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last updated on 2 April 2020 | reading time approx. 10 minutes
The Indian Union Budget was introduced by the Honorable Finance Minister of India, Mrs Nirmala Sitharaman on 1 February 2020 proposing several amendments on direct and indirect tax side.
In a swift move, amidst the havoc caused by the Covid-19 threat the Finance Bill has now received Presidential assent on 27 March 2020 to become the law. There have been various changes brought in while enacting Finance Act, 2020, which include relaxation in deemed residency rule proposed for Indian citizens, stringent TDS on cash withdrawals etc. Interestingly, Equalization levy is proposed to be extended to non-resident E-Commerce Operators having transactions in India vide the amended Finance Act.
The relevant changes in the Finance Act as enacted vis-à-vis the original Finance Bill introduced earlier are detailed below in this News Flash. Our earlier alert containing the detailed amendments proposed by the Finance Bill as introduced in the Lok Sabha could also be accessed at the Indian budget update 2020.
Indian citizen or a person of Indian origin, residing outside India is provided an extended time period of 182 days for visits to India, instead of the regular 60 days, otherwise applicable. There were certain changes proposed to make the conditions regarding residency stringent for Indian citizens or persons of Indian origin residing outside India, which has now been made less stringent. Summary of these changes is provided below:
It was proposed to reduce the criteria of stay in India from 182 days to 120 days
The above categories of persons, who would become residents as per the amended provisions, would also be regarded as "not ordinarily resident" in India.
Changes proposed in the earlier Finance Bill for criteria of individuals and Hindu Undivided Families to qualify as "Residents and Not Ordinarily Residents" are deleted in the Finance Act as enacted.
Further, "income from foreign sources" has also been now described to mean income, which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
The Finance Bill, 2020 proposed to abolish the Dividend Distribution Tax ('DDT') and move to the traditional system of taxation, wherein dividends would be liable to tax in the hands of the shareholders and companies would not be required to pay DDT on dividend.
In view of the same, consequentially exemption provided to such dividends in the hands of shareholders under section 10(34) of the Income-tax Act, 1961 (ITA) was proposed to be removed for dividends received by shareholders on or after 1 April 2020. However, liability for dividend distribution tax (under section 115O of ITA) as well as tax liability on dividends exceeding INR 1 million under section 115BBDA of ITA is triggered on declaration, distribution or payment. Thus, there was a possibility that dividend declared prior to 31 March 2020 is subject to taxation under old regime (i.e., section 115O and section 115BBDA, if applicable) as well as taxation under new regime, if paid after 31 March 2020. Hence, it is now provided that, if applicable tax under section 115O and section 115BBDA is paid in respect of any dividend, then such dividend received on or after 1 April 2020 would also be exempt under section 10(34) in the hands of shareholder.
As per the amendments proposed, the person paying the dividend was required to deduct tax at source under section 194 of ITA at the rate of 10%.
As per Sect. 115A of ITA, dividend received by non-residents are taxable at the special rate of 20 per cent.
In any case, the same would be subject to tax rates specified under the Double Taxation Avoidance Agreement between India and the country of residency of such non-resident recipient of dividend income from India, if more beneficial.
Deduction was proposed to be provided to a domestic company in respect of income by way of dividends from any other domestic company, to the extent of dividend distributed on or before the due date for filing return of income, by the domestic company receiving such dividend from another domestic company. Such benefit of deduction is also proposed to be extended to the dividend received from a foreign company or a business trust.
The existing Sect. 92CB of the Act provides that the determination of Arm's Length Price under Section 92C or Section 92CA shall be subject to Safe Harbour Rules as prescribed by the Board. For this purpose 'safe harbour' means circumstances in which the Income-tax authorities shall accept the transfer price declared by the assessee. The Finance Act amended Sect. 92CB to provide that income referred to in Sect. 9(1)(i) ITA shall be subject to safe harbour rules. However, the Explanation to Sect. 92CB defining safe harbour was not amended by the Finance Bill, 2020 to provide that safe harbour would now also include circumstances in which income tax authorities shall accept the income under Sect. 9(1)(i) ITA declared by the assessee. To align the above, the Finance Act has made the consequential amendments to section 92CB to expand the meaning of safe harbour. 'Safe harbour' for section 92CB shall now cover the transfer price or income, deemed to accrue or arise under section 9(1)(i), as the case may be, declared by the assessee.
New optional personal tax regime applicable to individuals and HUFs was introduced by inserting section 115BAC in the ITA. This measure was aimed at simplification of personal tax regime and rationalisation of tax rates applicable to middle class taxpayers.
It was proposed that individuals and HUFs not earning business income can decide every year whether to choose the optional personal tax regime, whereas it was a one-time selection for individuals and HUFs not earning business income. This has now been amended to provide that the one-time selection would be applicable for individuals and HUFs earning income from profession as well [as against business income, as specified earlier].
