Union Budget 2020 India: Complementing the recent reduction in tax rates for the corporate sector, the longstanding demand of removal of Dividend Distribution Tax and reverting to the classical system of taxing dividend in hands of shareholders has been brought back.
By Ritika Loganey Gupta
Budget 2020 India: Cometh the hour, cometh the man. The Finance Minister took guard of India’s first Union Budget of the new decade in the backdrop of the International Monetary Fund slashing its estimate on India’s 2019 economic growth to 4.8%, thus facing an uphill task of meeting expectations of the common man, corporate world and international rating agencies amidst dwindling economic indicators. Complementing the recent reduction in tax rates for the corporate sector, the longstanding demand of removal of Dividend Distribution Tax and reverting to the classical system of taxing dividend in hands of shareholders has been brought back. This bold measure would ensure that tax is restricted to the withholding rate under the relevant tax treaty and would also reduce the uncertainty on availability of credit against tax payable in the home jurisdiction of the overseas shareholder.
Start-up companies in the recent past witnessed a plethora of changes in tax reforms including the certainty brought on angel tax. Acknowledging that start-ups have emerged as growth engines for the Indian economy the threshold for availing 100% tax deduction under section 80IAC of the Income Tax Act (IT Act) has been increased to Rs. 100 crore which is currently pegged at Rs. 25 crores.
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At present, ESOPs given to employees are taxable as perquisites at the time of exercise which leads to a cash-flow problem for employees who do not sell the shares immediately and continue to hold the same for the long-term. Budget 2020 has proposed to ease the burden of taxation on employees of start-ups by deferring the tax deducted at source (TDS) on income earned from ESOPs by five years or at the time of leaving the company or disposing of shares, whichever is earliest.
Interestingly and rightly so due to burgeoning consumer spend, e-commerce sector has caught the attention of the FM for the widening of country’s tax base. New section 194-O has been proposed wherein the e-commerce company or operator will be under an obligation to deduct TDS at the rate of 1% for sale of goods or services facilitated by it.
However, e-commerce participants being individual and HUF whose gross sales or services facilitated through such e-commerce operator is less than Rs 5 lakhs per annum are exempt from TDS. With this change, e-commerce companies will need invest more in tweaking their technology platforms and have robust back end structure to capture data and ensure tax compliance.
Though the real estate community was bullish on tax sops being extended to revive the sluggish sector including extension of sunset clause for SEZ Units under section 10AA, only the affordable housing sector found favour with the FM. Now projects which are approved by 31 March 2021 will be eligible for 100% deduction on profits, which is likely to boost supply of affordable houses.
Measures have also been taken to settle controversy and bring tax certainty. Rate of TDS under section 194J in case of fee for technical services has been reduced to 2% from 10%, thus aligning it with rate given under section 194C. This would reduce unwarranted and frivolous litigation by tax authorities arising because of alleged short deduction of taxes at source. Even in the international tax arena, the Government has thoughtfully proposed amendment to cover cases of attributing income to Permanent Establishment of MNEs under the ambit of Advance Pricing Agreement and Safe Harbour rules, thus making the process effective.
Bringing transparency, efficiency and accountability in tax administration through technology has been the common thread weaving every year’s budget since the time Modi government took charge. To ensure that these reforms reach next level, it has been proposed to introduce e-appeal scheme, thus making the appeal disposal process completely faceless and devoid of human interface. Similar provisions for e-penalty have been proposed thereby limiting the interface between tax officers and assessee to the extent technologically feasible.
The FM is responsible for lion’s share of decisions which define how a country’s tax-GDP ratio is going to shape up in the future. Phasing out of incentives, continuous need to ensure tax compliance and ease of doing business to bring tax buoyancy seems to be the focus. When the world leaders at Davos were discussing geo-political impact on world economies, Indian industrialists mentioned they aren’t too worried about IMF growth downgrade which has been the highest for India in the latest WEO projections. Time will only tell, how far these measures help navigate through this VUCA (Volatility, Uncertainty, Complexity, Ambiguity) world and revive growth by bringing back the market confidence in the near future.
(The author is Partner – Tax & Regulatory Services, EY India. With inputs from Ankur Singla, Director, Tax & Regulatory Services, EY India. Views expressed are personal.)