Relevant Income Tax Updates in Finance Bill, 2020

Companies Tax

Removing dividend distribution Tax:

  • Currently As Per section 115-O which levies Dividend distribution Tax on the company. It is proposed to carry out amendments so that dividend or income from units are taxable in the hands of shareholders or unit holders at the applicable rate and the domestic company or specified company or mutual funds are not required to pay any DDT.
  •  Consequent to this amendment, the dividend to non-residents would be taxed @ 20% u/s 115A, 10% additional tax levied on dividends received in excess of Rs. 10 lakhs The Bill has also proposed provisions for withholding tax @ 10% on dividends distributed to resident shareholders and unit holders
  •  In continuation of the above, the Bill proposes to insert a new Section 80M for removal of cascading effect by way of adjusting dividends distributed against dividends received (Indian company) from Indian companies to compute its tax liability in respect of dividend income, Dividend received from foreign Company would continue to be taxed in the hands of Indian company as per the existing provision of the Act.

Corporate Tax Rates

  • In September 2019, the Corporate Tax rates for existing companies were reduced from 25% / 30% (plus surcharge and cess with highest effective tax rate being 34.94%) to 22% (with effective tax rate of 25.17%). The said rate was optional and was available to companies which do not claim certain incentives or accelerated / weighted deductions.
  • Similarly, for new manufacturing companies incorporated on or after October 1, 2019, a new regime of tax at 15% (effective tax rate of 17.16%) was also introduced subject to fulfilment of certain conditions. The said scheme of 15% tax is now extended to new companies engaged in generation of electricity.
  •  It may also be mentioned that rate of Minimum Alternate Tax (MAT) was also reduced from 18.5% to 15% in September 2019 albeit the companies opting for the new regimes were exempted from MAT provisions.

Option to avail deduction under Section 35AD

  • Section 35AD provides for a 100% deduction of the capital expenditure incurred on certain specified business whereby no option is available to not avail the incentive. To provide clarity, it is proposed to make the deduction under section 35AD optional so that a taxpayer can now claim deduction under section 35AD or depreciation under section 32.

Tax Audit

  • The monetary limit for audit u/s 44AB has been increased from existing limit of Rs.1 crore to 5 crores.
  • In case of entities carrying business, whose cash receipts and cash payment is less than or equal to 5% of total receipts as well as payments respectively threshold of Rs. 5 crores has been prescribed instead of Rs. 1 crores for the purpose of requirement of tax audit u/s 44AB

Tax Administration

  1. The Bill proposes to insert Taxpayer’s Charter as part of Income Tax Act and orders, instructions, directions or guidelines to be made for administration of Charter.
  2. Proposed to amend Due dates of filing of return of income for companies required to gets his accounts audited u/s 44AB to 31st October from 30th September and due date of return in Transfer Pricing cases would continue to remain 30th November.
  3. Faceless Appeals – The Central Government will notify e-appeal scheme in order to impart greater transparency, efficiency and accountability in administering the appellate proceeding. The notification shall be issued on or before 31st March 2022
  4. Similarly, the Central Government will also notify e-penalty scheme in order to impart greater transparency, efficiency and accountability in disposing the penalty orders
  5. The Government shall introduce scheme for settlement of disputes in Direct Taxes. It is expected that upon payment of disputed tax (without interest and penalty) by march 31 , 2020.
  6. Every person in whose case it is found that either he has made any bogus claim (based on fake invoices) or omits to pass any entry in the books then he shall be liable for penalty equivalent to the amount of transaction
  7. Due date for Transfer Pricing compliance i.e 3CEB and TP documentation proposed to be amended to one month prior to due date for filing of return of income
  8. It is proposed that the powers of the ITAT to grant stay and extension thereof shall also be subject to the assessee –
  • depositing not less than 20 percent of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of the Act; or
  • furnishing security of equal amount in respect thereof
  1. The existing provisions of section 140 of the Act provide for who shall verify the return of income of various categories of assesses
  2. In case of companies and LLP, it is proposed to provide that any other person as may be prescribed by the CBDT shall also be able to verify the return of income

TDS /TCS

TCS

  • The Finance Bill proposes for to introduce TCS @ 0.1% in case of sale of goods to a buyer who in aggregate buys goods for more than Rs. 50 lakh in a year. This shall be applicable in case of sellers whose turnover during immediately preceding year is more than Rs. 10 crores.
  • The rate of TCS shall be 1% in case the buyer does not have PAN / Aadhaar

Amending definition of “work” in section 194C

  • it is proposed to amend the definition of “work” under section 194C to provide that in a contract manufacturing, the raw material provided by the assessee or its associate shall fall within the purview of the ‘work’ under section 194C.
  • Associate is proposed to be defined to mean a person who is placed similarly in relation to the customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A of the Act.

