The Finance Bill 2020 that was presented in the Parliament on 1 February 2020 was passed by the Lok Sabha on 23 March with various amendments. The key amendments are relating to tax residency, enlarging the scope of tax equalization levy to cover e-commerce supply or services, limiting the scope of tax collection at source on remittances outside India by excluding remittance below INR 0.7 million and on sale of goods by excluding exports and imports, tightening the provision relating to cash withdrawal for the persons who have not filed the tax returns by levying tax on cash withdrawal exceeding INR 2 million and other miscellaneous amendments. The Key Amendments are as under:
As per recent reports, the government has notified the Lok Sabha for moving amendments to the bill. Such amendments are expected to be tabled in the Parliament soon.
Key highlights of the amendments are as follows:
|Amendments in residency rules
- An Indian citizen, employed overseas, was considered as a resident if his stay in India amounted to 182 days or more in the previous year. The Finance Bill 2020 reduced this duration to 120 days, which adversely affected the people making frequent visits to India or staying in India for an extended duration.
- The Finance Bill 2020 also provided that an Indian citizen who is not liable to tax in any other country by reason of domicile, residence, etc. would be deemed to be a resident of India, and thus, their global income became taxable in India
- The reduced duration of 120 days of stay in India and the deemed residency rule would now be applicable only to the Indian citizens or persons of Indian origin having a total income, other than income from foreign sources, exceeding INR 1.5 million during the previous year.
Further, such a person would be treated as RNOR if his stay in India is less than 182 days.
- The expression ‘income from foreign sources’ has been explained 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 that an individual or HUF shall be said to be ‘not ordinarily resident’ if the individual or the manager of HUF has been a non-resident in India in seven out of ten previous years preceding that year.
The above amendment has been omitted, and henceforth, the earlier provision shall continue to apply viz. an individual or HUF shall be said to be a ‘not ordinarily resident’ if such individual or manager of the HUF is a non-resident in nine out of ten previous years preceding that year, or has been in India for 729 days or less in the preceding seven previous years in addition to the two conditions stated above.
New Tax regime for Individual and HUF
Similar to a person having a business income, a person having professional income also needs to exercise its option for old or new regime before the due date of filing the tax return and the option once exercised shall apply to subsequent years.
|Voluntary contribution with specific direction to form part of the corpus, not income
- An explanation is added to clarify that income of the fund or trust or institution or any university or any other educational institution or any hospital or other medical institution shall not include voluntary contribution made with a specific direction that they shall form part of the corpus of fund, trust, etc.
Expanding the scope of provisions relating to trusts, institutions to universities, hospitals, other institutions
The provision is now extended to similar contributions made to the corpus of university, educational institution, hospital, other medical institution referred to in Sec 10(23C).
- Currently, any amount credited or paid, by any eligible trust or institution, to any other trust or institution registered under section 12AA, being in the nature of contribution with a specific direction that they shall form part of the corpus of the trust or institution, is not treated as application of income for charitable or religious purposes.
Amendment to section 10(23FE)
- The amendment in Finance Bill 2020 restricts the exemption under Section 10(23FE) granted to a specified person in respect of income in nature of dividend, interest or long term capital gain arising from an investment made in India whether in debt or equity on or before 31 March 2024.
- The above exemption will now apply to an investment in share capital or unit, as against the earlier proposal of it being applicable to equity investment during the period from 1 April 2020 to 31 March 2024
- The number of entities in which investment could be made to avail the above exemption has been increased. The investment can now be made in –
- Business trust specified in section 2(13A)(i)
- Category I or II Alternative Investment Fund regulated by SEBI(Alternative Investment Fund Regulations, 2012) having 100% investment in one or more of the entities carrying on business of developing and/or operating and maintaining any specified infrastructure facility.
- The amendment also provides that in case the person availing the above exemption fails to satisfy any condition for exemption, then the said income for which exemption is claimed would be taxable in the year in which the failure takes place.
- Further, in addition to a wholly-owned subsidiary of the Abu Dhabi Investment Authority and a sovereign wealth fund, a pension fund specified by Central Government would also be eligible to claim the above exemption.
|Widening the scope of dividend income eligible for deduction
The provision is now expanded to include dividends distributed out of dividends received from a foreign company or a business trust as well.
- To avoid cascading effect of taxation of dividends, the Finance Bill 2020 had provided for a deduction of dividend received by a domestic company from another domestic company to the extent of dividend distributed or actual dividend received whichever is lower
Deferment of claiming deduction under section 80M
- The Finance Bill proposed that companies opting for the new tax regime would be eligible to claim a deduction for didvidend distributed against dividend received from the FY 2019-20. The same is now available from the FY 2020-21.
Dividend income in case of Business Trust (Section 194LBA)
- Along with the proposed abolition of DDT, the distributed income of the business trust was taxable, and taxes were proposed to be withheld at the rate specified under section 194LBA. The Act now does not require any taxes to be withheld out of dividend income from a Special Purpose Vehicle (SPV) if such SPV has not opted for reduced tax rates under the new tax regime.
Dividend income subject to DDT tax received after 1 April 2020
- With the abolition of DDT, there was an ambiguity as to whether the dividend which has been subjected to DDT would be taxable in the hands of the recipient if the same is received after 1 April 2020. It is now clarified that the dividend income, which is subject to DDT and received after 1 April shall be exempt in the hands of the shareholder/unitholders.
