From an individual tax perspective, most of the proposals of the Finance Bill, 2020 have been incorporated in the Act with /without modifications.
On Feb 1, 2020, the Hon’ble Finance Minister Nirmala Sitharaman presented Finance Bill, 2020 wherein several amendments were proposed in the domestic tax law from an individual tax perspective. Among other tax proposals, some of the significant proposals impacting individual taxpayers (specifically globally mobile individuals) were change in the tax residency conditions, introduction of optional new tax regime, introduction of TCS on foreign remittances under Liberalized Remittance Scheme (LRS), abolishment of Dividend Distribution Tax (DDT) and taxing the dividends in the hands of shareholders, introduction of tax on Employer’s contribution to certain social security funds (i.e. Provident Fund (PF), Superannuation Fund (SF) and National Pension Fund (NPS)) in excess of certain threshold, deferment of TDS on ESOPs for eligible start-ups etc.
On 27 March 2020, the Finance Bill, 2020 received the Presidential assent and has now become a statute which is applicable for Financial Year (FY) 2020-21 with effect from 1 April 2020 (except certain provisions for which applicability has been separately mentioned under the relevant provisions of the Act). From an individual tax perspective, most of the proposals of the Finance Bill, 2020 have been incorporated in the Act with /without modifications. In light of this, it is important to discuss as to how the amended law which have become the Act with certain amendments /modifications may impact the individual taxpayers in managing their India tax affairs.
Modifications in the tax proposals of the Finance Bill, 2020:
1) Changes in the tax residency rules
(a) Tightening the residency conditions for Indian Citizens /Persons of Indian Origin (POIs)
The existing tax law provides that an Indian citizen or a POI who has come to India on visit during a FY, would qualify as a tax resident of India in case his /her total stay duration in India as exceeded 182 days during that FY.
With an objective to increase the tax filing base and to avoid misuse of the relaxed provisions by the Indian citizens /POIs who carry out significant economic activities within India and manage their stay in India as less than the specified limit of 182 days and thereby, escaping the payment of tax on their India income, the Finance Bill, 2020 proposed to reduce the period of stay criteria for these individuals from the existing 182 days to 120 days.
The Finance Act has incorporated the budget proposal. However, it has also provided that such reduced stay criteria would be applicable only for the individuals having income (other than foreign sourced income) exceeding Rs 15 lakh during the FY.
The term ‘other than the income from foreign sources’ is defined to mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
(b) Introduction of Deemed residency rules for Indian citizens
The Finance Bill, 2020 proposed that Indian citizens who are not liable
to pay taxes in any other jurisdiction by reason of his domicile /residence /any other criteria of similar nature shall be treated as deemed residents of India and would be liable to tax on their India sourced income.
The Finance Act, 2020 has added an additional condition that this amendment shall apply only if the total income of the individual (other than the income from foreign sources) exceeds Rs 15 lakh during the FY.
The term ‘other than the income from foreign sources’ is defined similarly as mentioned above.
(c) Relaxing conditions relating to Not Ordinary Residents (NOR)
The Finance Bill, 2020 had proposed to delete the existing twin conditions for treating an individual as NOR and proposed to insert a new condition i.e. individual who is Non-resident (NR) in seven out of the ten FYs preceding that FY shall be regarded as NOR.
However, the Finance Act 2020 has dropped this proposal and restored the existing twin conditions for determining NOR. Further, it has also been added that the following individuals would also qualify as NOR:
# An Indian citizen or a POI whose total income (other than income from foreign sources) exceeds Rs 15 lakh during a FY and who has been in India for a period of 120 days or more but less than 182 days during that FY;
# An Indian citizen whose total income (other than the income from foreign sources) exceeds Rs 15 lakh during a FY and is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature (i.e. deemed resident as specified above)
2) Introduction of Tax Collected at Source (TCS) on overseas remittances and sale of tour packages
The Finance Bill, 2020 had proposed to introduce TCS on the foreign remittance made under LRS in case the amount of remittances exceed Rs 7 lakh. Further, TCS was also introduced on sale of overseas tour package.
The Finance Act, 2020 has further made following amendments in the proposed provision of Bill:
# The applicability of this provision has been deferred to 1 October 2020;
# Reduced tax rate @ 0.5% has been provided on the remittances of loan obtained from any financial institution as defined in Section 80E of the domestic tax law for the purpose of pursuing any education abroad;
# Authorised dealer shall not collect the sum on an amount in respect of which the sum has been collected by the seller; and
# TCS would be applicable only on the amount of remittance in excess of Rs 7 lakh
While the above amendments to the Finance Bill, 2020 have brought some clarity over the applicability of various tax amendments, however, it still does not address certain concerns raised by various stakeholders and anomalies over procedural aspects in the newly introduced amendments. Some of the key issues which have remained unanswered from an individual tax perspective include, clarity with regard to deduction of taxes by employer under old vs. new optional tax regime, applicability of TCS on capital account remittances under LRS, impact of deferment of TDS on ESOPs for determining tax liability in the hands of employees etc. It is expected that the government would soon address these issues as well along with issuing detailed procedures for implementing various amended provisions of the law.
(By Akhil Chandna, Associate Partner – Grant Thornton India LLP.
With inputs from CA Pooja Lara and CA Garvit Agrawal)