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Union Budget 2020-Income Tax announcements in Budget Speech

union-budget-2020-income-tax-announcements-in-budget-speech

Finance minister Nirmala Sitharaman presented the Union Budget 2020 in the Parliament today on 1st February 2020. The Finance Minister announced various direct tax matters covering the income tax in her budget speech. 

Extracts from her budget speech covering the income tax matters are reproduced in this article.


The highlights of Budget Speech for Union Budget 2020 on Direct Taxes which the Finance Minister presented before the Parliament are given hereunder-

At the outset, the Finance Minister stated that her Government had spearheaded radical fiscal measures to ensure that India’s economy continued to tread the path of high growth.

She recognized the competition among the countries worldwide to attract investments by offering lower rate of taxes. Further, to boost the competitiveness of the local businesses, tax rates are required to be lowered. 

Therefore, to make sure that India stays globally competitive and a favored destination for investment, the government took a bold historic decision of reducing the corporate tax rate for new companies in the manufacturing sector to an unprecedented level of 15%. 

Similarly, for the existing companies, the rate has also been brought down to just 22%. 

She claimed in the budget speech that due to these measures our corporate tax rates are now amongst the lowest in the world. This will enable companies to expand their businesses and make fresh investments in the coming future.

She is confident that though the government will have loss of substantial revenue due to these measures in the short-run, the economy will reap huge returns on this score in due course.

Personal Income Tax and simplification of taxation: In the interim Budget of 2019, our government exempted individuals having income up to Rs. 5 Lakh from paying any income tax. Presently, an individual pays 20% on income between Rs. 5 Lakh to Rs. 10 Lakh and 30% on income above Rs. 10 Lakh. Further, currently the Income Tax Act is riddled with various exemptions and deductions which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process. It is almost impossible for a taxpayer to comply with the Income-tax law without taking help from professionals.

In order to provide significant relief to the individual taxpayers and to simplify the Income-tax law, I propose to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions.

Under the new regime, an individual shall be required to pay tax at a reduced rate of 10% for income between Rs. 5 Lakh to Rs. 7. 5 Lakh against the current rate of 20%.

For income between Rs. 7.5 Lakh to Rs. 10 Lakh he will pay at the reduced rate of 15% against the current rate of 20 %. 

Similarly for the income between Rs. 10 Lakh to Rs. 12.5 Lakh the taxpayer will pay at a reduced rate of 20% against the current rate of 30 %. 

The income between Rs. 12.5 Lakh to Rs. 15 Lakh will be taxed at the reduced rate of 25% against the existing rate of 30 %. Incomes above Rs. 15 lakh will be continued to be taxed at the rate of 30 %. 

Those earning up to Rs. 5 lakhs shall not pay any tax either in the old regime or in the new regime. 

The proposed tax structure will provide significant relief to taxpayers and more so to those in the middle class.

Taxable Income Slab (Rs.)
Existing Tax Rates
New Tax Rates
0 – 2.5 Lakh
Exempt
Exempt
2.5-5 Lakh
5%
5%
5-7.5 Lakh
20%
10%
7.5-10 Lakh
20%
15%
10-12.5 Lakh
30%
20%
12.5-15 Lakh
30%
25%
Above 15 Lakh
30%
30%

In the new tax regime, the substantial tax benefit will accrue to a taxpayer depending upon exemptions and deductions claimed by him. For example, a person earning Rs.  15 lakh in a year and not availing any deductions, etc. will pay only Rs.  1,95,000 as compared to Rs.  2,73,000 in the old regime. Thus his tax burden shall be reduced by 78,000 in the new regime. He would still be the gainer in the new regime even if he was taking a deduction of Rs.  1.5 Lakh under various sections of Chapter- VI-A of the Income Tax Act under the old regime.

The new tax regime shall be optional for the taxpayers. An individual who is currently availing more deductions & exemption under the Income Tax Act may choose to avail them and continue to pay tax in the old regime.

The new personal income tax rates will entail an estimated revenue forgone of Rs. 40,000 crore per year. We have also initiated measures to prefill the income tax return so that an individual who opts for the new regime would need no assistance from an expert to file his return and pay income tax.

In order to simplify the income tax system, I have reviewed all the exemptions and deductions which got incorporated in the income tax legislation over the past several decades. It was surprising to know that currently more than one hundred exemptions and deductions of different natures are provided in the Income-tax Act. I have removed around 70 of them in the new simplified regime. We will review and rationalize the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate.

Dividend Distribution Tax: Currently, companies are required to pay Dividend Distribution Tax (DDT) on the dividend paid to its shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax payable by the company on its profits.

