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FINANCE ACT, 2020- A DIRECT TAX PERSPECTIVE

FINANCE ACT, 2020- A DIRECT TAX PERSPECTIVE

In the midst of the continuing global coronavirus pandemic, the Indian Parliament just passed the Finance Act, 2020. The legislation that affect commercial entities for the Financial Year 2020–21 contain a variety of tax-related and other amendments. The new law received presidential approval on March 27, 2020. There have been almost 104 changes, either by adding new parts or by modifying or removing those that currently exist. The following highlights the key modifications made by the new law that have an effect on people and enterprises in India. The alterations we attempt to identify and describe the income tax provisions made by Finance Act, 2020. All modifications, unless otherwise specified, shall become effective on April 1, 2021, the first day of the assessment year 2021–2022, which shall be computed on the basis of the income of the financial year 2020–2021, which commences on April 1, 2020. The Union Budget of India for Fiscal Years (FY) 2020–21 was released on February 1st, 2020. (Budget 2020) was unveiled by the country’s Finance Minister (Minister).[1] Following passage by The Bill was passed by the Parliament and signed into law by the President as the Finance Act, 2020 (The Act), with a few modifications, on March 27, 2020.  The Act modifies several transfer pricing (TP) provisions of the Indian Tax Law (ITL).

Changes to Non-Residents’ Tax Residency Rules

Individuals of Indian Origin

Before this modification, the Income-tax Act mandated that Indian nationals or people of Indian descent who lived outside of India could only be considered tax residents of this country if they spent 182 days or more in India during the applicable year. There have been many instances where these rules have been broken. As long as they were in India for fewer than 182 days while engaging in significant economic activity, they were exempt from India’s requirement that they report their worldwide income. The new rule decreased the timeframe from 182 days to 120 days in order to prevent such tax evasion and discourage the employment of stateless individuals as taxpayers. If an the average person’s total income from sources outside of India exceeds INR 1.5 million during the

120-day period, the 120-day rule[2] will only apply in those situations during the fiscal year.

Indian nationals are exempt from taxation in other countries

People have sought to set up their affairs in recent years such that they were not compelled to pay taxes in any nation during a specific year because they were not subject to taxation in any nation. An Indian citizen will be regarded as a resident of India if they are not subject to taxation in that country, according to a new provisions in the law another nation due to domicile or residency laws, or any other equivalent standards. Only if such an Indian citizen’s total income for the tax year reaches INR 1.5 million, excluding income from overseas sources, would this modification take effect.[3]

Tax Reform for New Businesses

As of right now, start-ups in India that were established between April 1, 2016, and March 31, 2021 are eligible for a 100% tax exemption in their first seven years, based on profits for any three years in a row. Their annual revenue cannot surpass INR 250 million, which is another crucial need. The waiver has now been broadened under the new law to cover any three of the first 10 years of a start-up. The turnover barrier has also been raised from 250 million to 1 billion Indian rupees.[4]

Dividends between corporations Tax Deduction

The addition of this new section coincides with the transfer of dividend tax liability from the payer to the recipient. This means that when a domestic firm’s gross total revenue for a given year includes money received as dividends from any other domestic firm may be deducted from total income in an amount equal to the dividends received.[5]

Individuals and HUF are subject to a concessionary tax regime.

Individuals and Hindu Undivided Families (HUF) have an option under the new legislation as to whether they would be subject to the current, more stringent tax regime or the previous. The rates are voluntary. Deductions under Chapter VI-A of the Income Tax Act, basic deductions, leave travel reimbursements, housing rent reimbursements, and mortgage interest payments are all included in this (investments in a provident fund, insurance premium, donations to charities, etc.). [6]

Comparative Levy

A tax called the equalization levy is levied India will begin collecting taxes on a handful of certain services provided by non-residents in the “hard to tax” digital sector on June 1, 2016. The following e-commerce products or services supplied after April 1, 2020 are now subject to this tax thanks to the Finance Act of 2020’s expansion of its scope:

Online sales of the e-commerce operator’s own items, services, or a combination of both goods and services that are made possible by the e-commerce operator are all examples of online sales.[7]

