The global economy has succumbed to the uninvited guest, COVID-19, which arrived at the beginning of the year and brought an onslaught of huge ramifications on the economy and businesses as a whole. The COVID-19 pandemic has brought the entire nation to a standstill for more than two months now. This has significantly hampered the GDP of the country, along with cash flow issues. The Indian rupee continues to weaken by the day. Needless to say, the negative impact on businesses and profitability is leading to the closure of several businesses, leaving employments at stake. The brunt of business loss has severely affected the tax collections and administration.

To circumvent this situation, the Indian government has provided some relief in these unprecedented times, which have been implemented both by central and state governments from time to time. Further, the Hon'ble Prime Minister, while addressing the nation on 12 May 2020, to make India self-reliant, i.e., Atma Nirbhar Bharat, announced a stimulus package worth INR 20 lakh crore, which was equal to 10% of the GDP of India. The package focused on various aspects like land, labor, liquidity and laws. The five pillars for being self-reliant were identified as economy, infrastructure, system/technology, demography and demand. These pillars were given due preference in the stimulus package.

In order to lay the foundation of self-reliant India and taking steps towards accomplishing the vision of Hon'ble Prime Minister and at the same time to boost the businesses and the economy from the damage caused due to the pandemic, the Finance Minister (FM) announced a slew of measures taking into consideration each section of the society. Over the period of five days, the FM announced the specific contours of the stimulus package highlighted as under :-

Direct tax perspective

The Central Board of Direct Tax, in the recent past, had announced a series of measures including the extension of due dates for various compliances to be done under the Act, reduction in the rate of interest for delay in compliance, issuance of refund up to INR 5 lakh, clarifying on the residential status of individuals who are stranded in India because of the pandemic.

  1. Relaxing the provisions relating to residential status was need of the hour considering the fact that there was an amendment in the Finance Act 2020, which had reduced period of stay in India from 182 days to 120 days for a certain category of individuals;
  2. During the lockdown, the tax authorities would be clearing rectification petitions and effect orders;
  3. The pending refunds will be issued to charitable and non-corporate entities. It seems that this time there is no threshold kept on the maximum amount of refund that can be given to a specific assessee unlike the limit of INR 5 lakh proposed prior to this announcement;
  4. It has been conveyed that no cohesive action will be taken during the lockdown;
  5. Further to provide some relief to the businesses and to infuse liquidity, the following additional measures were announced:

Reduction in TDS/ TCS rates to provide liquidity to businesses

With the intention to provide more funds at the disposal of the taxpayers, the FM announced a move wherein the TDS rates for all non-salaried payment to residents, and TCS rates are reduced by 25% of the existing specified rates. This reduction in the rates shall be in operation from 14 May 2020 to 31 March 2021.

Note: - The above reduction in rates shall not be applicable in the following scenarios: -

  • Where tax is deductible from payments made under the head salary as per provisions of section 192 of the Income-Tax Act, 1961 (the Act);
  • Where payment is made to a non-resident, not being a company or to a foreign company;
  • Where tax is deductible at 20% on payments made to a person resident in India where he fails to furnish PAN or Aadhar;
  • Where a lower deduction certificate has been obtained u/s 197 of the Act;
  • TDS on cash withdrawals under section 194N and TCS on alcoholic liquor for human consumption, TCS on foreign tour, and TCS on remittances under the Liberalised Remittance Scheme.

The reduction in rate is an apt measure given that the profitability is difficult to predict, and in fact, for many, it could be a tough breakeven or even a loss. Lower withholding tax certification is a process by itself and is time-consuming, in such a scenario, this brings some relief although not very substantial. This can be explained by an example, say you were liable to deposit INR 1 lakh as TDS, and now you shall be required to deposit only INR 75,000. This does leave you with a cash surplus of INR 25,000 until you actually pay to the deductee/creditor. While the TDS is payable immediately by the 7th of the following month, higher credit terms for the deductee can help improve the cash flow to some extent.

It is pertinent to note that the above measure intended to increase liquidity in the hands of the taxpayers is hit by the fact that there is no consequent reduction in the liability to be discharged quarterly on account of advance tax. The due dates and payment schedule under advance tax remains unaltered. Hence, one may visualize and conclude that it is only a timing difference to prevent any further liquidity crisis.

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