It has been argued that the system of levying DDT results in increase in tax burden for investors and especially those who are liable to pay tax less than the rate of DDT if the dividend income is included in their income.

Further, non-availability of credit of DDT to most of the foreign investors in their home country results in reduction of rate of return on equity capital for them. In order to increase the attractiveness of the Indian Equity Market and to provide relief to a large class of investors, I propose to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients at their applicable rate.

Further, in order to remove the cascading effect, I also propose to allow deduction for the dividend received by holding company from its subsidiary. The removal of DDT will lead to estimated annual revenue forgone of Rs. 25,000 Crore.

This is another bold move which will further make India an attractive destination for investment.

Concessional tax rate for Electricity generation companies: In order to give boost to the manufacturing sector, new provisions were introduced in September 2019 offering a concessional corporate tax rate of 15% to the newly incorporated domestic companies in the manufacturing sector which start manufacturing by 31st March, 2023.

In order to attract investment in power sector, I propose to extend the concessional corporate tax rate of 15% to new domestic companies engaged in the generation of electricity.

Tax concession for foreign investments: In order to incentivise the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, I propose to grant 100% tax exemption to their interest, dividend and capital gains income in respect of investment made in infrastructure and other notified sectors before 31st March, 2024 and with a minimum lock-in period of 3 years.

In order to make available foreign funds at a lower cost, I propose to extend the period of concessional withholding rate of 5% under section 194LC for interest payment to non-residents in respect of moneys borrowed and bonds issued up to 30th June, 2023.

I also propose to extend the period up to 30th June, 2023 for lower rate of withholding of 5% under section 194LD for interest payment to Foreign Portfolio Investors (FPIs) and Qualified Foreign Investors (QFIs) in respect of bonds issued by Indian companies and government securities.

I further propose to extend the concessional rate of withholding of 5% under section 194LD to the interest payment made on the Municipal Bonds.

In order to incentivise listing of bonds at IFSC exchange, I propose to further reduce the withholding rate from 5% to 4% on interest payment on the bonds listed on its exchange.

Start-ups: Start-ups have emerged as engines of growth for our economy. Over the past year, our Government has taken several measures to hand-hold them and support their growth.

During their formative years, Start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term. In order to give a boost to the start-up ecosystem, I propose to ease the burden of taxation on the employees by deferring the tax payment by five years or till they leave the company or when they sell their shares, whichever is earliest.

Further, an eligible Start-up having turnover up to 25 crores is allowed deduction of 100% of its the profits for three consecutive assessment years out of seven years if the total turnover does not exceed 25 crore rupees. In order to extend this benefit to larger start-ups, I propose to increase the turnover limit from existing Rs. 25 crore to Rs. 100 crores. Moreover, considering the fact that in the initial years, a start-up may not have adequate profit to avail this deduction, I propose to extend the period of eligibility for claim of deduction from the existing 7 years to 10 years.

Concessional tax rate for Co-operatives: Co-operative societies play an extremely important role in our economy in facilitating access to credit, procurement of inputs and marketing of products to their members. These cooperatives are currently taxed at a rate of 30% with surcharge and cess. As a major concession and in order to bring parity between the co-operative societies and corporates, I propose to provide an option to cooperative societies to be taxed at 22% plus 10% surcharge and 4% cess with no exemption/deductions. Further, I also propose to exempt these co-operative societies from Alternative Minimum Tax (AMT) just like companies under the new tax regime are exempted from the Minimum Alternate Tax (MAT).

Medium, Small and Micro Enterprises (MSME): Currently, businesses having turnover of more than one crore rupees are required to get their books of accounts audited by an accountant. In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, I propose to raise by five times the turnover threshold for audit from the existing Rs. 1 crore to Rs. 5 crore. Further, in order to boost less cash economy, I propose that the increased limit shall apply only to those businesses which carry out less than 5% of their business transactions in cash.

Affordable housing: For realisation of the goal of ‘Housing for All’ and affordable housing, in the last budget I had announced an additional deduction of up to one lakh fifty thousand rupees for interest paid on loans taken for purchase of an affordable house. The deduction was allowed on housing loans sanctioned on or before 31st March, 2020. In order to ensure that more persons avail this benefit and to further incentivise the affordable housing, I propose to extend the date of loan sanction for availing this additional deduction by one more year.

Further, in order to boost the supply of affordable houses in the country, a tax holiday is provided on the profits earned by developers of affordable housing project approved by 31st March, 2020. In order to promote the affordable housing projects, I propose to extend the date of approval of affordable housing projects for availing this tax holiday by one more year.