Equalization levy was introduced by the Finance Act, 2016 at 6 per cent on gross basis to apply to advertisement services provided by non-resident not having Permanent Establishment in India. It is now proposed to extend the scope of Equalization levy from 1 April 2020 onwards to consideration receivable by non-resident E-Commerce Operators from e-commerce supply or services.
E-Commerce Operators are defined to mean non-residents (not having a PE in India) who own, operate or manage digital or electronic facility or platform for online sale of goods or provision of services or both.
Such E-Commerce Operators shall be charged with an equalisation levy of 2 per cent of the consideration received or receivable by an E-Commerce Operator from E-Commerce supply or services made or facilitated by it –
"Specified circumstances" in the above context have been defined to mean -
(i) sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
(ii) sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.
Equalization levy not to be charged in certain situations
The equalisation levy is not to be charged -
(i) where the E-commerce operator has a permanent establishment in India and such e-commerce transactions are effectively connected with such permanent establishment;
(ii) where the equalisation levy is leviable as digital or online advertisement; or
(iii) sales, turnover or gross receipts, of the E-commerce operator is less than INR 20 Million during the previous year.
Payment of Equalization Levy
Equalization levy shall be paid by even e-commerce operator to the credit of the Central Government on a quarterly basis.
Other procedural aspects have been notified.
The said amendment would be applicable on and from 1 April 2020.
Consequential amendment is proposed in Sect. 10(50) ITA to exempt the income arising from e-commerce supply or services chargeable to Equalization levy.
The earlier Finance Bill had proposed TDS on credit or payments to an E-commerce participant by the E-commerce operator of the amount towards sale or services or both at the rate of one per cent of the gross amount of sales or services or both.
Finance Act now deems e-commerce operator to be the person responsible for paying to e-commerce participant.
The applicability of these provisions has been deferred to 1 October 2020.
No requirement to collect TCS in case of import or export of goods
It was proposed to insert a new subsection (1H) under section 206C to provide for the collection of tax from the sale of goods other than those already covered under any other sub-section of section 206C. There was a concern as to whether such requirement will apply in respect of import or export transactions as well. Finance Act It has been clarified no tax shall be required to be collected at source in respect of goods exported out of India or in connection with import of goods in India.
Changes in rate of TCS
Provisions relating to TCS were proposed to be amended to require collection of tax from a person remitting the amount outside India under Liberalised Remittance Scheme (LRS) or buying an overseas tour program package. For this purpose, a new sub-section (1G) was proposed to be inserted in Sect. 206C to provide for collection of tax at 5 per cent by an authorised dealer who receives an amount or aggregate amount of INR 0.7 Million or more during the financial year from a person for remitting such amount out of India under the LRS.
In respect of overseas tour program package, it was proposed that a seller of such package shall be required to collect tax from buyer thereof at the rate of 5 percent of the amount received from the buyer.
The Finance Act has now inserted a new clause to provide that tax shall be collected only on the amount in excess of INR 0.7 million, except where the remittance has been made for overseas tour program package, wherein TCS of 5 per cent will apply, regardless of the amount of transaction.
A lower rate of 0.5 per cent is proposed for amounts remitted out of loan obtained from any financial institution for the purpose of pursuing any education.
A new Sect. 194N was inserted vide Finance Act 2019 to provide for deduction of tax at the rate of 2 per cent on cash withdrawals made by any person from his bank or post-office account exceeding INR 10 Million.
Now, threshold for TDS on cash withdrawals has been reduced as below for the recipients who have not filed the return of income for three years immediately preceding the previous year, in which the payment of the sum is made to him:
It is also proposed that Central Government shall be empowered to notify, in consultation with the Reserve Bank of India, the recipient in whose case the above provision shall not apply or apply with reduced rate on satisfaction of conditions specified in the notification.
It was proposed to reduce the TDS rate under Sect. 194J ITA to 2 per cent from the earlier 10 per cent in respect of payment by way of fees for technical services (not being professional services).
The Finance Act has now extended the reduced TDS rate of 2 per cent to royalty in the nature of consideration for sale, distribution or exhibition of cinematographic films.
It was proposed to abolish the Dividend Distribution Tax and move to the traditional system of taxation, wherein mutual funds do not pay tax on distributed income, whereas the unit-holders are liable to pay tax on such income at the applicable tax rate.
To ensure collection of tax, a new Section 194K was proposed to be introduced, which required Mutual Funds to deduct tax at the rate of 10% while making payment of income to the unit-holders.
To remove any ambiguity with respect to the applicability, Sect. 194K now provides that no tax shall be deducted from capital gain arising on transfer of units.
Tillmann Ruppert
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