Budget 2020: The Key Tax Changes
It seems that the government is setting a direction where the old IT regime would be withdrawn gradually, writes Maulik Doshi.
Simplified And New Tax Regime For Individuals
The Union Budget for 2020-21 proposed a new tax regime for individuals with lower tax rates compared to the existing rates for those who forgo deductions, exemptions, and rebates. Taxpayers have been granted an option to either continue under the existing rate or to opt for the new regime. This would definitely complicate things and it appears that a person claiming all deductions would be disadvantaged and would not opt for the new regime. However, it seems that the government is setting a direction where the old regime would be withdrawn gradually and a simple tax structure is likely to remain in the future.
Dividend Distribution Tax Abolished
This will make India an attractive investment destination and is on expected lines. This may be somewhat negative for promoters who hold shares in the companies directly. Their tax liability on dividends would increase based on their personal tax rate. The major gainers here seem to be foreign investors who were burdened with the dividend distribution tax which was not available as a tax credit in their home country. Foreign investors (including FPIs) would thus be liable to dividend taxes in India at a 20 percent rate as per Indian domestic law or the rate specified in the respective tax treaty.
Most tax treaties, except the United States, have a lower rate of dividend taxation and thus effective dividend taxation for such foreign companies would be between 5 percent and 20 percent.
Also, there are some anomalies in the provisions.
A situation where the company declares its dividend before March 31, 2020, but an individual receives the same after April 1, 2020, would suffer old dividend distribution tax by the company as well as full dividend taxation in hands of the individual!
This makes it pretty likely that companies will avoid declaring dividends in the final two weeks of the financial year.
Reduction In Tax Litigation
In her budget speech, the Finance Minister Proposed proposed a “Vivad se Vishwas Scheme” – a tax dispute resolution scheme for taxpayers to pay only disputed tax amount and the interest and penalties would be foregone or waived. The scheme would be operational till June 30, 2020, with a window available till March 31, 2020, for further reduction in the tax amount. It would be interesting to see what cases would get covered and whether the tax rate would be current (reduced) tax rate or the tax rate of the respective years to which dispute pertains. This would provide a big boost to reducing litigation and cases that are stuck at various levels of the judiciary.
Non-Resident Shocker
Now to be regarded as a non-resident, an Indian citizen now has to stay outside India for 245 days, against 182 days previously. Also, a citizen of India who is staying abroad in a country where he is not liable to tax will be regarded as an Indian resident and liable to tax in India. This is a big disadvantage to Indian citizens residing abroad especially in Middle East Countries – who would be liable to tax in India on their overseas income and would have to comply with Indian laws. The way the provisions are worded will surely leave scope for litigation.
Tax Collected At Source provisions Expanded
The lesser-known concept, or devil, of tax collected at source has suddenly sprung a surprise in this budget. The scope of TCS has been significantly expanded to now include:
- Sale of goods by any person of more than Rs 50 lakh to a buyer, where the seller would be a person whose turnover is more than Rs 10 crore in the previous financial year. In such a case, TCS would be collected by the seller from the buyer at 0.1 percent and deposited to the government. It is unclear whether such buyers would include those situated outside India in which case there would be 0.1 percent TCS even on exports. The government should specify classes of buyers and sellers to whom these provisions won’t apply.
This would also have additional cash flow issues and increased compliance burden on the taxpayers.
- Another category that has been added is under the TCS net is remittances made by Indians under the Liberalised Remittance Scheme and Indians who buy overseas tour program packages from tour operators. In the case of LRS, authorised dealers (bankers) are required to collect TCS at 5 percent on LRS remittances of more than Rs 7 lakh. In case, of tour operators, the tour operator would have to collect TCS at 5 percent in case of an overseas tour program and there is no threshold limit here.
E-Commerce TDS
New provisions on tax deducted at source for e-commerce have been introduced in the budget. The provisions now provide that the e-commerce operator shall deduct tax at 1 percent on payments made to an e-commerce participant. An e-commerce participant would be an Indian resident person selling goods or services or both including digital products to an e-commerce operator.
This would affect all e-commerce transactions and would also have an impact on the cash flows of e-commerce participants.
The new provisions provide relief in the case of individual e-commerce participants if their sales through the e-commerce operator are less than Rs 5 lakh. It would also increase the compliance burden of the e-commerce operator.
End Of Tax Harassment
A taxpayer charter will be a part of the statute. The government will ensure that the citizens are not worried about tax harassment. This is the first move of its kind to bring trust and demonstrating the seriousness of taxpayer’s rights and providing legal backing by bringing it in the statute. This would need a serious mindset change at the lowest level of the tax administration and if implemented in the right spirit would change the way taxpayer perceives the tax department.
Maulik Doshi is Partner at SKP Business Consulting LLP.
The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.