India: Union Budget 2020 - Analysis14 February 2020
The Indian economy registered a growth rate of 5% in the year 2020, projecting growth of 6.5% in the year 2021 with a vision of becoming US$ 5 trillion economy by 2024-25. Despite the global economic slowdown, on-going trade war, impact of Brexit, distress in financial sector, India remains the world’s fifth largest economy.
The Indian Government presented the Union Budget for the financial year 2020-21 dated 1 February 2020 and introduced several reforms with an objective to boost income, attract foreign investment, generate employment & increasing purchasing power. The initiative includes reduction in corporate tax rate, relaxing FDI norms, ease of doing business in India, promoting electronics manufacturing, solar infrastructure, setting up airports, development of smart cities and data centre parks under the PPP mode, reforms in sectors such as MSMEs, agriculture, infrastructure, real estate, financial services to name a few.
In order to attract more investment in India, the government has abolished the Dividend Distribution Tax and reduced the corporate tax rate of companies in manufacturing & power sector. The government has introduced the scheme of ‘Vivad se Vishwas’ to reduce the direct tax litigations and faceless appeal & proceedings. The government has also proposed the improvement in GST procedures through rationalize the rates and refunds to taxpayers. The government increased the rate of custom duty on some products like medical devices, footwear, furniture, electric goods, machineries to promote make in India. We have provided below a more comprehensive analysis and further insights on the 2020 Budget proposals.
Key Policy Announcements
Infrastructure and Transport
a) The government announced to develop 100 airports by 2024 under UDAAN Scheme due to constant increase in air traffic. This will ease the strain on existing airports and will also be an opportunity for major foreign players who have the expertise to enter aviation sector.
b) The government envisions setting up the PPP projects for re-development of railway stations with refrigerated coaches for perishable foods. The government has also decided to set up solar power along with rail tracks on the land owned by Ministry of Railway and Allocation for 148 km long Bengaluru suburban transport project.
c) The budget proposed to formulate National Logistics Policy to simply the documentation for exports and imports through digitization including 24X7 custom clearance. The proposed policy increases the efficiency, cost effectiveness and timely movement of goods.
a) Indian Government has asked the State governments to replace the conventional energy meter by prepaid smart meters in 3 years. It will increase the manufacturing of smart meters and can also attract foreign companies for collaboration in the said sector.
b) It is proposed to shut down the Power projects which are old and unable to meet the carbon emission norms. The land could be used for alternative purposes.
c) A concessional rate of corporate tax of 15% has been provided to companies involved in business of generation of electricity. The announcement has been greatly appreciated by existing and new companies in power space.
a) The policy proposed to enable private sector to build data centre parks throughout the country.
b) It is proposed to promote knowledge-driven enterprises for the creation and better protection of IP through a digital platform. This will boost the confidence of multi-national companies willing to do business in India.
c) In order to advance the development of technologies in computing, communications, artificial intelligence, 3D Printing and cyber security, government proposed to introduce a National mission on Quantum Technology and Computing. The mission will encourage investment in development of new technologies in engineering, aerospace, health, cyber security, education etc.
Non-Banking Financial Services
a) For better recovery and borrower discipline, the budget provided relaxation to NBFCs with an asset size of over INR 1,000 million (earlier INR 5,000 million or more) allowed to exercise the right of recovery of dues under SARFAESI Act, for a sum of INR 5 million or more (earlier 10 million or more).
b) Government announced that the Partial Credit Guarantee Scheme which was previously only available to public sector banks will now be revised to lend further support to NBFCs and stated that Government would guarantee the securities floated. Government’s guarantee would provide confidence and strengthen investor sentiments thereby aiding revival of NBFCs from the liquidity crisis and propelling investments by NBFCs.
c) TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of Micro, Small and Medium Enterprises (MSMEs) through multiple financiers. In order to enhance financial stability of MSMEs, NBFCs have been permitted to extend invoice financing to MSMEs through the TReDS platform.
a) Addressing the shortage of hospitals in Tier 1 and Tier 2 cities, it is proposed to set up hospitals in PPP mode. This will boost investment of Private and Public sector in healthcare space.
b) It is proposed to levy a health cess of 5% on the import of medical equipment. Proceed of cess will be invested in healthcare infrastructure.
