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The Finance Bill, 2020 has been passed with amendments and has received assent of President on March 27, 2020.
Some of the key variations in the Finance Act, 2020 vis-à-vis the original Finance Bill as introduced by the Finance Minister, include inter-alia, rationalisation of provisions relating to criteria for deemed residency of individuals, provisions governing Tax Deduction at Source ('TDS') for E-commerce operators, applicability of Tax Collected at Source ('TCS') on sale of goods and services and on amounts remitted under the Liberalised Remittance Scheme, exclusion of capital gains income from mutual funds for TDS.
TDS on cash withdrawal is made more stringent in case of non-income tax return filers by reducing the cash withdrawals threshold from INR 10 million to 2 million for 2 per cent TDS and by introducing a higher rate of TDS of 5 per cent in case cash withdrawals exceed INR 10 million.
Further, scope of Equalisation levy is extended to include e-commerce transactions by non-resident e-commerce operators, not having a PE in India. Equalisation levy of 2 per cent shall be charged in case of such company. Charge of equalisation levy was not included in the Finance Bill presented in Parliament initially.
For detailed analysis, please refer to the following link: Read more »
Amidst the continuing efforts of the Indian Government to combat the spread of Covid-19, the Finance Minister has released a Press Note on 24 March 2020 announcing various relaxation norms in order to ease the tensions of missing deadlines under various statutory laws. The Finance Minister has announced several relaxations across regulations including Income Tax, GST/Indirect Tax, Customs, Corporate Affairs etc.
For detailed information regarding the relaxations, please refer to the following link: Read more »
Continuing with the slew of measures to reduce tax litigation, the Finance Minister announced a scheme for settlement of tax disputes between the tax payer and the tax department called the Direct Tax – Vivad se Vishwas Scheme or DT-VsVS to achieve a fast track closure of pending appeals concerning direct taxes. The objective is to reduce the time, energy and resources both on the part of the Government as well as taxpayers.
DT-VsVS is inter-alia applicable in respect of certain appeals which are pending or time limit for filing an appeal has not expired as on 31 January, 2020 before Commissioner (Appeal), Income tax Appellate Tribunals, High Courts or Supreme Court.
On 18 March 2020, the Finance Ministry vide Notification no. 18/2020 issued rules for implementing the DT-VsVS. The rules inter-alia provided for the various forms / procedure for making a declaration under the DT-VsVS along with the timelines in which such forms are to be filed / declaration is to be made by both the tax payer and the tax authority.
As per DT-VsVS, if a tax payer has opted for this scheme and has paid the prescribed disputed tax (100 per cent) / interest or penalty (25 per cent) on or before 30 June 2020, the tax authority shall give the tax payer immunity from any proceeding for an offence, penalty or interest in respect of the dispute for which DT-VsVS is opted.
Further, the Government of India vide Circular no. 7/2020 dated 4 March 2020 has issued 55 FAQs to provide clarity to the tax payers on several open issues emanating from this scheme.
In terms of the Taxation Laws (Amendment) Act, 2019 ("TLA"), the Government has offered reduced base corporate tax rate of 22 per cent [under newly inserted section 115BAA of Income-tax Act, 1961 ('ITA')] and 15% for new domestic manufacturing companies [under newly inserted section 115BAB ITA], subject to fulfilment of certain specified conditions. A tax payer who wishes to avail the concessional tax rate needs to exercise their option in prescribed manner before due date for filing return u/s 139(1) ITA, for any Assessment Year ('AY') commencing from AY 2020-21 onwards.
Accordingly, new Rules 21AE & 21AF, for exercising option to avail the concessional tax rate, have been notified vide Notification no. 10/2020 dated 12 February 2020, effective 1 April 2020. As per the aforesaid rules, Form 10-IC or Form 10-ID, as applicable, is to be furnished electronically for exercising the option. The forms seek general details of the company along with a declaration that - the option once exercised for a Financial Year, cannot be withdrawn for the same or subsequent Financial Year. Further, there is no sunset Financial Year provided by when this concessional rate is to be opted and it has been left up to the tax payer to decide the Financial Year in which the Assessee wishes to exercise this option.
As per provisions of ITA, Income-tax paid or payable by a taxpayer is not an allowable expenditure. Section 40(a)(ii) ITA specifically provides for disallowance of any rate or tax levied on the profit or gains of any business or profession, or assessed at a proportion of or otherwise on the basis of any such profits or gains. However, there is no explicit mention of "cess" paid on the Income-tax. This has led to uncertainty regarding deductibility of "cess" and has resulted in litigation between the tax payer and the tax authorities before various courts.
There have been divergent rulings on this issue, where various tax tribunal / courts have ruled against the tax payer and held that education cess is a part of tax and hence, not an allowable deduction in accordance with section 40(a)(ii) ITA.
In a recent ruling in the case of Sesa Goa Limited vs. The Joint Commissioner of Income-tax, Goa (Tax Appeal No. 17 of 2013 and Tax Appeal No. 18 of 2013) dated 28 February 2020, the Hon'ble Bombay High Court held that Secondary and Higher Education Cess is not 'tax' and hence, should not be disallowed under section 40(a)(ii) ITA. The Hon'ble Bombay High Court relied on a circular issued by by the Central Board of Direct Taxes (CBDT) (F. No. 91/58/66-ITJ(19) dated 18 May 1967). In the said circular it was clarified that the legislators had consciously omitted the word 'cess' from section 40(a)(ii) ITA so that only taxes paid are disallowed and not cess.
The Hon'ble Bombay High Court has followed the ruling delivered by Hon'ble Rajasthan High Court in the case of Pr. CIT v. Chambal Fertilizers and Chemicals Limited [D.B. IT Appeal No. 52 of 2018, Dated 31-07-2018], wherein it was similarly held that Education cess is not tax and hence, should not be disallowed under section 40(a)(ii) ITA.
However, it needs to be noted that the Hon'ble Supreme Court has, in past, held that surcharge levied by Finance Act every year is to be treated as income-tax. Education cess (now health and education cess) is described as an additional surcharge in the Finance Act. Thus, there could be a risk of education cess being considered akin to income-tax for the purpose of section 40(a)(ii) ITA. This ruling of the Hon'ble Supreme Court has not been considered in the decisions pronounced by the Hon'ble High Courts discussed above.
However, it is also pertinent to note that while education cess does go into national corpus of India like income-tax, it is utilised only for specific purpose, for which it is collected. Since the Supreme Court decision was delivered in context of surcharge and nature of education cess was not discussed, it would be interesting to see the interpretation by the Supreme Court in future.
The Government of India on 12 February 2020 approved the signing and ratification of the Protocol amending the Agreement between India and Sri Lanka for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The move entails updating the preamble text and inclusion of Principal Purpose Test ('PPT'), a general anti-abuse provision in the Double Taxation Avoidance Agreement ('DTAA') between India and Sri Lanka, which will result in curbing of tax planning strategies which exploit gaps and mismatches in tax rules.
The amendment to the DTAA could have been made via the Multilateral Instrument ("MLI") as India is a signatory to the MLI; but Sri Lanka is not a signatory to the MLI. Therefore, the aforesaid amendment of the India-Sri Lanka DTAA bilaterally was required to meet the minimum standards on treaty abuse under Action 6 of G-20 OECD BEPS Project.
Martin Wörlein
Partner, Head of India practice
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