This amendment will take effect from 1st April, 2020.

Section 194J

  • It is proposed to reduce rate for TDS in section 194J in case of fees for technical services (other than professional services) to two per cent from existing ten per cent. The TDS rate in other cases under section 194J would remain same at ten per cent.

This amendment will take effect from 1st April, 2020

Individual

Resident status

  • The Finance Bill proposes to bring into the ambit of residency, all the citizens of India who have a domicile/residence out of India are not liable to pay tax outside India by reason of their domicile or residence outside India, could be liable to tax in India.
  • Further clarify by CBDT dated 02.02.2020 that in case of an Indian citizen who become deemed resident of India under this proposed provision, income earned outside India by him shall not be taxes in India unless it is derived from an Indian business or profession.
  • A citizen of India or a Person of Indian Origin (“PIO”) shall be treated as resident in India if they are in India for 120 days or more. The number of days have been reduced from 182 days to 120 days for a citizen of India or a Person of Indian origin.
  • Further Number of years for qualifying as Resident but Not Ordinarily Resident has been reduced to 7 years from existing 9 years out of total 10 years. Alternative condition of presence in India for 729 days or less in preceding 7 years has been removed.

Tax structure

On satisfaction of certain conditions, an individual or HUF shall, from assessment year 2021-22 onwards, have the option to pay tax in respect of the total income at following rates:

  • Upto 2,50,000 Nil
  • From 2,50,001 to 5,00,000 5 per cent.
  • From 5,00,001 to 7,50,000 10 per cent.
  • From 7,50,001 to 10,00,000 15 per cent.
  • From 10,00,001 to 12,50,000 20 per cent.
  • From 12,50,001 to 15,00,000 25 per cent.
  • Above 15,00,000 30 per cent

For opting this option taxpayer is required to forgo Exemption/Deduction Such as LTS, HRA , specified allowances under section 10(14), Standard Deduction/Profession Tax, Interest on loan for self-occupied property, additional depreciation, deductions under section 32AD,33AB, 33ABA, 35(1)(ii),(iia) & (iii), 35(2AA), 35AD, 35CCC, 57(iiia), Chapter VIA deductions except 80JJAA and 80CCD(2) (employers contribution to notified pension scheme).

The option is to be exercised before the due date of filing the return of income u/s 139(1) in case of taxpayer having business income. In case of no business income, option to be exercised along with the return of income filed u/s 139(1).

Option once exercised shall be applicable to all the subsequent Years. Option once exercised for a taxpayer having business income can be withdrawn only once for any subsequent year. Once withdrawn, option shall not be available except in case where taxpayer has no business income to offer in return of income.

Tax treatment of employer’s contribution to recognized provident funds, superannuation funds and national pension scheme.

  • Employer’s aggregate contribution towards any approved superannuation fund, PF, or any Pension scheme approved u/s 80CCD in excess of aggregate limit of Rs. 7,50,000 shall be taxable as perquisite in the hands of employee.
  •  Further, Interest, dividend or other accretion arising on the excess contribution shall also be taxable as perquisite on proportionate basis.

Extending time limit for sanctioning of housing loan

  • The benefit of claiming deduction for interest paid on affordable housing loan u/s 80EEA i.e. Rs. 1, 50,000 is extended to the loan facility sanctioned till FY 2020-21
  • Lower withholding tax on interest from long term bond/ rupee denominated bond
  • Lower withholding tax rate of 5% proposed to be extended to 30 June 2023 in respect of interest paid to non-residents in respect of monies borrowed in foreign currency by way of issue of any long term bonds including long term infrastructure bonds
  • Lower withholding tax rate of 4% proposed in respect of monies borrowed from a source outside India by way of issue of any long-term bond or rupee denominated bond on or after the 1 April 2020 but before the 1 July 2023, which is listed only on a recognised stock exchange

Rationalisation of provisions relating to trust, institution and funds

  • Existing trusts registered under Section 12A/ 12AA to apply for registration afresh within three months of 1 June 2020 under newly inserted Section 12AB
  • Registration granted under Section 12AB would remain valid for 5 years
  • Registration under section 12A/12AA/12AB of the Act to become inoperative from the date on which the trust or institution is approved under section 10(23C) or notified under section 10(46);
  • The trust or institution whose registration has become inoperative may apply to get its registration operative under section 12AB subject to the condition that on doing so, approval under section 10(23C) or notification under section 10(46) of the Act shall cease to have any effect and thereafter, it shall not be entitled to exemption under the respective sections
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