Budget 2020 Direct Tax Highlights

Note: When you read the below changes in Direct Tax Laws in budget 2020, we bet you won't find simplification anywhere.

• Individual Tax Rates: No change in tax slabs and rates. Optionally, a new set of reduced tax rates can be adopted by individuals only in case they forego all major exemptions and deductions like 80C, 80D (Mediclaim), 80G (Donations), HRA Exemption, Interest on housing loan etc. Further, while for those having no business income can make a choice every year, those having business income have to perpetually follow the new tax regime if once adopted, with the option to withdraw once and then never have this option again. As such, there seems to movement towards simplification, rather the taxpayers will now have to take professional help to make the better choice. Further, this move shall be materially helpful only to those having higher incomes, more than Rs. 15-20 lakh to be precise. Hence, not much benefit for lower middle class and lesser income earners.
• Corporate Tax Rates: Corporate tax rates were already reduced by the Government in last budget 2019 and then again in the mid of the year 2019-20. The companies are taxed at 30% if turnover is more than 400 crores. For other companies, the tax rates were reduced to 25% in last budget. Again in mid 2019, the reduced tax rate of 22% was specified for the companies if they forego all deductions, exemptions and set off of carried forward losses and depreciation; and a reduced tax rate of 15% for new companies engaging in manufacturing. In this budget, only this 15% rate has been extended to new power generation companies. It is worthwhile to note that for companies having income less than Rs. 1 crore, there is no reduced tax of 22% as surcharge of 10% is applicable to them which makes effective tax rate equal to 24.20% that too after foregoing all deductions and exemptions, whereas they can opt to pay normal 25% income tax by keeping all those benefits. Surcharge of 7% begins for normal companies on exceeding income of Rs. 1 Crore. So again, no benefit to small income earners, major benefit extended to those earning more than 1 crores.
• Increased tax on Capital Gain on Immovable Property: There is as such no direct increase in tax on sale of immovable property but an indirect change in tax law has lead to this increase in tax effect on long term capital gains on sale of those properties which were acquired before 01.04.2001. While calculating the long term capital gain, indexation benefit is given to inflate the cost of acquisition as per cost inflation index. Since the cost inflation index starts only from 2001-02, if any asset has been acquired before 01.04.2001, its value as on 01.04.2001 is taken as the cost of acquisition for indexation and calculation of capital gains. Till now, taxpayers used to get the valuation certificate from registered valuer certifying the 'market value' of the property as on 01.04.2001 which is higher and hence with increased cost of acquisition, lesser capital gain was calculated. Now, in this budget, amendment is made to ensure that the value as on 01.04.2001 does not exceed the circle rate on that date, which will obviously be lower than the market value and hence more tax will be payable on increased amount of capital gain.
• Increase in threshold limit for Tax Audit u/s 44AB and due date of filing return: Till now, every taxpayer doing business having turnover exceeding Rs. 1 Crore was liable to get the accounts audited from a CA and furnish the audit report in form 3CA/3CB along with 3CD before filing income tax return. This limit was effectively Rs. 2 Crore for individuals, HUF and firms (eligible assessee) keeping in view the benefit given by section 44AD which says that eligible assessee having turnover less than Rs. 2 Crore can declare profit of 8percent/6percent of turnover and not required to get accounts audited. Now, the limit under section 44AB has been revised to Rs. 5 Crore (if 95% receipts and payments are cashless) and no change in section 44AD has been proposed as apparent from Finance Bill. Hence now the position seems like, companies & LLPs will be exempt from tax audit if turnover is less than Rs. 5 Crore and Individuals, HUF & Firms shall be exempt from tax audit only upto turnover of Rs. 2 Crore if they declare 8/6 percent profit. The due date of filing of income tax return for auditable assessee was 30th September till last year, now it has been increased to 30th October, but the audit report now needs to be filed at least 1 month prior to filing of Income Tax Return.
• Reduction in cases of double taxation in property registered below circle rate: In Income Tax Law, double tax is levied on the difference between the registry value and circle rate of the immovable property sold if former is lesser than the latter. How? The buyer of the property is liable to pay income tax on the difference as gift since he has got the property at rates lesser than the circle rate of the property, and the seller is liable to pay capital gains tax on higher amount as he has to take the circle rate as sale value for calculating gain in case the he has sold the property on rate less than that. Till now, a buffer of 5% difference was allowed between circle rate and registry value, where both of the above provisions were exempted, not this buffer has been increased to 10%. Hence now, if the difference between the circle rate and registry value is less than 10%, no gift tax on buyer and no extra capital gain on seller.
• Extending the tax holiday time for Startups: To help boost Start-up culture, the Income Tax Law gives 100% deduction of income to eligible startups (recognised by DPIIT) having turnover upto Rs. 25 Crores, for any 3 consecutive years out of 7 years from year of incorporation. Now this budget has allowed the startups to take this deductions for any 3 consecutive years out of 10 initial years considering the nature of business models of startups in which income starts generating on later stage. The benefit has also been extended to include startups having turnover upto Rs. 100 Crores in place of current Rs. 25 Crores.
