Analysis of Union Budget'20

Budget Blinks for Individuals
  1. Expanded scope of Perks -A combined upper limit of contribution in provision fund, superannuation fund and NPS, of ₹7.5Lakhs is imposed. Over this, contributions will be considered as Perquisites, hence taxable.

  2. Extension of 80EEA deduction-Deduction in respect of interest (Rs.1.5 lakh)on loan taken for certain house property (affordable housing) u/s 80EEA, extended to loans taken up to 31st March 2021.

  3. E-scheme for Penalty -E-scheme to be launched to impose penalty by eliminating the interface between AO and assessee.

  4. Tax on Dividend-Dividend income will now be taxable in the hands of the individual, without any exemption. Only interest expense is allowed as deduction up to 20% of the dividend income.

  5. Instant PAN through Aadhaar-For ease and convenience of taxpayers, the FM said that a system will be launched soon, for instant online allotment of PAN on the basis of Aadhaar, without the need for filling any application form.

  6. ESOP Breather-Perquisite value of ESOPs issued by registered start-ups will no more be taxed on being exercised. It will be taxed 5 years after being exercised, or when employee leaves company or when employer transfers shares, whichever is earlier.

  7. Annual Information Statement-New Statement (replacing 26AS), which will capture more than just TDS data (like capital gains on shares and property transactions), to assist taxpayers in prefilling their returns with ease.

  8. Cash Donation u/s 80GGA-Now deduction will be allowed only to the extent of ₹2,000 (Earlier ₹10,000)

  9. TCS on overseas travel-TCS @5% to be collected from buyer on overseas tour package – will increase cash outgo on foreign travel.

Budget Blinks for Businesses
  1. Relief from Tax Audit-Turnover limit for Tax Audit increased from 1Cr. to 5Cr. For businesses having cash receipts/payments <5% of total receipts/payments.

  2. Increase in TCS Requirement- TCS to be made on sale of goods>₹50 Lakhs at the rate of 0.1%. TCS @5% to be made by e-comm companies on gross sales of goods/services made by listed merchants.

  3. No DDT on Dividend -Companies no longer liable to pay DDT on Dividend distributed to its shareholders.

  4. Due date of Tax Audit -Due date of Tax Audit Due date of furnishing Tax Audit disconnected from due date of ITR. Now to be furnished one month (30 Sept) prior to due date of ITR (31 Oct).

  5. Detailed information statement- Form 26AS to be replaced by an annual information statement which will capture information more than just TDS and assist in prefilling returns of taxpayers.

  6. Extension of ITR due date- Due date of filing ITR, of Company/ assessee subject to audit/partner of a firm subject to audit extended to 31st Oct from 31st Sept.

  7. ITR of partners unified- Now due date of ITR same for working and non-working partner.

  8. Tax cut to new Power company- Extension of corporate rate cut to 15% to new company engaged in generation of Electricity.

  9. Relaxation in circle rate -Consideration received on transfer of property held as stock-in-trade will now be considered for capital gains if Stamp Duty Value does not exceed 110% (earlier 105%) of the consideration.

  10. Relaxation in TDS -TDS u/s 194J on Technical Fees now to be made at 2%.

  11. E-Appeals-E-Appeals scheme to be launched for faster disposal of appeals through electronic modes.

  12. Penalty on fake entries/invoices-Penalty imposed for issue of fake invoices and passing false entries equal to the aggregate amount of such false entries.

  13. Increase TDS compliance- TDS to be made by large Cooperative societies on interest pay-outs u/s 194A. TDS to be made on dividend pay-out to shareholders at the rate of 10% (Resident) and 20% (NRI), for pay-outs>₹5,000. Definition of work for the purpose of TDS u/s 194C amended to include contracts in which raw materials are provided by associated enterprises of buyer.

New Era for Dividend Income

Existing Provisions

  • Dividend income up to ₹10 Lakhs is exempt, and over ₹10 Lakhs is taxable at the rate of 10% only. This provision will become inoperative from 1st April, 2020.

  • DDT i.e. tax borne by a company/mutual fund on dividend distributed to its shareholders/unit holders – to be scrapped.

  • No deduction for any expense incurred for earning dividend was permissible.

Moving to Classical System of Taxing Dividend from 01-Apr-2020

  • Dividend income now to be taxed in the hands of individuals at the applicable slab rates and company/MF will not longer pay DDT on such dividend.

  • Inter-corporate dividend i.e. dividend received by a company from another company will be exempt in the hands of the receiving company only to the extent of dividend distributed by the receiving company before the due date.

  • Deduction of expenses, other than interest, incurred to earn such dividend income like brokerage and commission, still not allowed. Interest expense allowed as deduction up to 20% of dividend income.

  • TDS to be made on Dividend distribution by companies, mutual funds and business trusts.

  • TDS to be made u/s 195 (at the rate of 20%) on dividend distributed to NRI.

Our Take

  • Abolishing DDT will improve cash flows of companies, which may in turn be used to distribute higher dividends or invested back.

