Analysis of the amendments made in the Finance Bill, 2020 approved by the Parliament on 23.03.2020
-Ved Jain
The Finance Bill, 2020 was laid down before the Parliament for consideration and approval today. While moving the Bill for consideration and approval, the Finance Minister moved amendments to the Bill introduced on the Budget day as well in the light of feedback received and the issues arising thereon. The Finance Bill, 2020 has now been approved by both the houses of the Parliament along with the amendments on 23.03.2020. The key difference in the approved Bill and the initial Bill is that away that the amendments affecting Non-Residents Indian on the issue of deemed residency have been withdrawn to a great extent. Efforts of all concerned to persuade the Government to not to amend the law on this issue succeeds. The analysis of major amendments as approved by the Parliament is as under:
- Deemed ‘not ordinarily resident’ status now given to stateless persons as against deemed ‘resident’ status earlier proposed
Considering the fact that the proposed amendment on the status of non-resident was going to affect all non-residents, such proposal has been withdrawn by the Finance Minister while moving the bill for consideration and approval. The objective of such amendment as was stated in the press release issued by CBDT after the budget was to tax that income of business or profession which accrues or arises from the business controlled in or a profession set up in India. Accordingly, the scope of amendment has been restricted to only Indian non-residents which have income from business controlled in or from a profession set up in India and that too when such income exceeds beyond a threshold of Rs. 15 lakhs. Even in such cases, it will only be this income earned from business controlled in or a profession set up in India that will be taxable in India and not the entire global income as was proposed in the earlier Finance Bill. Thus, such Indian non-residents who are not paying tax in any country by reason of domicile/ residence or any other criteria of similar nature, such Indian non-resident will now be deemed to be resident but not ordinary resident. Consequently, there will be no liability to pay tax on foreign income. The liability to pay tax on such deemed resident will be only in respect of business controlled in India or profession set up in India and that too when such income exceeds the threshold of Rs. 15 lakhs.
- Non-resident Indians who were proposed to be considered ‘residents’ if period of stay in India during the year was 120 days as against 182 days now given status of ‘not ordinarily resident’ status if total stay in India does not exceed 182 days.
As per the provisions of Section 6(1) of Income Tax Act, an individual is said to be resident of India if he has been in India for a period of 182 days or more. Further, an individual is also considered to be resident if during the year he has been in India during the year for 60 days or more and such person has been in India within the four years preceding such year for a period of 365 days or more. On fulfilling of either of the above condition, an individual is considered to be a resident in India.
However, concession has been provided to citizens of India in respect of the second condition in the existing Explanation below this section 6(1). In this regard, clause (a) of Explanation (1) to section 6(1) which provides that in case of citizen of India who leaves India in any previous year as a member of the crew of Indian ship or who leaves India for the purpose of employment outside India, then the second condition of 60 days stay in India, in case such individual has been in India for 365 days or more in the four preceding years, will be relaxed and such Indian citizen will not be considered as resident if he is in India for less than 182 days during the year despite the fact that such individual has been in India for 365 days or more in the preceding four years.
Similarly, clause (b) of Explanation 1 to section 6(1) provides a similar relief in case of an individual, being a citizen of India, or a person of Indian origin who being outside India comes on a visit to India in any previous year. In respect of such individuals who being citizen of India or person of Indian origin and being outside India, comes on a visit to India as well, the second condition of 60 days stay in India, in case he has been in India for 365 days or more in the four preceding years, will be relaxed and such Indian citizen will not be considered as resident if he is in India for less than 182 days during the year despite the fact that such individual has been in India for 365 days or more in the preceding four years.
Amendment proposed in the Initial Finance Bill, 2020
The Finance Bill, 2020 initially proposed to reduce such period of 182 days to 120 days only in respect of clause (b) of Explanation 1 to section 6(1). The implication of the amendment proposed was that the Indian Citizens who comes to visit India during the year for an aggregate period exceeding 119 days, as against 181 days earlier, were to be considered as ‘resident’ if such person were in India for a period of 365 days or more in the immediately preceding 4 years. In case such individuals were to qualify as ordinary resident, such persons would have been required to pay tax in respect of their global income whereas in case such individuals were to qualify as not-ordinarily resident, such individuals, in addition to any income that accrues or arises in India or is received or is deemed to be received in India, would have been additionally liable to pay tax in respect of any income that accrues or arises outside India but is derived from a business controlled in or a profession set up in India.