MSMEs and Start Ups
a) It is proposed to introduce a scheme of subordinate debt for MSMEs. This subordinate debt will be provided by banks would count as quasi equity and would be fully guaranteed through the Credit Guarantee Trust for the MSMEs. It will improve the working capital challenges that majority of MSMEs are facing at the moment.
b) It is proposed to extend restructuring window to MSMEs until 31 March 2021 (currently expiring on 31 March 2020).
c) Government proposes to provide early life funding, including a seed fund to support formation and development to early stage start-ups.
d) It is proposed to provide 100% tax incentive for a period of 3 consecutive years out of 10 years from the year of incorporation subject to condition that eligible start-up is incorporated on or after 1 April 2016 but before 1 April 2021 and total turnover of its business does not exceed hundred crore Indian Rupees.
a) In order to improve procurement of agriculture produce and supply chain, it is proposed to encourage the State Governments to implement model laws which is issued by the Central Government:
* Model Agricultural Land Leasing Act, 2016,
* Model Agricultural Produce and Livestock Marketing (Promotion and Facilitation) Act, 2017, and
* Model Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) Act, 2018
The announcement will improve the quality and discipline in agriculture space.
b) Government will take measures to provide solar pumps to farmers and allowing farmers to solarize their farms. ‘Kisan Rail’ will be set up which will offer quick transport of farm produce and provide refrigerated coaches under PPP model.
c) It is proposed to build a structure for development, management and conservation of marine fishery resources. The Ministry of Civil Aviation will launch Krishi UDAN on international and national routes to raise fishery exports.
Direct Tax Announcements
Abolition of Dividend Distribution Tax
a) The dividend declared, distributed or paid by domestic company to shareholders or income paid by mutual funds to their unitholders is subject to Dividend Distribution Tax at the rate of 15% plus surcharge and cess. It is now proposed that dividend declared, distributed or paid by domestic companies to shareholders or income paid to unit holders is not subject to Dividend Distribution Tax but would be taxable to shareholders or unit holders as per applicable tax rates.
b) The dividend declared by domestic company is under an obligation to withhold the tax at the rate of 10% subject to applicable threshold. In case of non-resident, the domestic company is under obligation to withhold the tax at the rate of 20% plus surcharge & cess or lower beneficiary rate as per Double Taxation Avoidance Agreement.
c) The dividend received by a domestic company from another domestic company to be set off while calculating the total income, to the extent of dividend further distributed by it up to one month prior to the due date of filling of return.
d) The different residential status of shareholders i.e., resident or non-resident, may increase the compliance to deposit withholding tax by companies. The proposed regime may increase the tax rate in the hand of shareholders (both resident and non-resident). Therefore, it is important to evaluate and repatriate the funds accordingly.
Modification in Residency of Non-Resident
a) The non-resident shall not be required to file the income tax return if his/her total income consist of dividend, interest, fee for technical services & royalty and income tax at prescribed rate is deducted by the payer.
b) Currently, an Indian Citizen or a person of Indian Origin shall be considered as resident if he is in India for 182 days in a year and has been in India for an overall period of 365 days or more within four years preceding that year. It is now proposed to amend the period of 182 days to 120 days.
c) A person who has been a non-resident for 9 out of 10 financial preceding the relevant year or has stayed in India for less than 730 days during the 7 financial preceding the relevant year is regarded as not ordinarily resident in India. It is proposed to replace the said clause to provide an individual or a manager of a HUF who has been a non-resident in India for 7 out of 10 preceding financial years will now be regarded as a not ordinarily resident.
d) A citizen of India will be deemed to be a resident of India if he is not liable to pay tax in any country outside India on account of his domicile, residence, or any other criteria of a similar nature.
e) Due to amendment in residency clause of non-resident, it is advisable that person staying outside India but regularly travelling to India should evaluate their applicability of income tax in India and complete compliances accordingly.
