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India: Tax proposals in Union Budget 2020

India: Tax proposals in Union Budget 2020

The Union Budget 2020 was presented on 1 February 2020 and includes certain tax measures.

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Corporate tax - dividend distribution tax

  • The dividends declared, distributed or paid by domestic companies to shareholders or income paid by mutual funds to unitholders not to be subjected to dividend distribution tax but would be taxable for the recipient shareholders or unitholders as per applicable tax rates. The recipients of such income would be eligible for maximum interest expense to the extent of 20% of such income in the previous year.
  • The domestic companies declaring dividends to resident shareholders or mutual funds declaring income to resident unitholders, obligated to withhold taxes at the rate of 10%, subject to applicable threshold. In case of non-residents, the tax is required to be withheld at the rate of 20% or as per lower beneficial tax treaty rate.
  • The dividend received by a domestic company from another domestic company to be set-off while calculating its total income, to the extent of dividends further distributed by it up to one month prior to the due date of filing of return. This benefit is available also to domestic companies opting for lower rate of 15% or 22% as introduced with effect from FY19-20.

Start-up

  • The total business turnover limits in any previous year for start-ups to claim a profit-linked deduction would be increased from INR25 crore to INR100 crore. Further, the eligibility period for claiming such deduction in three consecutive years would be expanded to 10 years from the year of incorporation from the existing period of seven years.

Non-resident taxation

  • The existing significant economic provision (SEP) rules constituting taxable business connection for non-residents was omitted from AY 2021-22 but would be re-introduced from AY 2022-23 as the aggregate amount of specified transactions and the relevant number of users for making the underlying rule in this regard is pending due to ongoing discussions in G20-OECD BEPS project (the outcome is expected by the end of December 2020).
  • The business connection rule and the source rule for SEP would be expanded to include income from (1) advertisement that targets customers residing in India or having internet protocol address located in India; (2) sale of data collected from person residing in India or having internet protocol address located in India; and (3) sale of goods and services using data collected from person residing in India or having internet protocol address located in India.
  • The purpose of entering into an income tax treaty aligned with the Multilateral Instrument (MLI) would stipulate that the central government can enter into an agreement with the government of any country or specified territory outside India for the avoidance of double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs stipulated in any agreement for the indirect benefit of resident of any other country or territory).
  • The exclusion from the coverage of royalty taxable for non-residents as income deemed to accrue or arise in India with respect to the sale, distribution or exhibition of cinematographic films would be repealed, and such payments would become taxable in India (subject to relief if any under tax treaty).
  • The non-resident or a foreign company earning only royalty income or fees for technical services income from India, not connected to a permanent establishment, would be exempted from filing return of income, if taxes withheld as per applicable rates in force.
  • The exception from taxation of indirect transfer for non-residents having investment in erstwhile foreign portfolio investments ( FPIs) registered under SEBI FPI Regulations 2014 would be grandfathered and such exception would be granted to their investments in FPIs registered under SEBI FPI Regulations 2019.
  • The conditions relating to an offshore fund exemption from business connections in India when an eligible fund manager would be modified.

Transfer pricing

  • The determination of profits attributable to a permanent establishment (PE) in India of a non-resident brought would be within the scope of the advance pricing agreement (APA) rules and the safe harbour regime
  • The interest paid to an Indian PE (branch) of a non-resident bank would be excluded from the application of the thin capitalisation rules under the transfer pricing provisions
  • All the provisions that mandate filing of an audit report along with the return of income or by the due date of filing of return of income would be amended to require the same to be furnished at least one month prior to the due date of filing of such return of income. This amendment also would apply to the transfer pricing accountant’s report. This amendment would be effective retroactively from FY19-20.

Capital gains

  • The safe harbour limit for taxing sale of immovable property (land or building or both) held either as stock in trade or capital asset and purchase/gift of immovable property (as stipulated) in comparison with the value adopted for stamp duty purposes would be increased from 5% to 10%. In the case of computing capital gains from a capital asset (land or building or both) acquired prior to 1 April 2001, when an option is available to take the FMV of such asset as on 1 April 2001 or actual cost of asset as the cost of acquisition for such computation, the FMV as on 1 April 2001 could not exceed the stamp duty value as of that date.

