The Union Budget 2020-21 is woven around the themes of Aspirational India, Economic Development and Caring Society, together with better governance and growth of the financial sector for betterment of ease of living. The tax proposals are aimed to “stimulate growth, simplify tax structure, bring ease of compliance and reduce litigation”.
Proposals to stimulate growth
- Dividend Distribution Tax (DDT)
DDT will be abolished and dividend will henceforth be taxed in shareholders’ hands under the classical system. Indian companies will not pay tax on dividends from domestic companies to the extent of onward distribution of such dividends within a specified period. Mutual funds’ dividends will also be similarly taxed.
The biggest beneficiary of this will be the corporate sector (domestic and foreign) and lower-income non-corporates. Higher-income groups will pay more tax (Table 1). Foreign investors can avail of beneficial tax treaty rates and foreign tax credit (FTC) in their home countries. This measure, coupled with beneficial low corporate tax rates, should enhance capital inflows for industrial development. Reducing the dividend tax for upper tax slab individuals to the DDT level can be considered before enactment. A disparity still remains for domestic companies earning foreign dividends, which needs to be addressed.
The tax holiday for startups has been enlarged. Startups with turnover of up to Rs 100 crore (earlier Rs 25 crore) will be eligible and can avail the three-year benefit within the first 10 years (earlier seven years). Startup employees/promoters will not pay tax on stock plan benefits until the earlier of five years from exercise, exit or disposal of shares.
These make the tax benefits more realistic for startups and should encourage entrepreneurship, especially in the field of technology, contributing to ease of living. Considering the low success rate of startups, a limited concessional capital gains tax can be introduced for exits.
- Corporate tax rate
Power sector: The beneficial tax rate (15 per cent++) introduced earlier in this fiscal year for new manufacturing companies wasn’t explicitly applicable to power generating companies. The benefit is now extended. Going by the nature of the industry, transmission companies can also be granted the benefit.
Co-operative societies: The other beneficial tax rate (22 per cent++) applicable to corporates will apply to co-operative societies also.
These extensions should benefit the Government’s thrust on infrastructure development and help rural development.
Affordable housing: The tax-holiday for developers will now be extended to projects approved upto March 31, 2021. Home-buyers will also get benefit of deduction (of up to Rs 150,000) for loans sanctioned up to March 31, 2021.
Although beneficial, the extension could be for a longer term, to help long-term planning. Considering the state of the real estate sector, removal of notional tax on unsold stock would be further welcomed.
Financial sector: Merged banks will now be allowed to carry forward the unabsorbed tax loss of merging banks. This will help create substantial tax savings for merged banks, which can be pumped into the economy.
Foreign currency borrowing: The sunset clause has been extended up to July 1, 2023 for the 5 per cent TDS rate on interest on foreign currency borrowings, masala bonds, and certain bonds to FIIs, QFIs, and so on.
Simplify tax structure
- Personal income tax
An elective provision is introduced with beneficial tax rates for lower-income individuals/HUFs who opt for simpler tax compliance. Such persons cannot avail of deductions/exemptions but will pay tax at lower slab rates (Table 3). The option is to be exercised before filing the tax return, and is yearly for non-business cases while permanent (except for opt-out once) for business persons. Taxpayers can also continue under the older regime of higher tax and more deductions.
Elective tax provisions are now becoming a trend in India. This proposal would not only make tax compliance simpler but also leave additional funds with the taxpayer, which will largely be expended in consumption. This may discourage small investments but should help the economy through growth in demand. Being elective, taxpayers have the option to choose between savings and consumption.
Transfer pricing: The 30 per cent ceiling on interest deduction on loans from related parties will not apply for loans from the Indian branch of a foreign bank.
Better governance and ease of compliance
Taxpayer’s Charter: The Central Board of Direct Taxes will be empowered to declare a Taxpayer’s Charter which will govern the functioning of the tax administration. This is intended to deliver a better experience for taxpayers in their interactions with the tax department. Since this will be legally mandated, the tax administration can be held responsible for the Charter’s application.
Stateless persons: As per the Finance Bill, Indian citizens who are not liable to tax in India on global income and also not liable to tax in any other country due to domicile, residence, etc., will be deemed to be Indian tax residents and subject to tax in India. As per media reports, the government has issued a press release that this will apply only to income earned outside India but derived from an Indian business or profession. Similarly, NRIs visiting India for more than 120 days (earlier 182 days) in a year will be treated as resident.