- Finance Bill proposed to extend the benefit of Advance Pricing Agreement (APA) and Safe Harbor to profit attribution to PE of non-residents in India. The definition of ‘Safe Harbor’ is now aligned with such extension of benefit so as to include the income, deemed to accrue or arise under Section 9(1)(i).
|Tax Deduction at source
|Tax on Interest income under section 115A
- Under the current regime, interest received by non-resident or foreign company from infrastructure debt fund or interest income from Indian Company or interest on certain bonds and government securities and income from units of a business trust is taxable at a standard rate of 5%.
- The Finance Act now amends the provision to state that the income tax on interest received from an infrastructure debt fund will be taxable at the rate of 5%, and other interest or income is taxable at the rate specified under the respective sections.
Reduction in TDS rate for royalty income
- The reduction in withholding tax rate for Fees for Technical Services from 10% to 2% is now extended to Royalty income, where such Royalty is received for sale, distribution, or exhibition of cinematographic films. For professional services, the withholding rate would remain the same at 10%.
Income in respect of units
- The Finance Bill introduced a new section for withholding of taxes in respect income from units of a Mutual Fund specified under Section 10(23D) or units from the administrator of the specified undertaking or units from the specified company. The Finance Act now exempts income in the nature of capital gain from the above proposed provision.
Widening the scope of tax deduction for the payment made in cash by banking companies, co-operative societies and post office
- The Finance Act, 2019 inserted section 194N which provides that any banking company, co-operative society engaged in carrying on the business of banking or post office responsible for making any payment or aggregate of payments to a person in cash shall deduct tax at source @ 2% in excess of INR 10 million.
- In order to reprimand taxpayers who are not filing Income Tax Returns and withdrawing huge cash amounts, the section is now amended to provide that if a recipient has not filed tax returns for all the three financial years immediately preceding the financial year in which the cash payment is made and the time limit to file such tax returns has expired, the tax deduction rate shall be as under:
- Cash payment in excess of INR 2 million but not exceeding INR 10 million – 2%
- Cash payment is excess of 10 million – 5%
- The amendment further provides that the Central Government may in consultation with RBI notify recipient to whom the provisions of above clause or provision of this section shall not apply or apply at a reduced rate if the conditions as specified in the notification are satisfied by such recipient.
- The above amended provision shall come into effect from 1 July 2020.
Payment of certain sums by e-commerce operator to e-commerce participants:
- The Finance Bill, 2020 proposed to insert new section 194-O to include e-commerce participants under the tax net. Under the proposed provisions, an e-commerce operator is required to withhold tax on the gross amount of sale of goods or provision of services made through its electronic platform paid or credited (whichever is earlier) to e-commerce participants.
- E- commerce operator was defined to mean a person who owns, operates, or manages digital or electronic facility or platform for electronic commerce and is responsible for paying to e-commerce participants. The Finance Act has amended the definition of E-Commerce operator to mean a person who owns, operates or manages digital or electronic facility or platform for electronic commerce. The Finance Act also includes within the ambit of e-commerce operator, a person responsible for paying to e-commerce participants.
|Tax Collection at Source
|Amendments in proposed changes in section 206C
The Finance Bill, 2020, proposed to widen the scope of tax collection at source by including amount received on overseas remittance under the Liberalised Remittance Scheme (LRS), for sale of overseas tour packages as well as on sale of goods over a limit. The amendment was proposed to be applicable from 1 April 2020. The Act now makes this provision
TCS on amounts remitted under LRS
- applicable from 1 October 2020.
TCS on sale of goods
- As per the Finance Act, the authorized dealer does not have to collect tax from such person if the aggregate amount being remitted is less than INR 0.7 million and is for the purpose other than the purchase of tour program package. However, in case the amount exceeds INR 0.7 million, the authorized dealer is required to collect a 5% tax on the excess amount.
- In order to reduce the burden on the individuals who go abroad for any education and has obtained a loan from the financial institution as defined under Section 80E, the Act now requires that any remittance of such loan amount shall be subject to a tax collection rate of 0.5%.
- It is clarified that TCS is not applicable to import of goods and export of goods. Further, if the buyer is liable to deduct tax under other provision of Income Tax Act on the goods sold by him to the seller, such seller is not liable to collect tax at source from such buyer.
|Tax Equalization Levy
Exemption to income chargeable to equalization levy
- As per the Finance Act, income arising from e-commerce supply or services chargeable to equalization levy is now to be treated as exempt under section 10(50) of the Act.
Extending the scope of equalization Levy
- The scope of tax equalization levy has been extended. Currently, tax equalization is levied for online advertisement services payable to a non-resident. The Finance Act now includes e-commerce supply or service made on or after 1 April 2020 in the tax equalization ambit. The key amendments in relation the same are as below:
- E-commerce supply or service will include online sale of goods or online provision of services or both facilitated/owned by e-commerce operators. E-commerce operator means non-resident who owns, operates, or manages digital or e-facility or platform for the online sale of goods or online provision of services or both.
- The equalization levy will be applicable at the rate of 2% of the consideration received on e-commerce supply of goods or services or both by the e-commerce operator for the sale or facilities provided to a residentin India or to a non-resident in specified circumstances or to a person who buys goods or services or both using internet protocol address located in India.
- The equalization levy will not be applicable where e-commerce operator has permanent establishment in India, or it is leviable @6% as per existing provision, or the sales of such goods/services is less than INR 20 million during the previous year.
- The equalization levy will be paid by every e-commerce operator by the below due date to the Central government:
||Due date for quarter
- Penaltyequal to equalization levy will be applicable in case of failure to pay the equalization levy.
- In case of any difficulties faced in implementing the above provisions, the government may resolve it by passing an order. However, such an order will not be passed after 31 March 2022.