Concessional Income Tax on Power Sector
a) A concessional rate of 15% is available to a domestic company engaged in the business of ‘business of generation of electricity’ subject to satisfaction of various other conditions.
Tax Incentive to Start-up
a) The eligible start up provides 100% deduction of the profit earned for a period of 3 consecutive years out of 7 years from year of incorporation subject to the condition that the eligible start-up is incorporated on or after 1 April 2016 but before 1 April 2021 and the total turnover of its business does not exceed twenty-five crore rupees. It is now proposed increase the period from 7 years to 10 years and enhance the turnover limit from twenty-five crore rupees to hundred crore rupees.
b) The ESOPs are taxable as perquisite. In order to ease the burden of payment of taxes by the employees of the eligible start-ups or TDS by employer, it is proposed to deduct or pay tax on such income within fourteen days:
* after the expiry of forty-eight months from the end of the relevant assessment year
* from the date of the sale of such specified security or sweat equity share by the assessee
* from the date of which the assessee ceases to be the employee of the person
whichever is the earliest based on rates in force of the financial year in which the said specified security or sweat equity share is allotted or transferred.
Tax Deducted at Source (TDS) and Tax Collected at Source (TCS)
a) The payments relating to Fee for technical services, royalty, professional services, etc. to resident payees (other than those engaged in the business of operation of call centre) are subjected to TDS at the rate 10%. It is proposed to reduce TDS rate on fees for technical services (other than professional services) to 2% from existing 10%.
b) The concessional rate of TDS at 5% on interest payable to non-resident on specified forms of borrowings raised before 1 July 2020 from sources outside India. The time limit for borrowing funds raised has been extended from 1 July 2020 to 1 July 2023.
c) TDS on e-commerce transactions i.e., payment by e-commerce operator to e-commerce participant for sale of goods or provision of services facilitated by it, has been proposed to be introduced. E-commerce operator would deduct TDS @1% on gross amount of sales or services or both made by e-commerce participant (who sells goods or provides services through electronic facility).
Tax Holidays on affordable housing
a) The taxpayer engaged in the business of developing and building affordable housing projects are eligible for a 100% deduction of the profits and gains derived from such business, subject to the fulfilment of certain conditions. It applies to the projects approved by competent authority during the period from 1 June 2016 to 31 March 2020. In order to promote the affordable housing, the date by which the competent authority can approve the project is proposed to be extended to 31 March 2021.
Consideration for sale, distribution, or exhibition of cinematographic films proposed to be taxed as royalty
a) The consideration for the sale, distribution and exhibition of cinematographic films has been excluded from the definition of royalty. Thus, such royalty is not taxable in India even if DTAAs give India the right to tax such royalty. It is proposed to amend the definition of royalty such that the consideration for sale, distribution and exhibition of cinematographic films is not excluded from the definition of royalty under the Income Tax Act.
Capital Gain on sale of real estate transaction
a) In order to compute the capital gain arising from transfer of land or building or both, the consideration for such transfer is deemed to be the value adopted for stamp duty purposes, if the sale consideration is less than the stamp duty valuation. The said provision is not applicable in case difference between actual sale consideration and stamp duty valuation does not exceed 5%. It is now proposed to expand the safe harbour of 5% to 10%.
New Dispute Resolution Scheme (Vivad se Vishwas Scheme)
a) It is proposed to bring a scheme for settling existing direct tax litigation. The taxpayers would be required to pay the amount of the disputed taxes only (waiver of interest and penalty) where payment of disputed taxes is made by 31 March 2020.
b) In case where the dispute relates to penalty, or interest or fee not connected with the disputed tax, taxpayers would be required to pay only 25% of the same by 31 March 2020 for settling the dispute.
c) In case payment is made after 31 March 2020, taxpayer will be required to pay 110% of the disputed tax (10% for interest and penalty) and 30% in case of penalty, interest and fee. The scheme will remain open till 30 June 2020.
