Speculations were quintessentially sky high as the corporate sector waited for some big bang announcements in this year’s Union Budget given the dipping economic indicators. Though there wasn’t much room left for the North Block to further cut down corporate tax rates due to shortfall in the tax collection numbers set for this fiscal, Budget 2020 has introduced some sweeping changes in the existing tax regime.
Much anticipated industry demand for abolishing Dividend Distribution Tax (DDT) in the hands of Indian companies has been addressed by reverting to the internationally accepted practice of taxing dividend in the hands of shareholders as introduced originally in 1997. Though the existing system facilitated easy tax collection, it was viewed to be regressive in nature.
Dividends received by non-resident shareholders will now be taxed at 20 percent under domestic tax laws, subject to applicable tax treaty which could provide reduced tax rates of taxing dividend. The proposed amendment would also reduce the uncertainty on the availability of credit against tax payable in the home jurisdiction of the overseas shareholder. Corporates will now need to get back to the drawing board to undertake jurisdiction analysis and re-assess the most tax-efficient shareholding structure i.e. whether a company, LLP or any other form of trust would work better. There is also a provision to remove the cascading effect by allowing set-off for dividend distributed through a holding-subsidiary structure.
On the flip side, the resident individual shareholders falling in the highest tax bracket of 43 percent would have to cough up more tax on dividends since the amount of dividend will be taxed at such higher tax rates.
The Startup India scheme has been the flagship initiative of the Narendra Modi government and it was introduced for nurturing innovation and promote entrepreneurship. Recognising that startups are growth engines of the economy, finance minister Nirmala Sitharaman has provided a booster shot with significant amendments proposed for the startup community.
Budget 2020 has expanded the spectrum of startups eligible for availing 100 percent tax holiday on profits covering bigger startups of turnover up to Rs 100 crore in the year of claim. This is aligned with the Department for Promotion of Industry and Internal Trade (DPIIT) regulatory norms which recognise the entity as eligible startup for turnover up to Rs 100 crore.
An eligible startup can also claim deduction for any three consecutive assessment years out of 10 years (previously 7 years) from the date of its incorporation making the section more effective since most startups have longer gestation period before they turn profitable.
Widening country’s tax base has been the key priority of the Modi government as evident from sweeping reforms like the Goods and Services Tax (GST), demonetisation, linking of PAN with Aadhaar, introduced in the recent times. Despite such measures, the current tax-GDP ratio is abysmally low. It is believed that bringing a larger chunk of people into tax net will create more fiscal discipline.
A new section for an optically flourishing e-commerce sector has been proposed wherein e-commerce companies would now be required to deduct tax at source (TDS) on payments to be made to the seller of goods and services on gross sales effected through the e-commerce platform. An exception has been created for individuals and Hindu undivided family (HUF) whose gross sales from the platform does not exceed Rs 5 lakh in a year.
For e-commerce operator, this means creating more robust technology platforms and enabling tax complaint back end infrastructure to capture data and ensure compliance.
Data and technology are the backbones for creating a strong economy, this is aligned with the current government’s vision. Measures for digitising tax administration are a prominent feature of the last few Budgets. Even this year, for curbing certain old-age practices and further reducing human interface, schemes have been proposed for making the first appellate and penalty proceedings online.
Ceremoniously, the finance minister started her Budget speech by thanking the people of India for awarding mandate to the Modi government, raising expectations of the common man.
The Budget 2020 has received a mixed bag of response from stakeholders witnessing sudden market crash.
It will now be interesting to see whether the think tank’s proposals in this Budget will bring back investor’s confidence to propel the ship of the Indian economy reach towards $5 trillion goal.
(The writer is Director – Tax and Regulatory Services, EY India)
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Updated Date: Feb 04, 2020 10:48:30 IST