Amendment made in the Bill approved by the Parliament
Now in the approved Bill, it has been provided that a citizen of India or a person of Indian origin who being outside India comes to visit India shall be considered a ‘resident’ in India if his period of stay in India is 120 days as against 182 days provided in the Act if such Indian citizen or persons of Indian origin has total income, other than the income from foreign sources, exceeding Rs. 15 lakhs during the previous year. Further, section 6(6) has also been amended to provide that in such cases where the person is considered to be resident in India on account of his stay in India exceeding 120 days under the proposed amendment, then in case the total period of stay does not exceed 182 days, such persons shall be considered to be not ordinarily resident. Thus, similar to the threshold prescribed for applicability of the provision of deemed residency for stateless persons, the reduced period of stay in India to 120 days to consider a person as resident shall only be applicable when the income of such person that accrues or arises in India, or is deemed to accrue or arise in India or such income that accrues or arises outside India from a business controlled in or a profession set up in India exceeds Rs. 15 lakhs. Further, even in such cases where the income from Indian sources exceeds Rs. 15 lakhs, the global income will not be taxable but the income that accrues or arises in India, income that is received or deemed to be received in India or the income that accrues or arises outside India and is derived from business controlled in or profession set up in India shall only be taxable in India.
Impact of the amendment
Pursuant to the amendment in the approved Bill, the impact will be only in respect of such individuals who being Indian citizens or person of Indian origin, and having total income, other than income from foreign sources, exceeding Rs. 15 lakhs, comes to visit India for a period of 120 days or more but for a period less than 182 days. An individual whose period of stay in India is 182 days or more regardless of any threshold of his income in India is already considered to be resident in India and thus, there will be no impact of the amendment on such individuals who now also continues to be treated as a resident.
Further, even in cases where the total stay now is 120 days or more but less than 182 days, there will be no impact of the amendment proposed in case the total income from Indian sources does not exceed Rs. 15 lakhs during the previous year. It may be noted that any income that accrues or arises in India or is deemed to accrue or arise in India or is received in India or is deemed to be received in India or income that though accrues or arises in India but is arising derived from a business controlled in India or a profession set up in India shall be considered to be income from Indian sources. This will include income from interest, dividend, rental income, etc. from any source of capital asset situated in India. Any foreign income that that accrues or arises outside will not be considered in the threshold of Rs. 15 lakhs.
Further, even in such cases where the total income from Indian sources exceed Rs. 15 lakhs and such person is considered to be resident on account of period of stay exceeding 119 days owing the amendment in the Bill, then in case the total period of stay is less 182 days, the limited impact will be that such individuals shall now be considered to be a not-ordinarily resident as against ‘non-residents’ status enjoyed by such individuals until now. Consequently, in addition to any income that accrues or arises in India or is received or is deemed to be received in India, only the income that accrues or arises outside India but is derived from a business controlled in or a profession set up in India shall also be taxable. Any income from foreign sources shall continue to be not taxable in India in respect of such individuals. It may be noted that income that accrues or arise in India or is received or deemed to be received in India is taxable in the hands of non-residents as well. Thus, since such individuals were normally considered to be non-resident and were already liable to tax to such extent, there will be no additional tax in respect of such income that accrues or arises in India or is received or deemed to be received in India. Thus, the only additional burden will be to pay tax in respect of income that accrues or arises outside India but is derived from a business controlled in or a profession set up in India. The same can also be avoided in the total period of stay in India does not exceed 119 days or if the total income from Indian sources does not exceed Rs. 15 lakhs.