Tax incentives

  • For claiming the concessional corporate tax rate of 15%, the scope of business of manufacture or production of any article or thing would be expanded to include the business of generation of electricity. This amendment would be effective retroactively from FY19-20.
  • The timeline for obtaining approval from the competent authority to develop and build affordable housing projects would be eligible for tax deduction extended by one year from 31 March 2020 to 31 March 2021.
  • The deduction of 100% of a capital expenditure as investment-linked incentive to specified business would be optional and thereby filing a claim of tax depreciation on such capital assets would be possible including for domestic company opting for concessional tax rate. Further, no deduction of such 100% capital expenditure claimed as investment-linked incentive would be allowed under any other sections. This amendment would be effective retroactively from FY19-20.
  • The benefit of carrying forward of accumulated losses and unabsorbed depreciation allowance of the amalgamating bank with the other banking institution would be extended in respect of the merger/amalgamation of public sector banks. This benefit would also be extended in respect of the merger/amalgamation of public sector general insurance companies. This amendment would be effectively retroactively from FY19-20.

Return and assessment

  • The due date of filing the return of income of companies and other assessees not required to file a transfer pricing accountant’s report would be extended from 30 September to 31 October.
  • The return of income of a company or LLP would be verifiable by any other person identified by the tax authority.
  • The filing of prescribed accountant’s report certifying computation of book profits to be submitted one month prior to the due date of filing of return of income for non-transfer pricing cases. The said provision takes effect from 1 April 2020.

New dispute resolution scheme (Vivad se Vishwas scheme)

  • A new dispute resolution program (Vivad se Vishwas scheme) would require the taxpayer to pay only the amount announced of disputed taxes to attain a complete waiver of interest and penalty if such disputed taxes are paid by 31 March 2020. The new scheme would remain open until 30 June 2020 and would apply to taxpayers in whose cases appeals are pending at any level.

Tax withheld at source

  • On payments otherwise not subject to tax withheld at source, an ecommerce operator is obliged to deduct tax at 1% on payments to the e-commerce participant for the sale of goods/provision of services through the e-commerce operator’s digital/electronic facility or platform even if payment is made directly by the purchaser to the e-commerce participant.
  • The REIT/InVIT while distributing dividend income with unitholders would be required to withhold tax at the rate of 10% for both non-resident and resident unitholders.
  • For applying the concessional withholding tax rate of 5% by an Indian company or a business trust in respect of interest paid to non-residents for monies borrowed in foreign currency, the time limit for entering into a loan arrangement or issue of any long-term bond including long-term infrastructure bond, would be extended from 30 June 2020 to 30 June 2023.
  • A concessional withholding tax rate of 4% would apply on interest paid to non-residents in respect of monies borrowed from a source outside India by way of issue of any long-term bond or rupee denominated bond on or after 1 April 2020 but before 1 July 2023.
  • The concessional withholding tax rate of 5% on interest payable to FPI on rupee denominated bonds of an Indian company or a prescribed government security would be extended to interest payable from 30 June 2020 to 30 June 2023.
  • The concessional withholding tax rate of 5% on interest payable on or after 1 April 2020 but before 1 July 2023 in respect of investments made by the FPI would be extended to investments made by them in prescribed municipal debt securities.
  • An individual and HUF (family unit) would continue to be liable to deduct the amount of withheld tax on various domestic payments if the turnover from business exceeds INR1 crore notwithstanding the increase in limits for audit of books of accounts
  • The definition of “work” in respect of contract manufacturing would be expanded to include provision of raw material from an associate of the customer as stipulated under the domestic related-party payment deduction rules.
  • The rates of withholding tax in respect of payment of technical services (other than professional services) to residents (as stipulated) would be reduced to 2% from the existing 10%
  • In respect of a non-resident, the definition of “person responsible for paying” the tax withheld at source would be expanded to include that person, or any person authorised by such person or the agent of such person in India (as stipulated).


Read a February 2020 report [PDF 1.2 MB] prepared by the KPMG member firm in India

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