Contrary to expectations, there were no sweeping cuts in personal income tax rates. There is now a carefully-calibrated optional regime for individuals that offers tax rate cut benefits, subject to the condition that no incentives and deductions are claimed. To some extent, this resembles the approach taken by the government with respect to corporate tax cuts last year, by making the lower rates conditional upon giving up incentives and exemptions.
The proposed replacement of the Dividend Distribution Tax (DDT) with a classical system of taxing dividends in the hands of shareholders is positive. Foreign investors will now find it easier to claim treaty benefits on dividends and to claim credit in their respective home countries for taxes paid on dividends in India. For corporate shareholders, the removal of the DDT and the consequential elimination of exemption in respect of dividend income will help eradicate litigation on Section 14A.
To fund India’s infrastructure needs, the Finance Bill proposes to provide an exemption to sovereign wealth funds in respect of dividends, interest and capital gains arising from investment in infrastructure companies in India. One could potentially see a significant increase in funding available for infrastructure.
Compliance requirements for foreign taxpayers are also proposed to be rationalised. Returns will no longer be required to be filed in India by foreign investors earning royalty and fees for technical services from India if tax has been deducted under the Income-tax Act on such payments. However, returns may still be required in cases where tax is deducted at rates under the treaty which are lower than those under the Act.
Tax provisions relating to start-ups also saw some changes in the Budget. Existing tax holiday proposals for eligible start-ups are proposed to be widened. The threshold turnover limit for qualifying for this is proposed to be increased from Rs. 25 crore to Rs. 100 crore. The benefit was available for three consecutive years out of a seven-year period. This has been modified to apply to three consecutive years out of a 10-year period from the year of incorporation. Incentives are also proposed for employees of start-ups who receive ESOPs.
The other big change in the Budget relates to dispute resolution. Taxpayers will now be able to close disputes by paying the disputed tax amounts in full by March 31, 2020. Upon such payment, there will be a full waiver of interest and penalty. This can go a long way in resolving old legacy disputes, as well as in enabling the government to realise tax dues in the current fiscal. The proposed taxpayer charter can help bring focus on taxpayer rights, drive accountability in tax administration and help build a climate of trust between authorities and taxpayers.
(A version of this article appeared in The Hindu Business Line on February 02, 2020)