Budget 2020-21: Given the need for Indian businesses to continue to access global debt financing, the concessional tax rate of 5% for interest on funds borrowed from overseas has been extended from June 2020 to June 2023.
By Gautam Mehra
Union Budget 2020: The backdrop in which the finance minister presented her second Budget as part of the Modi 2.0 government wasn’t easy. Globally, the growth outlook for 2020 was pessimistic and Indian sentiments largely mirrored this. Further, lower GST collections and a positive and unprecedented corporate tax rate cut were pointing to a growing fiscal deficit, apart from continuing credit issues in the financial sector.
In this backdrop, the tax proposals presented to mirror the themes of ease, trust and some very focused pieces on economic development. Expectedly, fiscal deficit of 3.8% of GDP has restricted the government’s leeway to lower tax rates or announce other large exemptions to spur demand and growth, though these have yet been carried through a few proposals.
To simplify the I-T system the Finance Bill 2020 has proposed a new tax regime for individuals and HUFs. This proposes to cut I-T slab rates for such taxpayers, at the same time withdrawing various tax exemptions and deductions that are otherwise available to them. The advantage of this proposal is that it is optional for every individual to either opt for this benefit or not.
A second major structural change was about moving back to the shareholder-based system of dividend taxation. The dividend distribution tax (DDT) of 20.56% payable by corporates is proposed to be replaced with tax payable by each shareholder at the applicable rate of tax to that shareholder. This should benefit a large number of small shareholders, and also those foreign shareholders who would be able to avail tax credit of such DDT against tax payments in their home countries. However, resident HNIs will now be taxed at rates that could go up to 42% on such income. One important fallout of this is the proposed fresh levy of a 10% tax on dividends to be distributed by REITs and InvITs.
The existing indirect tax dispute resolution scheme has met with some success and it was natural for a similar scheme to be extended on the income tax side as well.
The government has committed to review various enactments and take effective steps towards removing criminal prosecution for lapses that are civil in nature. This is a positive move and besides building trust, also avoids clogging criminal courts system with avoidable litigation.
The announcement of including the Taxpayer’s Charter as part of the legislation is another welcome move; it would be useful to see if an element of accountability is included in this, which should be equally applicable to taxpayers and tax authorities.
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The Finance Bill proposes a complete exemption to certain sovereign funds for income arising from any investments made up to March 31, 2024, provided they are held for at least three years. This is a focused move to promote big-ticket and long-term investments in an important sector.
Given the need for Indian businesses to continue to access global debt financing, the concessional tax rate of 5% for interest on funds borrowed from overseas has been extended from June 2020 to June 2023.
The Union Budget 2020 seems to be a match well played under difficult conditions!
The author is Leader Tax & Regulatory, PwC India