Economic Turnaround by ‘Simplified’ Tax Reforms?

Economic Turnaround by Simplified Tax Reforms

Article By: Dhwanil Shah

Inspite of major concessions announced by way of an Ordinance in October 2019, the Indian economy continued to skedaddle considering the global economic meltdown.

1.  Background and Overview

The afore-mentioned revelation necessitated bold steps from our Hon’ble Finance Minister (‘FM’) to present a simplified/populous budget resulting into a quick economic turnaround. However, whether such a ‘Simplified’ budget really unlocked potential of a complicated economic turnaround still remains an intimidating question. Some key amendments coupled with their challenges are listed below:

  • Salient features of key amendments and other key considerations:
  • Personal Tax Regime (‘PTR’):

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

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

  1. Individuals and HUF having various incomes would not be allowed to claim various deductions/incentives –
    1. being certain Business deductions and deduction from Other Incomes;
    1. House property deduction;
    1. Salary deductions including standard deduction and professional tax;
    1. Major deductions under Chapter VI-A (i.e. deductions under section 80C, 80D, etc); and
    1. Set-off/carry forward of losses in relation to the above
  • Further, Alternative Minimum Tax (‘AMT’) shall not be applicable to an individual/HUF opting for PTR. Consequentially, 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. Therefore, PTR may be considered as a regressive step against promoting growth in investments and may impact adversely sectors like insurance, banking, capital markets, social security, etc.

  • Abolition of Dividend Distribution Tax (‘DDT’):

The Finance Bill proposes to abolish DDT in the hands of the 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 on a dividend exceeding INR 5,000 per shareholder. Further, it has been proposed to provide a deduction of interest expense up to 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, dividends distributed by companies for a particular AY (subject to conditions) shall be allowed as a deduction from dividend income. Further, benefit of deduction has also been extended to companies opting for CTR.

  • In view of the above, the Company vs LLP Structure needs to be revaluated.
  • 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 the case of banks and NBFCs where dividend income is a major source of business income, no separate provisions have been carved out.
  • Other Key Amendments

A.  Start-ups – Rationalising provision for a tax deduction and ESOP Taxation

With a view to rationalize 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
  • Further, the threshold of turnover for claiming such deduction 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 TDS on ESOPs perquisites of such start-ups. The amendment shall be applicable in case of the below events, whichever is earliest:

Event Proposed Timing of withholding taxes
Exercise of Options Expiry of 5 years from the end of the relevant financial year
Sale of Shares Date of sale by an individual taxpayer
Cessation of Employment Date of cessation of employment

B. Tax withholding on e-commerce transactions

TDS @ 1% shall be made applicable on payments by e-commerce operators (who owns/operates a digital e-commerce platform) to e-commerce participants (who sell goods/providing services/both). Further, the exception is provided for payments to such participant who is an individual/HUF if the transaction value during a particular AY is less than INR 5 lakhs.

This amendment is most likely to compel e-commerce giants like Amazon, Flipkart, etc to undertake heavy TDS compliances while making payments to their e-commerce participants.

C.  Increasing Tax Audit Turnover Threshold

The FM proposes to increase the turnover threshold for tax audit applicability to INR 5 Crores provided that aggregate cash receipts/cash payments by such taxpayer do not exceed 5% of the total receipts/payments respectively during the financial year.

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

ITAT may grant a stay of demand on condition that the taxpayer deposits not less than 20% of the amount of tax, interest, fee, penalty, etc.

E.  Revised Due dates for various compliances

Particulars Original Due-dates Revised Due-dates
Furnishing Tax Audit Report September 30 September 30
E-filing of return of income in cases of Tax Audit Applicability September 30 October 31
Furnishing Transfer Pricing Audit Report November 30 October 31
E-filing of return of income in cases of Transfer Pricing Applicability November 30 November 30

F. ‘Vivad se Vishwas’ Scheme

  • Taxpayers having pending appeals at any level can take the benefit from this scheme.
  • The scheme provides to pay only the amount of the disputed taxes with a complete waiver of interest/penalty provided such payment is made on/before March 31, 2020. Those who avail of this scheme after March 31, 2020 will have to pay some additional amount. The scheme will remain open till June 30, 2020.
  • Concluding Thoughts

Considering the fact that taxpayers at various levels are now being provided alternative tax regimes, the same may lead to complications of the tax computation mechanism and may not entail a tangible benefit to such taxpayers. Accordingly, such amendments proposed by the FM do not truly indicate a simplified system of taxation.

CA Dhwanil Shah - Ahmedabad

Dhwanil Shah is a qualified Chartered Accountant based in Ahmedabad having over 4 years of experience and working in one of the top-most Multinational Consultancy firms in the world.

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