Union Budget 2020: The Finance Bill 2020 proposes several significant changes to the direct tax regime. Enumerating even all the important ones is not practicable. The key ones which are likely to have a significant impact are as follows:
1) Taxation of individuals: The first significant change in taxation of individuals is that the period of residence in India which would result as a person being regarded as resident has been cut from 182 to 120 days. Conversely, the overseas stay should be 240 days instead of 182 days. Also, an Indian citizen would be regarded as resident in India if he is not liable to tax in a foreign country by reason of his domicile, residence, etc there. This will considerably broaden the ambit of overseas Indians who would now be liable to tax in India. It could result in unintended consequences in that a person residing overseas for the last several years may suddenly become liable to tax in India on global income. The words “liable to tax” could become a subject of controversy.
There is now a choice available to opt for a reduced tax rate regime, like in the case of companies, if one foregoes all deductions, exemptions and concessions. If this choice is made a person would not get standard deduction, deduction for interest on home loans, LTA, HRA, etc. The thrust would shift from savings to spending.
2) Dividend distribution tax: The one major amendment which is on expected lines is the abolition of dividend distribution tax (DDT). The 20% DDT payable by the company is now substituted by a tax payable by the recipient of dividends. Individual recipients whose effective rate of tax is below 20% would be better off under this regime whereas promoters and high tax-paying individuals would shell out a larger tax than 20% and therefore face a higher effective tax rate. The entire regime of holding shares through investment companies, LLPs and trusts may need a review and a complete overhaul in the light of the new provisions. Foreign dividend receiving companies would pay taxes on dividends at rates prescribed in applicable tax treaties subject to applicability of GAAR/LOB/MLI.
3) ESOP taxation: A very welcome amendment is that benefit arising from ESOPs granted to employees of start-ups would not be taxed in the hands of the employee at the time of exercise of the option, which currently results in payment of taxes without realising the gains but needs to be paid at the time of sale of the shares or four years after the end of the year of receiving the ESOPs, whichever is earlier, subject to the recipient continuing to be an employee of the start-up.
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4) Tax dispute settlement scheme: Perhaps one of the very interesting aspects of the Finance Bill is the provisions that allow an assessee who is in appeals on tax disputes to settle the dispute by paying the principal amount of tax without having to pay interest or penalty. The settlement has to be done by March 31, 2020. Given the fact that judicial decisions keep on evolving, taxpayers who are in litigation for several years and who have run up a potential interest liability far in excess of the taxes may find it attractive to consider taking advantage of this scheme.
Overall, the changes proposed by the Finance Bill are very significant as they expand the base of taxation, provide for an altogether new regime for taxation of individuals and enable resolution of disputes which are long outstanding.
