Positive reforms for the tax system in the Budget

Hitesh Gajaria | Updated on February 02, 2020

Carefully-calibrated tax regime   -  VectorStory

Focus on rationalisation of rates and boosting foreign investments

In terms of its overall direction, the Budget continues with the broad themes of rationalising rates, boosting key sectors and reducing compliance costs and disputes. 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.

For corporates, the biggest change is the proposed replacement of the Dividend Distribution Tax (DDT) with a classical system of taxing dividends in the hands of shareholders. This is a positive step, with several beneficial consequences, both domestically and for to foreign investors. For example, 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. In a domestic context, shareholders in lower income brackets will now be able to offer dividends to tax at their applicable slab rates, rather than have such dividends subject to tax at approximately 20 per cent at the corporate level. 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.

Foreign investment

There are measures to boost foreign investments and reduce compliance costs for foreign investors as well. 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. This will be available for investments made upto March 31, 2024, and will be subject to a three-year lock in. By incentivising such funds, 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.

Provisions for start-ups

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 ₹25 crore to ₹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. To ease cash-flow problems that may arise from tax dues payable at the time of exercise of the options, it is proposed to defer the tax by five years or till they leave the company or when they sell their shares, whichever is earliest.

The other big change in the Budget relates to dispute resolution. With the success of the Sabka Vishwas Scheme for indirect taxes, it was widely expected that a similar scheme would be introduced for tackling direct tax disputes. This expectation was met, and 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. Taxpayers, however, have also been given the option to pay the tax dues, along with some additional amount, any time before June 30, 2020 and obtain a 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.

The writer is Partner & co-Head,

KPMG India

Published on February 01, 2020

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