Charitable Trust / other eligible tax exemption institutions
a) Currently, a trusts and specified institutions receive registration for an indefinite period with manual documentation. In order to simplify the registration process, it is proposed to enable the electronic registration process.
b) The Bill proposes the following process of registration and approval:
A fresh application for approval for registration shall be provisionally approved or registered for three years based on the application without detailed enquiry.
Approval, registration or notification for exemption shall be for a limited period of five years at one time.
c) The objective of this amendment is to streamline the application, registration process and put checks and balances in place so as to ensure that the conditions for approval or registration or notification are adhered to.
Income Tax Return and Tax Audit
a) Every person carrying on business is required to get his accounts audited, if his total sales, turnover or gross receipts, in business exceed or exceeds one crore rupees in any previous year. In case of a person carrying on profession he is required to get his accounts audited, if his gross receipt in profession exceeds, fifty lakh rupees in any previous year.
b) In order to reduce compliance burden on small and medium enterprises, it is proposed to increase the threshold limit for a person carrying on business from one crore rupees to five crore rupees in cases where:
aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipt; and
aggregate of all payments in cash during the previous year does not exceed five per cent of such payment
c) The due date for filing return of income is proposed to be amended by 31st October (as against 30th September).
Indirect Tax Announcements
Proposed legislative changes in the Customs Act, 1962
a) The government proposed to prohibit import and export of goods which can cause injury to the economy of India. Currently, it is limited to gold and silver only. This amendment may move towards sanction-based regime like other international economies.
b) The provision to be introduced to prevent misuse of Free Trade Agreement/ Preferential Trade Agreements. The new provision proposes certain obligations on importer and required to provide more information in order to claim preferential rate of the duty. Any wrongful claim may render the imported goods liable to confiscation. This will protect domestic manufacturers impacted by imported goods from preferential countries.
a) The budget has imposed a Health Cess on import of medical equipment. The proceed of cess will be utilized for financing health infrastructure and related services. This amendment increases the manufacturing of medical equipment in India and investment in health infrastructure.
b) The applicable rate is 5% on the assessable value of the imported goods. Medical devices which are exempt from Basic Customs Duty would not be subjected to Health Cess. Credit of Health Cess is not available to the importer.
Exemptions/ removals from customs duty
a) Exemption from social welfare surcharge for specified electronic and media products has been withdrawn.
b) Exemptions as per the multilateral Information Technology Agreement has been expanded to specified items
a) In order to provide benefit to domestic market, Anti-Dumping Duty on Purified Terephthalic Acid and its variants when exported from Peoples Republic of China, Iran, Indonesia, Malaysia, Taiwan, Korea RP and Thailand has been revoked.
Goods & Service Tax
a) It has been proposed to exclude following from the ambit of the composition scheme: (1) suppliers of goods who also render exempted services, (2) inter-state supplies of services, and (3) supply of services through an e-commerce operator.
b) The time limit for availing input tax credit on debit notes is relaxed. This is done by delinking the date of issuance of debit note from the date of original invoice.
c) The transfer of business without consideration is deemed to supply of goods & services from a retrospective effect from 1 July 2017. It is important for a company to evaluate the implication of GST during transfer of business to avoid litigation.
d) The power granted to government to prescribe rules for issuance of certificate as proof for tax deducted at source (TDS) in cases where such deduction is mandated by a governmental / local authority, governmental agencies etc.
e) The provision is introduced to levy penalty (equivalent to the demand of duty / input tax credit that has been incorrectly availed) on persons who retain the benefit of the transaction or at whose instance the following offences have been committed:
* Supply of goods / services without an invoice or incorrect invoice
* Issue of invoice without any underlying supply
* Availment or utilisation of input tax credit without actual receipt of goods / services
* Incorrect availment or distribution of input tax credit by an Input Service Distributor
The Budget focused on boosting investor confidence and increasing investment opportunities, which are critical pillars supporting investments in India.
For further information, please contact:
Gautam Khurana, Managing Partner
India Law Offices, New Delhi
t: +91 (11) 24622218
The material contained in this note is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.
#India, #WLNadvocate, #budget2020, #analysis, #feedback, #taxation, #foreigninvestment , #FDI