• Deferment of tax on ESOPs by Startups: Currently, the ESOPs are taxed at two stages. Firstly, when the ESOP option is exercised by the employee, it fair value adds to his income as perquisite and TDS is accordingly deducted by the employer. Secondly, when the ESOP shares are sold, the difference between sale value and fair value as on exercising, is charged to capital gains tax. While the second taxability is acceptable, the first taxability hampers the cash flow in the hands of employee since no money has been received by him on exercising the ESOP option, but he has to pay tax on perquisite. Now for startups only, it has been proposed that tax be levied and accordingly TDS be deducted by employer on perquisite value after 48 months from year end, the date when employee leaves the organisation or the date he sells the ESOPs, whichever is earlier. This move, Government says, will help the startups acquire and retain the talent.
• Reduction in TDS rate on Fee for Technical Services: Currently, TDS @ 10% is deducted on Fee for technical services (FTS) under section 194J. There is a thin-line between FTS and works contract on which TDS rate is 2% under section 194C, which leads to litigation between taxpayer and tax-authorities. Hence, TDS rate on FTS under section 194J has been reduced by this budget to 2% from current 10%. Please note that other payments under section 194J - Professional services, Directors' remuneration (other than salary) and Royalty continue to be in 10% TDS rate. Hence under section 194J, there would be two rate of TDS, 2% for FTS and 10% for other payments.
• New TDS provision of 1% for E-Commerce Companies & Participants: To bring all E-commerce sellers into taxnet, this budget has inserted a new section 194-O to instruct e-commerce operators (Amazon, Flipkart etc.) to deduct TDS @ 1% while making payment to the sellers on their platform. Threshold limit of Rs. 5 Lakh has been proposed in case of e-commerce participants being Individuals or HUF. For others, no threshold shall be there and TDS shall be deductible on very first rupee paid by e-commerce operator.
• Faceless assessment to Faceless Appeal: Last year, FM had proposed the faceless scrutiny of income tax returns under section 143(3) in order to do away with the harassment faced by taxpayer from the tax officer and also to curb revenue loss due to corruption in assessment cases. The same has also been implemented to a larger extent. However, the appeal to Commissioner of Income Tax (Appeals) was still in face to face hearing mode. The application to CIT(A) could be filed online but hearing was done physically in the office of Commissioner. Now, this budget has proposed faceless appeal also, in order to bring ease and transparency in that process too.
• No stay on demand by ITAT without 20% demand deposit: Currently, in case of the appeals which are pending before the tribunal, it can grant stay on deposit on demand upto 180 days extendable upto 365 days considering the merit of the application made by the taxpayer. This power was unconditional till now, but this budget has proposed to put a condition that taxpayer shall have to deposit at least 20% of the tax demand before ITAT can grant stay. This can prove to be detrimental to the finances of those genuine taxpayers who are facing litigations due to error of tax authorities.
• Removal of Dividend Distribution Tax (DDT): Till now, every company who paid dividends to its shareholders, had to deposit Corporate Dividend Tax before paying such dividend at effective rate of 17.65% plus surcharge and cess. The dividend is the distributed profit to owners (shareholders) out of already taxed income of the company. So, in effect, DDT is the second tax on the same profits. Dividend after getting taxed at company end, was tax free in the hands of the recipients (the shareholders), if the total annual dividend income of a shareholder from all companies was less than Rs. 10 Lakh. So, the same income (profit of the company) is taxable on 3 instances - first corporate income tax on profits, then DDT on distributing the already taxed profits, then personal income tax on these dividends in case the dividend income exceeds Rs. 10 Lakh. Now, DDT has been proposed to be abolished by this budget and all dividend be taxable in the hands of shareholders only. A partly welcome measure since DDT was an extra compliance on the companies but for the shareholders now who were enjoying tax free income in their hands, will have to pay tax on it, although theoretically more cash with the company on account of abolished DDT could mean increased dividends to shareholders.
• NRI status modification: Currently, a person of Indian origin (POI) who stayed in India for less than 182 days was considered NRI and his global income was not subject to tax in India. This limit has been reduced to 120 days in this budget. Hence, if a POI stays in India for 120 days or more, he will be considered as a resident in India and tax scope of his global incomes would be more. Further, now a person who has been a non-resident in India for 7 out of 10 preceding years shall be considered as a Resident but not ordinarily resident, thereby reducing the tax scope of his global income. Also, a person who is an Indian citizen, but not a tax resident in any other country, he shall be considered as a tax resident in India despite not fulfilling any other conditions. This has been done to invalidate the mischievous attempts by HNIs to avoid taxability in any country including India by managing their stay.
• Vivaad se Vishwas Dispute Resolution Scheme: Currently, around 43,000 cases are pending in various institutions relating to income tax litigation between taxpayers and tax authorities. Government has proposed this scheme to allow taxpayer to close the dispute by depositing the disputed tax amount by 31st March 2020 and getting waiver from the interest and penalties. This scheme will be extendable upto 30th June 2020 by deposit of some extra amount above disputed tax. This move may help Government collect substantial funds in this time of financial crunch.