Tax on Corporate Income for Some Domestic Companies

A lower corporate tax rate is offered to some under the new Indian Tax Act, domestic businesses. The document states that domestic businesses that satisfy certain criteria will have the option to pay tax at a rate of 22% (plus any applicable surcharge and cess) starting in FY 2019–20.The fundamental need is that these businesses cannot make any claims for exemptions or incentives under other income tax regulations.[8] Among them are:

1-Units constructed in special economic zones are eligible for deductions;

2-Additional depreciation and investment credit for newly purchased equipment built in designated underdeveloped areas;

3-Deductions for businesses that produce tea, coffee, and rubber;

 4-Discounts for donations made to a site restoration fund by companies that extract or produce natural gas, petroleum, or both in India;

CONCLUSION

According to the Economic Survey and the FM’s Budget address, the government’s goal of recognizing India’s wealth creators was interpreted as a hint that major promoter-friendly measures would be introduced. [9] The Budget’s actual initiatives, nevertheless, did not further this objective; instead, they enhanced the scrutiny and taxability of these wealth generators. Thus, NRIs who have been working overseas and often go to India get respite in the Finance Act. Although there haven’t been any significant modifications to the Budget recommendations, these fresh adjustments provide some insight into what would happen to the Indian HNIs and UHNIs. However, the government, like many major nations currently, is primarily focused on combating the virus and establishing strict safety measures to stop the spread of the pandemic. Not to mention, to reduce the pandemic’s economic shock. Expecting more economic measures, relaxations, stimulus, etc. in the upcoming days to lessen the shock may not be unrealistic. We believe that the Budget will need to be routinely adjusted to take the epidemic into account because it was enacted under quite different economic conditions. Family companies, which form the backbone of the Indian economy, would need to remain strong in these trying times. Due to the tax system’s growing complexity and the range of alternatives available, planning carefully and consulting an attorney should be your top priorities as a taxpayer under both the old and new regimes to prevent being caught off guard by a hefty tax bill. Additionally, given the new deadlines established by the FM, it is essential to consult an attorney as soon as possible for guidance on any changes to your tax returns that may be necessary in light of the above. The pandemic threat can no longer be dismissed; it has become too real. Early preparation and implementation are essential. It is crucial to make sure that your assets are protected and that you stay well and happy as we get ready to take all the essential precautions to protect ourselves.

Author(s) Name: Akarsha Bajpai (University of Lucknow, Lucknow)

References:

[1] V Krasovskiy, ‘India Finance Act 2020: Key Changes to Tax Regulations’ (Corporate Services , 14 April 2020) <https://www.corporateservices.com/india-finance-act-2020-summary/ > accessed 12 November 2022

[2] CN Rao, ‘Income Tax Amendments/New Provisions of Finance Act 2020’ (Tax Guru, 18 April 2020) <https://taxguru.in/income-tax/income-tax-amendments-new-provisions-finance-act-2020.html>  accessed 12 November 2022

[3] “Central Board of Direct Taxation” (Central Board of Direct Taxation) <https://incometaxindia.gov.in/pages/about-us/central-board-of-direct-taxation.aspx> accessed November 26, 2022

[4] “Central Board of Direct Taxation” (Central Board of Direct Taxation) <https://incometaxindia.gov.in/pages/about-us/central-board-of-direct-taxation.aspx> accessed November 26, 2022

[5] “Central Board of Direct Taxation” (Central Board of Direct Taxation) <https://incometaxindia.gov.in/pages/about-us/central-board-of-direct-taxation.aspx> accessed November 26, 2022

[6] “Hindu Undivided Family (HUF) for AY 2022-2023” (Income Tax Department) <https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable> accessed November 26, 2022

[7]   “Central Board of Direct Taxation” (Central Board of Direct Taxation) <https://incometaxindia.gov.in/pages/about-us/central-board-of-direct-taxation.aspx> accessed November 26, 2022

[8] ClearTax, “Section 115BAB – Corporate Tax Rate for New Manufacturing Companies” (Section 115BAB – Corporate tax rate for new manufacturing companies, February 16, 2022) <https://cleartax.in/s/section-115-bab-corporate-tax-rate-new-manufacturing-companies> accessed November 26, 2022

[9] “India Budget | Ministry of Finance | Government of India 2022-23” (India Budget | Ministry of Finance | Government of India 2022-23) <https://www.indiabudget.gov.in/> accessed November 26, 2022