Concession to real estate transactions: Currently, while taxing income from capital gains, business profits and other sources in respect of transactions in real estate, if the consideration value is less than circle rate by more than 5 percent, the difference is counted as income both in the hands of the purchaser and seller. In order to minimize hardship in real estate transaction and provide relief to the sector, I propose to increase the limit of 5% to 10%.

Charity institutions: Acknowledging the important role played by the charitable institutions in the society, the income of these institutions is fully exempt from taxation. Further, donation made to these institutions is also allowed as deduction in computing the taxable income of the donor.

Currently, a taxpayer is required to fill the complete details of the donee in the income tax return for availing deduction.

In order to ease the process of claiming deduction for donation, it is proposed to pre-fill the donee’s information in taxpayer’s return on the basis of information of donations furnished by the donee. This would result in hassle-free claim of deduction for the donation made by the taxpayer.

Further, in order to claim the tax exemption, the charity institutions have to be registered with the Income Tax Department. In the past, the process of the registration was completely manual and scattered all over the country.

In order to simplify the compliance for the new and existing charity institutions, I propose to make the process of registration completely electronic under which a unique registration number (URN) shall be issued to all new and existing charity institutions. Further, to facilitate the registration of the new charity institution which is yet to start their charitable activities, I propose to allow them provisional registration for three years.

Faceless appeals: Our government is committed to bringing in transformational changes so that maximum governance is provided with minimum government. In order to impart greater efficiency, transparency and accountability to the assessment process, a new faceless assessment scheme has already been introduced. Currently, most of the functions of the Income Tax Department starting from the filing of return, processing of returns, issuance of refunds and assessment are performed in the electronic mode without any human interface. In order to take the reforms initiated by the Department to the next level and to eliminate human interface, I propose to amend the Income Tax Act so as to enable Faceless appeal on the lines of Faceless assessment.

No Dispute but Trust Scheme – ‘Vivad Se Vishwas’Scheme: Sir, in the past our Government has taken several measures to reduce tax litigations. In the last budget, SabkaVishwas Scheme was brought in to reduce litigation in indirect taxes. It resulted in settling over 1,89,000 cases. Currently, there are 4,83,000 direct tax cases pending in various appellate forums i.e. Commissioner (Appeals), ITAT, High Court and Supreme Court. This year, I propose to bring a scheme similar to the indirect tax SabkaVishwas for reducing litigations even in the direct taxes.

Under the proposed ‘Vivad Se Vishwas’ scheme, a taxpayer would be required to pay only the amount of the disputed taxes and will get complete waiver of interest and penalty provided he pays by 31st March, 2020. Those who avail this scheme after 31st March, 2020 will have to pay some additional amount. The scheme will remain open till 30th June, 2020.

Taxpayers in whose cases appeals are pending at any level can benefit from this scheme.

I hope that taxpayers will make use of this opportunity to get relief from vexatious litigation process.

Losses of merged banks: As a part of consolidation of the financial sector, our Government has brought out schemes for merger and amalgamation of public sector banks. In order to ensure that the amalgamated entities are able to take the benefit of unabsorbed losses and depreciation of the amalgamating entities, I propose to make necessary amendments to the provisions of the Income-tax Act.

Taxpayer’s Charter: Any tax system requires trust between taxpayers and the administration. This will be possible only when taxpayer’s rights are clearly enumerated. Towards this end, and with the objective of enhancing the efficiency of the delivery system of the Income Tax Department, I propose to amend the provisions of the Income Tax Act to mandate the Central Board of Direct Taxes (CBDT) to adopt a Taxpayers’ Charter. The details of the contents of the charter shall be notified soon.

Instant PAN through Aadhaar: In the last Budget, I had introduced the interchangeability of PAN and Aadhaar for which necessary rules were already notified. In order to further ease the process of allotment of PAN, soon we will launch a system under which PAN shall be instantly allotted online on the basis of Aadhaar without any requirement for filling up of detailed application form.

She concluded the speech on income tax reminding that her government took a path-breaking step of simplifying and rationalising corporate tax in September 2019. More importantly, the rate of corporate tax, which perhaps is the lowest in the world. 

As per the Finance Minister budget speech, the personal income tax at its lowest ever rates and totally removed DDT at the company’s hands. 

Further, direct taxes are now the lowest, simplest, and smoothest. Direct tax on the Start-ups also has seen many reformatory steps in quick succession. Even ease of compliance is seeing unprecedented changes. Last but not the least, personal interface with tax administration is at the minimum ever.

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