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Decoding Budget: The impact of changes in rules, regulations in tax laws

An analysis by Nangia Andersen consulting

Business Standard 

tax, taxation

Abolition of Dividend Distribution Tax

Background
Under existing regime, profits distributed by companies to their shareholders attracted dividend distribution tax (DDT) at effective rate of 20.56%. Such DDT was a pure cost for companies, being no credit available to shareholders. Additionally, this would leave less for companies to distribute as dividend. Further, individual shareholders earning more than Rs 10 lakh as dividend were also subject to income tax on such dividend income at the rate of 10%

Issue

The present system of DDT resulted in 3-tier taxation of profits earned by a company: First corporate income tax paid by company on its profits, secondly as DDT, and thirdly as tax on dividends paid by individual shareholder.

Impact

The abolition of DDT comes with pitfalls also. Earlier, the company was paying 20.56% but now the recipient will pay taxes at the rates applicable on his total income. Thus, the recipient with income (including dividend) in the range Rs 12.50 lakh to Rs 15 lakh will pay income tax @ 26% and so on. Moreover, the individuals having income (from all sources, including dividend) of more than Rs 2 crore, will pay taxes @ 39% and those above Rs 5 crore, will have to pay 42.74 % , which otherwise was 20.56 % in the earlier regime.

Rationalisation of personal income tax slabs

Background

Existing personal income tax slabs and the amount of savings eligible for tax break require rationalisation. Social security and pension contributions, insurance and investments getting clubbed under the existing savings threshold leave limited scope for savings in other eligible investments. Globally, many countries have introduced tax cuts on labour income and increasing earned income tax credits (EITCs) to improve the potential of labour market participation.

Issues

Current slabs of income almost bring majority of the salaried class into higher tax threshold, limiting disposable income. Contribution towards social security, pension & insurance, housing loan repayment and education expenses consume the existing limit for deduction on savings

Capping the interest deduction on housing loan and negligible scope for savings in eligible instruments/capital market instruments etc. restrict the opportunity to save/invest in capital market or bank deposits.

Impact

The impact of new tax slabs/ regime for individual taxpayers shall vary from case to case, depending upon the aggregate amount of exemptions claimed by the individual under the existing regime. The option shall be beneficial for those who were not availing of exemptions/deductions previously. However, for individuals already availing of full benefit for exemptions/ deductions available under the income tax provisions, new regime may actually result in increased tax liability and they would have no benefit/ incentive to opt for the new slab rates.

Taxing Start-ups

Background

Start-up taxation is evolving in India which has been the subject matter of significant litigation in the recent years. Government has softened the tax position on “angel taxation” through periodic circulars and clarifications and placed restrictions on angel-tax disputes and recoveries. Most of the start-ups are in early state and are expected to generate profits over a period of time. Tax law provides profit-linked deduction benefits for a limited period.

Issue

Most of the start-ups are not enjoying tax holiday benefit owing to their gestation period and the eligible period of 7 years from the date of incorporation. Dichotomy of turnover threshold prescribed for recognition of “start-ups” under regulatory authority vis-à-vis income tax provisions continue to dampen the remaining start-up entities generating positive revenue.

Impact

The proposal has tried to synchronise the turnover threshold for start-ups prescribed by Department of Promotion of Industry and Internal Trade at Rs 100 crore from existing Rs 25 crore for start-ups to qualify for profit-linked deduction. These give leeway for more start-ups to obtain tangible tax holiday given their exponential growth models.

The Bill has also proposed to extend the eligible period for start-ups to claim profit-linked deduction — available for three consecutive years over an extended 10 years window period as against the existing 7 years. Perquisite taxation, which was a cash cost to start ups to fund employees discharge tax on ESOP upon vesting, now have a leeway to defer the taxation on earlier of 5 years from date of allotment, or prior to leaving the employment or sale of securities. The proposal is expected to allow start-ups use ESOP effectively as a hiring tool.

Amnesty scheme for settlement of tax disputes

Background

Currently, a large sum of tax demanded by government is stuck in tax disputes at various levels. This has not only resulted in uncertainty both for government and taxpayers, but also clogged the courts and tax tribunals with large number of pending cases, which as per reports exceeds 485,000. Last year, the government introduced an amnesty scheme for settlement of Indirect tax cases under ‘Sabka Vishwas’ scheme, which turned out to be a huge success.

Issue

There was a dire need for a similar alternate dispute settlement scheme, which could give a window to taxpayers to settle their income tax disputes

Impact

The proposal of bringing a Direct Tax Amnesty Scheme in Budget in name of ‘Vivad se Vishwas’, shall help generate a positive sentiment amongst taxpayers who have been suffering owing to the cumbersome litigation process. With the scheme the government wishes to realise tax revenue locked in dispute and also clear the large number of long pending cases from the system

Rakesh Nangia, Chairman, Nangia Andersen Consulting

Rakesh Nangia, Chairman, Nangia Andersen Consulting

Tax incentives for housing sector

Background

‘Housing for All by 2022’ has been one of the long cherished dreams of the Modi government right since its first tenure. However, Indian real estate sector is constantly going through one of its greatest slowdown phase for past several years

Issue

Being one of the largest employment generating sectors of the economy, there was a dire need to give further incentive/ push to housing sector

Impact

In Budget proposals, the government has increased the approval window/ sunset provision for tax exempted affordable housing projects by 1 year. Simultaneously, eligible time period for taking home loan by individuals for purchasing houses under such affordable housing projects and claiming additional deduction of Rs 1.5 lakh has also been increased by 1 year. Additionally, the permissible non-taxable valuation gap between stamp duty and actual sale price has been increased from existing 5% to 10% in this budget. These measures are likely to have positive impact on the real estate sector.

First Published: Sat, February 01 2020. 23:25 IST
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