Finance minister Nirmala Sitharaman presented the Union Budget on February 1 amidst a lot of hopes and expectation from an ailing economy. As expected, the focus of the Budget was on agriculture, education, skill development, and entrepreneurship.
An important aspect of any Budget that equally excites the tax fraternity, as well as the common man, is the tax proposals. The finance minister presented quite a few direct tax proposals that aim at providing much-expected tax relief to individuals, simplification of the tax structure and ease in compliances, providing impetus to startups, and settlement of protracted tax disputes.
Abolition of Dividend Distribution Tax
One of the key expectations from the Budget was the abolition of Dividend Distribution Tax (DDT). The foreign investors were particularly keen on this, as many of the Indian tax treaties (Double Taxation Avoidance Agreements) do not allow underlying tax credit in the home country of the foreign investor in respect of the DDT paid by the Indian companies. Accordingly, in such cases, the foreign investors have to rely on the domestic tax laws of their countries, and many a times, such relief may not be available.
Interestingly, the memorandum to the Finance Bill, 2020, also mentions that levying DDT at a flat rate irrespective of the marginal rate at which the recipients are otherwise taxed is iniquitous and regressive.
It is now proposed to abolish DDT and revert to the classic system of taxation, where dividends are taxed in the hands of the shareholders. This will enable foreign investors to claim tax credit in their respective countries for the tax paid on dividends in India.
Similarly, tax payable by companies and mutual funds, as specified, on the income distributed to the unitholders is also proposed to be abolished. Such income would consequently be taxable in the hands of the unitholders.
In order to avoid the cascading effect, section 80M of the Income Tax Act, 1961, that was omitted after introduction of DDT is proposed to be given a fresh lease of life with certain amendments. This will enable domestic companies to claim deduction in respect of dividend received from another domestic company, as specified.
It is also proposed to limit the deduction of interest expenditure to 20% of dividend income/income from units.
Correspondingly, changes have been proposed under the provisions relating to withholding tax (tax deducted at source).
A long-pending demand of the companies and investors has been met with the abolition of DDT.
Startups get a boost
India has emerged as one of the key destinations for startups and the ecosystem is developing fast.
Startups also offer a lot of employment opportunities, especially to the youth. The government has been quite proactive in meeting the demands of the startups and addressing their concerns. Accordingly, this year’s Budget has proposed the following changes:
• Rationalisation of the provisions of section 80-IAC of the Income Tax Act, which provides for tax holiday to eligible startups.
Currently, an eligible startup with turnover not exceeding Rs 25 crore can claim tax holiday for a block of three consecutive years out of seven years from its incorporation. It is proposed to enhance the turnover threshold to Rs 100 crore and extend the block from seven years to 10 years. Thus, an eligible startup with turnover not exceeding Rs 100 crore would be able to claim tax holiday for a block of three consecutive years out of 10 years from its incorporation.
• Further, startups have largely been resorting to employee stock option plans (ESOPs) in order to attract and retain talent. Currently, the ESOPs are taxed as perquisite in the hands of employees at the time of exercise, irrespective of whether the employee chooses to sell the shares immediately or not. This leads to a cash flow problem for an employee who chooses to retain the shares for some time. It is proposed to defer ESOP taxation in the hands of employees of startups to the actual sale of shares by the employee or five years from the year of exercise or when the employee leaves the job, whichever is the earliest.
These measures would provide a further boost to the startups and help employees in managing their cash flow to pay their taxes.
Vivaadh se Vishwas: Scheme to settle tax disputes
Considering the success of the Sabka Vishwas, the legacy dispute resolution scheme (indirect tax amnesty scheme) introduced last year for indirect taxes, the Budget has proposed to introduce a similar dispute resolution scheme for direct taxes currently pending before various appellate forums from commissioner (appeals) to the Supreme Court, known as Vivaadh se Vishwas (No dispute but trust).
It is proposed that if a taxpayer pays the amount of disputed tax by March 31, 2020, the amount of undisputed interest and penalty shall be completely waived. The taxpayers availing the scheme after March 31, 2020, but before June 30, 2020, will have to pay some additional amount. The scheme would remain open till June 30, 2020.
An important point to note here is that unlike, the indirect tax amnesty scheme that offered concession (discount) on the amount of disputed tax, under the direct tax amnesty scheme the entire disputed tax amount is required to be paid. This issue requires a reconsideration to make this scheme a success.
It’s time to go fully digital for assessments and appeals
On the lines of the faceless assessment scheme launched last year, a faceless appeals scheme is also proposed to be launched.
This is a welcome step and is likely to reduce tax litigation and bring in transparency in the process of appellate proceedings.
Overall, the Budget has a lot of positive steps to help ease the compliances, reduce litigation and provide impetus to the economy.
Views are personal. The author is national tax leader–Grant Thornton India LLP, with inputs from CA Yogesh Kale.