A top tax expert decodes the new Income Tax regime changes announced in the Budget

In spite of major concessions announced by way of an ordinance in October 2019, the Indian economy continued to dwindle in the backdrop of the global economic meltdown.

The current economic situation necessitated bold steps from our Hon’ble Finance Minister (‘FM’) to present a simplified budget that would result in a quick economic turnaround. However, whether such a ‘Simplified’ budget really unlocked potential for an economic turnaround, remains a question. Some key amendments coupled with their challenges are listed below:

Some key amendments:

Personal Tax Regime (‘PTR’):

In line with the Concessional Tax Regime (‘CTR’) introduced by the Hon’ble FM in October 2019 which focused solely on corporates, a PTR has been introduced which focuses on providing alternative lower tax rates to individuals/HUF.

The aforesaid concessional tax rate is applicable subject to the following conditions:

1. The Individuals and HUFs having various incomes would not be allowed to claim any deductions/incentives, them being -
   
   • Certain business deductions and deductions from other incomes
   • House property deduction
   • Salary deductions including standard deduction and professional tax
   • Major deductions under Chapter VI-A (i.e. deductions under section 80C, 80D, etc) and
   • Set-off/carry forward of losses in relation to the above

1. Further, Alternative Minimum Tax (‘AMT’) shall not be applicable to an individual/HUF opting for PTR. Consequently, carry forward and set off of AMT credit shall not be allowed.

In view of the above amendments, an individual having salary income as a major source of income and making investments in various schemes/instruments (For example, LIC premiums, PPF, ELSS, etc.) may not consider opting for PTR. It needs to be seen whether such a scheme is welcomed by the taxpayers at large or not.

Dividend Distribution Tax (‘DDT’) Abolition:

The Finance Bill proposes to abolish DDT in the hands of domestic companies and tax the same in the hands of the recipient. Accordingly, domestic companies declaring dividends shall be required to deduct TDS @ 10% on dividends exceeding INR 5,000 per shareholder. Further, it has been proposed to provide a deduction of interest expense of upto 20% of dividend income received in the hands of the shareholders under income from other sources.

Lastly, in order to remove the cascading effect of taxes, dividend distributed by companies for a particular year (subject to conditions) shall be allowed as a deduction from dividend income. The benefit of deduction has also been extended to companies opting for CTR. However, the amendment leaves certain areas which need to be addressed:

• No scientific mechanism exists to allow deduction of expenses to the shareholders and only an ad-hoc deduction of interest expense capped at 20% of dividend income is allowed
• In view of the above, the Company vs LLP structure needs to be re-evaluated
• In case of banks and NBFCs where dividend income is a major source of business income, no separate provisions have been carved out

Though the above is in line with the longstanding demand of the corporate world, only time will be able to tell whether the objective of earning higher taxes is achieved by these amendments. The above amendments also open-up the question of selection of an offshore jurisdiction for investing in Indian companies.

Other Key Amendments

A. Start-ups – Rationalising tax provisions and ESOP Taxation

With a view to rationalise the tax deduction provisions for start-ups, the following amendments are proposed:

• 100% profit deduction for an eligible start-up for any 3 consecutive years out of 10 years; and
• Threshold of turnover for an entity, to be eligible as a start-up, has been increased to INR 100 Crores

Further, in order to ease the burden of tax payment for employees of eligible start-ups, it is proposed to defer the timing of taxation of ESOPs perquisites. The amendment proposes to tax ESOP at the earliest of the following event:

• Expiry of 5 tears from the end of the relevant financial year; or
• Date of sale by individual taxpayer; or
• Date of cessation of employment

These are welcome steps that would go a long way in providing ease of doing business for start-ups. Existing companies in the technology space must evaluate the possibility of obtaining necessary approval to claim exemption.

B. Tax withholding on e-commerce transactions

TDS @ 1% shall be made applicable on payments by e-commerce operators (who own/operate a digital e-commerce platform) to e-commerce participants (who sell goods/providing services/both). Further, exception is provided for payments to such a participant who is an individual/HUF if the transaction value during a particular AY is less than INR 500,000

This amendment will not only add compliance obligation on the e-commerce platforms but would also bring larger population of service providers and goods suppliers under the tax net.

C. Increasing Tax Audit Turnover Threshold

The FM proposes to increase the turnover threshold for tax audit applicability to INR 5 Crores, provided that the aggregate cash receipts/cash payments by such taxpayer do not exceed 5% of the total receipts/payments respectively during the financial year. This move is again intended with a view to move towards a cashless economy.

D. Stay by the Hon’ble Income-tax Appellate Tribunal (‘ITAT’)

ITAT may grant a stay of demand for upto a maximum of 365 days on a condition that the taxpayer deposits not less than 20% of the amount of tax, interest, fee, penalty, etc. Though the law seems to have been proposed, it would need to be seen whether condition can be applied to the judicial power of adjudicating authority.

Since taxpayers at various levels are now being provided alternative tax regimes, the same may lead to complication of the tax regime with minimal benefits. TDS levied on dividend payments to shareholders/payments by e-commerce operators shall only increase the TDS compliance burden of large companies and e-commerce MNCs respectively. The impact of such complications and compliances on ease of doing business need to be evaluated.

Disclaimer: This article is written by Pranay Bhatia, a Partner and Leader of Tax & Regulatory Services at BDO India. The opinions expressed are entirely that of the author.