Budget 2020: Top Seven Corporate Tax Changes

Finance Minister Nirmala Sitharaman took two hours to get to the tax part in her budget speech but then announced a series of changes. Besides the overhaul of personal income tax rates, here are the top seven changes to direct and indirect tax in Budget 2020:

DDT Relief For India Inc.

Budget 2020 eliminated the dividend distribution tax levied on dividends issued by companies. Dividend income will now be taxed only in the hands of investors as per the tax rate applicable to their income.

So far, companies were required to pay DDT at 15 percent, though including surcharge and cess put the effective rate at 20.56 percent. Foreign companies received no credit for DDT paid by their Indian subsidiaries.

The quantum of profit available to companies for distribution would get significantly enhanced, and foreign equity investors will get the benefit of credit while filing return in their resident country, which was not available under the DDT regime, experts say.

Confused NRIs

The income tax law allows an Indian citizen or a person of Indian origin to visit the country for a certain duration without becoming resident of India. Such individuals can spend 182 days in India, carry out economic activities and not declare their global income to the Indian tax authorities.

This provision is being misused, Finance Minister Nirmala Sitharaman said. In Budget 2020, she reduced the relaxation period to 120 days.

Additionally, the government also accepted the suggestion of the Direct Tax Code Task Force to bring stateless persons within the tax net. An Indian citizen who is not liable to tax in any other country or territory shall be deemed to be a resident in India and will have to declare global income here.

Indian citizens who stay outside the country but are not liable to tax in any other part of the world due to their residence, domicile or any other similar reason, would be now deemed to be Indian residents, said Rakesh Nangia, chairman at Nangia Andersen.

The intent is to tax those high net-worth individuals who arrange their affairs to settle in tax heavens or avoid taxes elsewhere in the world. But this also created confusion among regular Indian citizens working in tax-free countries like the Middle East nations.

The government should bring out necessary clarifications to alleviate concerns of salaried Indian expatiates working abroad and not liable to tax due to laws of those countries, and not by way of any tax avoidance arrangement, Nangia said.

Foreign Remittances Under Tax Net

A new provision will bring within the tax ambit foreign remittances above Rs 7 lakh under the Reserve Bank of India’s Liberalised Remittance Scheme.

An authorised dealer receiving an amount or an aggregate of amounts of Rs 7 lakh or more a year as remittance from outside India will have to collect 5 percent tax at source. If the person remitting this amount doesn’t provide the Permanent Account Number or Aadhaar, the applicable rate will be 10 percent.

TCS on foreign remittances under LRS scheme will entail 5 percent additional cash outflow for payers, and while it can be offset against any other tax liability, it can only be adjusted at the time of filing the tax return, Shefali Goradia, partner at Deloitte India, told BloombergQuint.

This TCS provision will also be applicable to sellers of overseas tour programme package who receive any amount from any buyer.

Sale of goods above Rs 50 lakh will attract 0.1 percent TCS but where PAN or Aadhaar is not provided, the applicable rate will be 1 percent. Only those sellers whose total sales, gross receipts or turnover from the business exceed Rs 10 crore in the previous year will have to collect such TCS.

E-Commerce Transactions Become Taxable

E-commerce operators selling goods or services through their digital platforms will need to deduct 1 percent tax and deposit it in the account of e-commerce participant. Operators mean any entity that owns or operates a platform and pays the provider of goods or services. A participant would be the entity selling goods or services on an online platform.

This 1 percent tax will be applicable on the gross amount of such sales or services or both. Services will include fees for technical services and fees for professional services.

Litigation To Get Costlier At ITAT

Income Tax Appellate Tribunals can grant a stay of up to 180 days considering the merits of a taxpayer’s application against an order of the tax department.

The Finance Bill, 2020 proposed the ITAT may grant stay only if the taxpayer deposits at least 20 percent of the amount of tax, interest, fee, or penalty. This has been heavily litigated before courts since the tax department issued circular in July 2017 directing them them to pay 20 percent of the demand when the matter with the the commissioner of appeals.

Bringing this provision in the income tax law has given legal backing to the tax department’s stance and it could make high-pitched assessments to meet revenue targets, experts told BloombergQuint.

Customs Act Surprise!

Rules of origin provision under free trade agreements will be reviewed. Undue claims of FTA benefits have posed threat to domestic industry and require stringent checks, the finance minister said in her budget speech.

According to Budget 2020, an importer making claim for preferential rate of duty under an FTA will have to:

• Make a declaration that goods qualify as originating goods for preferential rate of duty.
• Possess sufficient information on country of origin, including the regional value content and product specific criteria.
• Meet criteria in rules that will be prescribed.
• Exercise reasonable care as to the accuracy and truthfulness of the information furnished.

The fact that the importer has submitted a certificate of origin will not absolve the importer of the responsibility to exercise reasonable care, according to the Finance Bill.

Mukesh Butani, managing partner at BMR Legal, explained the rationale for this provision. “Let’s say we have an FTA with Japan and goods are imported from other countries availing the benefit under India-Japan FTA. This can be achieved by manipulating the invoicing mechanism,” he said. “So, a comprehensive set of amendments have been brought in to give customs officials the power to assess the origin of goods claiming the FTA benefit,” Butani said.

Benefit For Startups

The income tax law provides deduction for 100 percent of income of an eligible startup for three out of seven years from the year of its incorporation. Budget 2020 increased this period to 10 years.

So far, startups with a total turnover of up to Rs 25 crore could benefit from this deduction. The limit has now been increased to Rs 100 crore. Both these changes will become effective starting April 1, 2021.

There’s an additional benefit for employees of eligible startups. Employee Stock Ownership Plans or ESOPs are taxed at the time an employee signs up for it and at the time of sale. Budget 2020 amended this provision. Now, ESOPs will be taxed after the expiry of five years from the year in which the employee signed up for it, at the time of sale or when the employee leaves the company, whichever is earlier.

Watch the implications of these changes in detail here: