On 27 March 2020, the Finance Bill, 2020 (the Bill) with some amendments received the President's assent and has now become the Finance Act, 2020.
We, at BDO in India, have analysed and summarised hereunder the key amendments made in the Bill (as passed by the Lower House of Parliament):
1. Changes to Tax Residency Rules for Non-Residents
a. Person of Indian Origin:
Section 6 of the Income-tax Act, 1961 (IT Act) provides that an Indian citizen or a person of Indian origin who is a resident outside India comes on a visit to India, would qualify as a tax resident of India only if he spends 182 days or more in India in the year in which he comes to India.
The Budget Memorandum stated that the Government of India found the provisions being misused. For instance, individuals carrying out substantial economic activities from India kept their stay in India below 182 days and thus were not required to declare their global income in India. In order to counter such tax abuse and discourage the situation of stateless persons for tax purposes, the Bill proposed to reduce the period of stay in India from 182 days to 120 days.
In the Finance Act, 2020, this has been amended to provide that the period of 182 days shall be reduced to 120 days only in cases of such individuals whose total income, other than the income from foreign sources, exceeds INR 1.5mn during the fiscal year. The term 'other than the income from foreign sources' is defined to mean income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
b. Indian citizens not taxable in other jurisdictions
The tax authorities globally have expressed concerns on stateless persons and residency planning resulting in double non taxation. The Task force on Direct Tax Code has observed that it is possible for individuals to arrange their affairs in a manner that they are not liable to tax in any country or jurisdiction during a year and thus not pay taxes in any country.
The Bill attempts to curb a double non taxation scenario by proposing to insert Section 6(1A) in the IT Act. It was proposed in the Bill that an Indian citizen would be considered Resident in India, if such an individual is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
The Finance Act, 2020 contains an additional condition that this amendment shall apply only if total income, other than the income from foreign sources, of such Indian citizen exceeds INR 1.5mn during the tax year.
c. Not ordinary resident (NOR)
The Bill had proposed to repeal the existing condition to treat an individual / HUF as a non- ordinarily resident and proposed a new condition i.e. individual or an HUF whose manager is non-resident in India in seven out of the ten years preceding that fiscal year shall be regarded as NOR. However, the Finance Act 2020 has dropped this proposal and restored existing provisions for determining NOR. It has also incorporated the following additional conditions to treat an individual as NOR:
- An Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds INR 1.5mn during a fiscal year and who has been in India for a period of 120 days or more but less than 182 days
- An Indian citizen whose total income, other than the income from foreign sources, exceeds INR 1.5mn during the fiscal year and is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature
2. Changes to tax on income earned by a non-resident
As per the extant provisions of section 115A of the IT Act, the interest income referred in tax withholding sections - section 194LC, section 194LD and section 194LBA(2) of the IT Act is taxed at 5%. The Bill had proposed to amend these withholding sections to provide different tax withholding rates depending upon the type of income. However, no corresponding amendment was proposed in section 115A of the IT Act. Resultantly, irrespective of the rate at which taxes were withheld, these incomes continued to be taxed at 5%. Finance Act, 2020 has addressed this anomaly by amending section 115A of the IT Act to bring the tax rate in respect of these income at par with the withholding tax rate mentioned in these sections.
3. Corporate Tax
a. Abolishing Dividend Distribution Tax (DDT)
Presently, the burden to pay tax on dividend under section 115-O and 115R of the IT Act is on the company / mutual fund declaring, distributing or paying dividend to its shareholders / unit holders. Further, such dividend income is exempt in the hands of the shareholders and unit holders under section 10(34) and 10(35) of the IT Act respectively. Accordingly, the incidence of tax is on the company / mutual fund and not on the recipient of income. The Finance Act, 2017 introduced section 115BBDA of the IT Act whereby shareholder (other than Indian corporate shareholder) earning dividend income from domestic companies in excess of INR 1mn is liable to pay tax @ 14.248%, over and above the DDT paid by the domestic companies while distributing such dividend.
The Bill proposed amendments in various section due to abolishment of DDT by such domestic companies / mutual funds with an intent to eliminate dual level of taxation.
While most of these amendments are there in the Finance Act, 2020, the following changes in the proposed amendments have been made:
- The Bill had proposed to exclude dividend income received by the unit holders from business trust so that the dividend income is taxable in the hand of its unit holder of the business trust. However, the Finance Act, 2020 has not made exclusions of such dividend. Also, the exemption would be available to the business trust in respect of dividend from Special Purpose Vehicle (SPV), provided SPV has not exercised to be governed by section 115BAA of the IT Act.
- The Bill had proposed to withdraw the exemption granted to dividend under section 10(34) of the IT Act. While the Finance Act, 2020 has withdrawn the exemption of dividend, relaxation is provided to dividend on which tax under section 115-O and section 115BBDA of the IT Act, wherever applicable, has been paid.
- The Bill had proposed to grant deduction in respect of dividend declared by domestic company where the recipient company declares the dividend. Finance Act, 2020 has expanded the scope of deduction available under section 80M of the IT Act to include the dividend received from a foreign company and business trust as well.
b. Amendment in section 115BAA and section 115BAB of the IT Act
The Bill proposed to make the amendment in section 115BAA and section 115BAB of the IT Act effective from fiscal year 2019-20. However, Finance Act, 2020 has make these provisions effective from fiscal year 2020-21
c. Exemption to Sovereign Wealth Funds and WOS of ADIA in respect of investment income
Bill proposed to insert a new clause providing exemption from interest, dividend and capital gains arising from investment in India by following specified persons:
- UAE based WOS of ADIA; and
- Sovereign Wealth Funds, fulfilling certain conditions.
The exemption is available in respect of debt and equity investment made on or before 31 March 2024.
Finance Act 2020 has made following amendments:
- Exemption available in respect of investment in debt, share capital and units
- The investment should be made between 1 April 2020 and 31 March 2024
- The investee entity is extended to:
- Infrastructure Investment Trust under Securities Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 made under the Securities Exchange Board of India (SEBI)
- Category I or Category II Alternative Investment Fund regulated under SEBI (Alternative Investment Fund) Regulations, 2012, made under the SEBI having 100% investment in one or more of the company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility
- The specified person would also cover pension funds which:
- Is created or established under the law of a foreign country including the laws made by any of its political constituents being a province, state or local body, by whatever name called
- Is not liable to tax in such country
- satisfies such other conditions as may be prescribed, and
- Is specified by the Central Government, by notification in the Official Gazette, for this purpose
4. Transfer Pricing
In case of non-residents having Permanent Establishment (PE) in India, profits attributable to such PEs are subject to tax in India as per the provisions of section 9(1)(i) of the IT Act. Tax authorities have been using ratios prescribed in Rule 10 of the Income-tax Rules, 1962 (IT Rules) to determine attributable profits. However, these were felt to be very broad and alleged to be applied arbitrarily. In order to reduce disputes and bring more certainty to profit attribution, the Bill proposed to amend section 92CB and section 92CC of the IT Act. A non-resident would now be able to take shelter under the safe harbour rules (to be prescribed) for determining profit attributable to its PE in India.
Finance Bill 2020 has extend the safe harbor rules to income deemed to accrue or arise under section 9(1)(i) of the IT Act.
5. Tax withholding provisions
a. Dividend Income – section 194A
Finance Act 2020 has amended Part-II of First Schedule of the Bill to prescribe 20% tax withholding rate from dividend distributed to a foreign company, non-resident Indian or other non-resident person.
b. Professional fees – section 194J
Finance Act, 2020 has extended reduced tax withholding rate of 2% to royalty in the nature of consideration for sale, distribution or exhibition of cinematographic films.
c. Income in respect of units - section 194K
With abolishment of DDT, the Bill had proposed to insert a new section – section 194K – for withholding tax @ 10% by any person responsible for paying any income to a resident in respect of units of mutual fund, units from the administrator or units of specified company, if such payment exceeds INR 5,000.
Finance Act, 2020 has excluded capital gains arising from transfer of units referred in section 194K.
d. Certain Income from units of a business trust - Section 194LBA
With abolishment of DDT, all dividend income paid by business trust to resident and non-resident unit holder referred under section 115UA, 10(23FC) and 10(23FCA) of the IT Act are proposed to be brought within the ambit of tax withholding under section 194LBA of the IT Act.