  • However, from an individual’s perspective, the new system will entail higher tax burden on an income which was enjoyed as exempt receipts by the common man. Moreover, closely held companies that would earlier avoid paying dividend because of DDT, will get little respite due to this move since now dividend will simply be taxed twice – once in the hands of the company as profits and other in the hands of the individual as dividend.

  • Say for example an individual earns an income of ₹25 Lakhs. Suppose, a company gives dividend of ₹1 Lakh (net of DDT) under the existing framework. Now, after abolition of DDT, the company will be able to distribute a dividend of ₹1.21 Lakhs (i.e. without having to pay DDT). However, now the individual will have to bear a tax of ₹36K on such dividend income leading to a net cash inflow of ₹85K as against ₹1 Lakh under the existing framework, thus decreasing net cash inflow by approx. 15%. The picture will be even worse in case of HNIs who will also have to bear surcharge on such income.

International Taxation
  • Applicability of ‘Significant Economic Presence’ criteria, which constituted business connection, deferred until 2022.

  • Scope of ‘Business connection’ expanded Income from advertisements targeting Indian customers or data collected from Indians, or income generated by using data collected from Indians, now to be taxed as income in India.

  • Rules to ascertain residency status changed - Indian citizen/person of Indian origin to be now considered as resident if they visit India for >= 120 days (currently 182 days) during the tax year. A Resident will become ‘not ordinarily resident’ if he has been an NRI in 7 out of past 10 years. Deemed residency of an Indian citizen who is not a resident of any other country.

  • Royalty income will now also include fees earned from sale, distribution or exhibition of cinematographic films.

  • Section 90/90A, which empower the Govt. to enter into DTAAs with other countries, amended to align law with MLI for avoidance of double taxation without creating opportunities for non-taxation or reduced taxation.

  • Safe Harbour Rules (SHR) extended to determination of income attributable to PE of non-residents. Similar extension also given to Advanced Pricing Arrangement (APA) provisions.

  • Report on international and specified domestic transactions, in Form 3CEB, to be furnished by 31st Oct (1 month prior to due date of filing ITR).

  • Change in taxability of Dividend - Dividend income of NRIs to be taxed at 20%; TDS to be made at 20% u/s 195 on such dividend pay-out to NRI. Taxability of Dividend in individual’s hand will be beneficial for NRIs, who can now claim foreign tax credit while filing their ITR in their country of residence. This facility was not available earlier when DDT was charged from Companies.

  • Respite from filing of ITR to NRI, extended to income from Royalty and Technical Fees also, (in addition to the previously covered nature of incomes), provided TDS is deducted at applicable rates.

  • All NRIs can now be considered as eligible for ‘Dispute Resolution Process’, which is the respite available to assesses when their any variation in income is prejudicial to their interest.

  • Tax to be collected at source (TCS) on foreign remittance >₹7 Lakhs in a year under the Liberalised Remittance Scheme at the rate of 5%.

Charity and Charitable Organisations
  • Statement of Donors - The entities receiving donation will be required to furnish a statement in respect of donations received and issue a certificate to the donor. In order to ensure proper filing of the statement, levy of a fee & penalty may also be provided in cases where there is failure to furnish the statement. What it essentially means: Increase in paper work and compliance cost with additional requirement of reporting each donation elaborately.

  • Pre-filling in IT return - Now, deduction under section 80G/80GGA to a donor shall be allowed only if a statement is furnished by the donee. In order to ease the process of claiming deduction for donation, prefilling of the donee’s tax return will be enabled, on the basis of information of donations furnished by the donee. The information will also be available in Annual Information statement (a.k.a. 26AS) What it essentially means: In a situation where the donee erroneously does not upload information of donation made by a donor, the donor may not be able to claim deduction, just like in case of TDS provisions.

  • Cash Donation u/s 80GGA Now deduction will be allowed only to the extent of ₹2,000 (Earlier ₹10,000). Registration system of Charitable organisations revamped! (applicable from 1 June 2020)

  • An entity already approved/notified/registered under Sec. 10(23C), Sec. 12AA, Sec. 35 or Sec. 80G of the Act, shall be required to re-apply for approval/registration by31-Aug-2020. Further the approval, registration or notification so made shall be valid for a period of 5 years. 2. Section 11 amended to provide that registration u/s 12AA would become inoperative in case an entity is approved u/s 10(23C) or u/s 10(46). If an entity wishes to make its registration operative again, it would have to again file an application for registration.

  • Breather: The process of approval/registration will be made completely electronic under which a Unique Registration Number (URN) shall be issued to all new and existing charity institutions.

  • To facilitate the registration of the new charitable organisation, it is proposed to allow them provisional registration for 3 years, on the basis of application without detailed enquiry.

  • Twist: The existing applications pending for approval/registration, shall be treated as application in accordance with the new provisions. [May result in undue postponement of approval/registration until the new system is up and stable].

  • Approval/Registration under this new scheme will require renewal by reapplying 6 months before the expiry of the existing approval/registration.

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