This will prevent tax avoidance by people managing their affairs in such a way as to avoid tax residence in any country. However, genuine NRIs living/working overseas will not be affected. Such persons should also get treaty protection. The reduction of threshold for visiting NRIs may impact trade in a mobile world.
Catching up with technology in business: Foreign businesses without a physical presence in India will be deemed to have a taxable business presence in India if they have income from (a) advertisements targeting Indian customers, (b) sale of data collected from India using an Indian IP address, and (c) sale of goods/services using such data. Similarly, income of foreign businesses from the sale, distribution or exhibition of cinematographic films will be taxable as royalty.
While the domestic law in this case is amended, this provision may not be implementable until the tax treaties are renegotiated, except where covered under multilateral instruments (MLI).
TDS on e-commerce transactions: E-commerce platform operators will now deduct 1 per cent TDS from payments to Indian residents selling goods/providing services through the platforms.
In respect of both the above type of transactions, it was expected that a digital tax as in the UK and France, among other countries would be introduced. These proposals are probably a precursor to a digital tax.
Faceless tax administration: To reduce taxpayer-administrator interface, electronic facilities will be introduced for penalty and appeal proceedings, and for registration of charitable/religious trusts.
Faceless assessments have just been introduced and the administration has not been tested yet. Expansion could be deferred for seamless introduction after rectifying the initial challenges in e-assessment.
Ease of compliance: Foreign companies having only dividend, royalty or FTS income will not file tax returns if tax is withheld at domestic law rates. Any treaty benefit would require filing. Considering India’s vast treaty network, this may have limited application.
Tax audit: SMEs having turnover of up to Rs 5 crore (earlier Rs 1 crore) will not require a tax audit, provided not more than 5 per cent of receipts/payment is in cash. This is a bait towards a less cash-intensive economy, but can be difficult to prove in practice for the taxpayer.
Fake invoice: Fraudulent claims of GST credit through false invoices will attract penalty under the income tax laws, equivalent to false invoice amounts.
This provision should be a deterrent but needs careful administration to avoid double jeopardy through other penal provisions for unexplained credit.
Pre-filled returns: Audit/ accountant’s reports will be filed one month ahead of the due date of return for enabling pre-filling of data in the tax return. Similarly, deduction of donations will be pre-filled in the tax returns based on an information return to be filed by donees. This would prevent false claim but donees need to key in data correctly.
Vivad se vishwas: A one-time scheme to resolve pending disputes has been announced. The framework will be open up to June 30, 2020. Applicants opting before March 31, 2020 will have to settle only tax demanded, and after March 31, 2020 will have to pay an additional amount. The scheme will be notified.
This scheme is a substantial improvement over that introduced in 2016 which waived only a part of the penalty and wasn’t so successful. The ‘Sabka vishwas’ scheme introduced for indirect taxes in 2019, with similar terms, was very successful. This scheme will also garner revenue for the government by the year-end.
Kaushik Mukerjee, Partner-Tax & Regulatory, PwC IndiaDispute resolution panel (DRP): Non-corporate foreign assessees will also be eligible to approach the DRP, which will fast-track their litigation. Further, the DRP route will be open to any dispute irrespective of variation of income.
Pre-deposit before stay application to ITAT: The 20 per cent pre-deposit will henceforth be required. This may amount to curtailment of the powers of a quasi-judicial body and can face judicial scrutiny.
Transfer pricing: The scope of Safe Harbour and Advance Pricing Agreement (APA) will now cover attribution of profits to a Permanent Establishment (PE). This will provide certainty to business transactions for cross-border related parties. Given the expertise in APA administration, the results are expected to be much more scientific than arrived at through litigation. The scope of Advance Rulings can be similarly expanded to benefit other international transactions. Additionally, even unrelated parties can be allowed to approach APAs for similar profit attribution.
Overall, the proposals are intended to accelerate economic momentum and ease of living for taxpayers. The true experience of the simplest and smoothest direct taxes will lie in their administration.
Kaushik Mukerjee Partner-Tax & Regulatory, PwC India
Assisted by: Prasun Kumar Maiti, Saurabh Kedia, Kapil Basu, Bikash Jain, Diparun Mukherjee, Jai Soni, Puskar Gupta, Ajay Ruia, Himani Sheth, Amit Lal, Shreya Daga, Puja Agarwal, Karan Sethia, Alok Goenka, Sourav Bagaria