Finance Act, 2020 has excluded dividend income from tax withholding if the SPV has not exercised the option under section 115BAA of the IT Act.
e. Cash withdrawal – section 194N
Section 194N of the IT Act provides for tax withholding by bank and other specified institution where cash withdrawal exceeds of INR 10mn in a fiscal year:
The Finance Act, 2020 has substituted this section with new section 194N, mainly to provide for :
- Tax withholding of 5% on the entire amount of cash withhdrawal (currently it is on amount exceeding INR 10mn) if the cash withdrawal exceeds INR 10mn in a fiscal year
- Different tax withholding rate if the withdrawer has not filed
his tax return for three years (currently there is no such
provision). The tax withholding shall be as under:
- At 2% when the cash withdrawal in a year is more than INR 2mn but does not exceed INR 10mn (on amount exceeding INR 2mn) and
- At 5% when the cash withdrawal exceeds INR 10 Mn (on amount exceeding INR 2 Mn)
6. Tax Collected at Source (TCS) provisions
a. On foreign remittances
In order to widen and deepen the tax net, the Bill proposed to amend section 206C of the IT Act with effect from 1 April 2020 to levy TCS on the following:
- Foreign remittance through LRS if the amount or aggregate of the amount exceeds INR 0.7 mn
- Sale of overseas tour package
Finance Act, 2020 has made following amendments in the Bill:
- Postpone the effective date to 1 October 2020
- TCS to be on the amount in excess of INR 0.7mn (other than sale of overseas tour package)
- Reduced rate of 0.5% to be applicable if the amount being remitted is a loan obtained from any financial institution as defined in section 80E of the IT Act for the purpose of pursuing any education
- Authorised dealer shall not collect the sum on an amount in respect of which the sum has been collected by the seller
b. On sale of goods
With respect to TCS on sale of goods, the Bill proposes to cover seller whose total sales, gross receipts or turnover from the business carried on by it exceed INR 100mn during the immediately preceding fiscal year and the consideration received from a buyer in a fiscal year exceeds INR 5mn.
Finance Act, 2020 has made following amendments in the Bill:
- Export of goods brought out of the ambit of TCS
- If tax is withheld from the goods purchased, the provision of TCS shall not apply
- Importer excluded from the definition of buyer
7. Concessional Tax Regime for individuals and HUF
The Bill proposed to provide an option to individuals and HUFs to either be governed by the current tax regime or the concessional tax regime. This new regime provides that in case of an individual and HUF having income from business, the option can be exercised in the form and manner as may be prescribed, on or before the due date for furnishing of tax return and the option once exercised, shall apply to subsequent years. The option exercised by such individual / HUF can be withdrawn only once in a fiscal year other than the year in which it was exercised. Once the said option is withdrawn, the individual / HUF cannot re exercise the option unless the individual / HUF ceases to have any business income.
Finance Act, 2020 has extended this condition to income from profession as well.
8. Equalization levy
Finance Act, 2020 has enhanced the scope of Equalization Levy to cover consideration received or receivable for following e-commerce supply or service made or provided or facilitated on or after 1 April 2020:
- Online sale of goods owned by the e-commerce operator; or
- Online provision of services provided by the e-commerce operator; or
- Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
- Any combination of above-mentioned activities.
E-commerce operator means a non-resident who owns, operates or manages a digital or an electronic facility or platform for online sale of goods or online provision of services or both
The equalization levy shall be charged at the rate of 2%t from consideration received or receivable by an e-commerce operator provided by it to:
- Person resident in India
- Non-resident in following circumstance:
- Sale of advertisement, which targets a customer who is resident in India or a customer who accesses the advertisement through internet protocol (IP) address located in India
- Sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India
- Person who buys such goods or services or both using IP address located in India
Minimum Sales, Turnover or gross receipt of the e-commerce operator from specified buyer to exceed INR 20 mn for attracting equalization levy.
Various compliances prescribed.
Consequential amendments have been proposed in section 10(50) of the IT Act to give exemption for the income arising from any e-commerce supply or services made or provided or facilitated on or after 1 April 2021 and on which equalization levy is chargeable.
While the above amendments to the Finance Bill have address some concerns/anomalies, it has missed to address some of the issues which have been highlighted by some stakeholders.
1 Banking Company Co-operative Society engaged in carrying on the business of banking Post office
2 Section 10(50) of the IT Act which provides that incomes in respect of which equalization levy has been charged shall be exempt from tax.
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