and NOT ON WHOLE SUM if aggregate withdrawal exceeds Rs.1 Crore.
1. The existing provisions of the section 54GB of the Income-tax Act, inter alia, provide for roll over benefit in respect of capital gain arising from the transfer of residential property owned by the eligible assessee. To be able to get benefit of this provision, the assessee is required to utilise the net consideration for subscription in the equity shares of an eligible company (STARTUP or NEW COMPANY) before the due date of filing of the return of income. The assessee is required to have more than 50% share capital or more than 51% voting rights after the subscription in shares in the eligible company. The said section,inter alia, puts restriction on transfer of assets acquired by the company for 5 Years from the date of acquisition. Currently the benefit of this section was only available for investment in the equity shares of eligible start-ups and that period also got over on 31st March 2019.
2. In order to incentivise investment in eligible start-ups, FM proposed to amend the said section so as to-
(i) extend the sun set date of transfer of residential property for investment in eligible start-ups from 31st March 2019 to 31st March 2021;
(ii) relax the condition of minimum shareholding of 50% of share capital or voting rights to 25%.
(iii) relax the condition restricting transfer of new asset being computer or computer software from the current 5yearsto 3 years.
3. To resolve the so-called ‘angel tax’ issue, the start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums. The issue of establishing identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. FM announced in budget that, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department. However I am unable to find any such amendment in Finance Bill 2019 Part 2.
1. First proviso to Section 201(1) specifies that deductor shall not be deemed to be treated as assessee in default on failure to deduct TDS on payment made to a RESIDENT person if such resident person furnishes his Income Tax Return and discloses said payment. This proviso helps Businesses to claim deduction of such expenses also on which they failed to deduct TDS. FM proposed to extend the benefit of this proviso to NON-RESIDENT as well. It means if any payment made to NON-RESIDENT and assessee fails to deduct TDS on such amount then he will no longer be treated as assessee in defaultif such Non-Resident furnishes his ITR and disclose said payment in his ITR. However, Interest till the date of filing ITR by non-resident/resident still continue to levy.
Remarks:Person who is disclosing above payments in ITR is already paying Interest on due taxes on such payment when filing ITR, but charging Interest to Payer on Income earned by receiver till the date receiver files his ITR resulting in Double Interest one on Receiver and one on Payer. FM could have resolved this issue by bringing in suitable amendment. Payer is unnecessary bearing interest on Income Tax on Income earned by receiver.
2. Section 43B specifies deduction of certain expenses which is allowed only in case payment is made before due date of filing of Income Tax Return. Presently if due interest on Loans taken from Bank is not paid before filing of ITR then one cannot claim deduction of such expenditure. FM proposes to extend this provision to Loans taken from NBFC also.
3. In order to incentivize NBFC further FM extended the benefits of Section 43D to NBFC also. Section 43D prescribes that Interest Income on Bad and doubtful debts should be recognized only when such interest actually received. Presently this benefit was available to the Banks only.
4. In order to achieve the mission of less cash economy, FM introduced new Section 269SU which specifies that every person carrying on business whose turnover during preceding year exceeds 50 Crore should provide facility for accepting payment through the prescribed electronic modes. Failure to comply with this provisions will attract penalty under Section 271DB at the rate of Rs.5000/- per day.
5. In Budget-2016 FM slashed out most debated section 271(1)(c) and introduced fresh Section 270A for levy of penalty for under reporting and misreporting of Income. Being a fresh provision FM forgot to bring cases under Section 148 (Reopening of assessment) within the ambit of Section 270A. Anyways who cares, FM has magical sword of bringing amendments retrospectively, so in present budget FM amended Section 270A to bring in the mechanism to levy penalty on those persons also who has furnished return of income first time u/s 148 of the Act. I would have appreciate FM more if she could’ve bring more clarity in provisions of Section 270A in order to make these provisions workable in a clear and litigation free manner.
6. Interest Subvention of 2% for all GST registered MSME’s on fresh or incremental loan.
Tax Loopholes Curated
A. Earlier Tax Planning:
Under present provisions of the Act Gift is taxable in hands of donee (Person receiving the Gift) except for certain exceptions given u/s 56(2)(x). However, many residents in India made gifts (money or property) to person resident outside India and claimed it as non-taxable in Indiaarguing that Income does not accrue and arise in India in view of no specific provision given u/s 9 (Income Deemed to accrue or arise in India).
A new clause viii is added under Section-9(1) to ensure taxability of such gifts made by residents to person outside India. However, proviso to Section 56(2)(x) which exempts certain gift will continue to apply for such gifts deemed to accrue or arise in India. For example, Gift by resident father to his NRI Son is still exempt. Provision is effective from 5th July 2019.
B. Earlier Tax Planning:
In past, to avoid dividend distribution tax Unlisted Companies was engaged in practice of Buy Back of Shares because of lower capital Gain Tax. In order to curb that practice Section 115QA was introduced in previous budget which levy additional Income Tax at the rate of 20% of distributed income at the level of Company and consequential income arising in the hand of shareholders has been exempted from tax u/s 10(34A). Since this amendment was limited to Unlisted Companies, many of the listed company still engaged in practice of buying back of shares instead of distributing dividend to avoid tax.
Proposed Amendment: In order to cure above tax avoidance practise, FM proposed to extend applicapility of provisions specified u/s 115AQ to Listed Company as well.
What are the expectations from Budget which FM fails to meet?
a. This was a moment for FM to bring some radical changes for Common Salary People who was getting ignored since long time despite of being loyal and consistent tax payer always. In Interim Budget FM extended benefit of rebate u/s 87A to bring zero tax up to the Income of Rs.5 Lakhs, but tax slab remained same i.e. Rs.2.5 Lakh for person who earns money more than 5 Lakh. It was expected from FM that suitable amendment could have bring down to rationalize this anomaly.
b. The income-tax rules seem skewed against salaried employees. While businessmen and consultants can claim exemptions against all kinds of expenses every month, for salaried employees there is no such deduction except Standard Deduction of Rs.50,000/- and HRA.
A good way forward could have been by increasing standard deduction and not by a token amount of Rs.10,000 which was made in Interim Budget 2019, but by increasing substantially. FM could have also bring some %age base deduction in salary income like presumptive scheme to compensate the present disparity existing between consultants Income and Salary Income.
c. Many Allowances such as Childrens Allowance, Hostel Allowance are not revised since decades. I fail to understand now that every time government turn away face from such things.
d. It’s been more than 3 years Corporate Tax rates are reduced to 25% for certain specified companies having turnover less than 400 Crores, but Partnership Firms/LLP still facing same Tax Rate of 30%.
I can point No. of things which could have been done in this budget, but that will do nothing more than increasing pain in your wounds which you got in lieu of your Vote. So better move towards conclusion.
FM was handed over daunting task to keep everyone happy. I guess in her maiden budget she played very safe being her first budget. She did collected recommendations from Common People, but ignored it just like we ignore Rahul Gandhi. I understand the budget is not a silver bullet that can rid the country of all its economic ills but it is definitely important one which cannot be looked away.
This was a chance for her to blaze her own signature trail by bringing in radical changes in tax reforms which her predecessor Arun Jaitley fails to introduce in previous budget sessions, but she fails to do so. I didn’t find this budget helping in any way spurning the waning Indian Economy. This Budget is more of the Table Thumping Gathering than the Content.
Disclaimer: The Contents of the document are solely for information purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Comments on misinterpretation and mistakes are wholeheartedly invited.