Further, the amendment in the approved bill will also be beneficial vis-à-vis the initial Bill in such cases where the individual on account of their stay in India exceeding 119 days, in absence of specific provision to be considered as not-ordinarily resident, may have been considered to be an ordinarily resident as in such cases, the individual would have been liable to pay tax on the global income including income from foreign sources. However, now, since the amendment specifically considers the individual to be a not-ordinarily resident, the income from foreign sources continues to be non-taxable in India in respect of such Individuals.
As regards such individuals who are neither citizen of India nor persons of Indian origin, there will be no impact of the amendment and such individuals shall continue to be considered as a resident of India if the aggregate period of their stay in India is 60 days or more during the year and the period of stay in the immediately preceding 4 years is 365 days or more. Similarly, there will be no impact on such individuals who are citizen of India who leaves India in any previous year as a member of the crew of Indian ship or who leaves India for the purpose of employment outside India who shall continue to enjoy relaxation provided under clause (a) of Explanation 1 under section 6(1) i.e. such individual shall be considered to be resident of India if the aggregate period of their stay in India is 182 days or more (as against 60 days) during the year and the period of stay in the immediately preceding 4 years is 365 days or more.
- Period of Not Ordinarily Resident earlier proposed to be extended to four years from two years done away with.
As per the existing provision of Section 6(6) an individual and HUF is considered to be not ordinarily resident in India during the year if such individual or Karta of such HUF has been a non-resident in 9 out of the 10 preceding years or has been in India for a period of less than 730 days during the preceding 7 years. Further, as per the proviso to Section 5(1) such resident is not liable to pay tax in respect of income which accrues or arises to him outside India during the year except such income which is derived from a business controlled in or a profession set up in India. The Finance Bill, 2020 proposed to give extended period of this status of not ordinarily resident by considering the status as not ordinarily resident if such person has been non-resident in 7 of the 10 preceding years as against 9 of the 10 preceding years at present. The other condition of a period of stay of less than 730 days during the preceding 7 years was proposed to be deleted.
Such amendment proposed vide the Finance Bill, 2020 does not find its place in the approved Bill. With the amendment proposed initially vide the Finance Bill, 2020, an individual or HUF could have had a status of not ordinarily resident for a period of four years as against two years at present. During such period when the status is that of not ordinarily resident, such person would not have been required to pay tax on income which accrues or arises to him outside India during the year except income derived from the business controlled in or a profession set up in India. Such amendment proposed was beneficial to many expats who comes to India for employment as these expats would have been able to enjoy the status of resident but not ordinary resident for a period of 4 years from the year they become resident in India and consequently will not be required to pay tax on their global income during this extended period of 4 years of resident but not ordinary resident.
However, the above benefit proposed to be extended initially has been taken away in the approved Bill. Thus, the status of not-ordinarily resident will be determined in the same way as is being determined until now. However, as noted above, the persons of Indian original or Indian citizens who are now deemed resident under clause 1A of section 6 or have now become resident on account of reduced limit of 120 limit will also qualify as not ordinarily resident.
- No substantive changes in the new tax regime for Individuals or HUF’s – Clarificatory amendment in respect of Individuals or HUFs having income from profession
The approved Bill does not contain any substantive amendment in respect of the original proposal of new optional reduced tax rates without the benefit of any exemption or deduction announced for Individuals or HUF’s. However, a clarificatory amendment has been made in the new section 115BAC to provide that in case of Individuals or HUF’s having profession income, the option to pay tax under section 115BAC can only be exercised in a similar fashion in which individuals or HUF’s having business income are required to exercise such option.
In the original proposal, it was provided that in the case of individual having no business income, the option to pay tax under section 115BAC can be exercised on year to year basis at the time of filing the return under Section 139(1). In the case of such individual or HUF which have business income, it was provided that such option can be exercised before the due date of filing the return but once such option is exercised, the same shall be applicable for all the subsequent assessment years and such individual or HUF will be required to pay tax under this section 115BAC without any deduction and shall not be entitled to withdraw from such option. It was further provided that such individual or HUF having business income may however withdraw from such option only once in which case such individuals or HUFs having business income, shall not again be eligible to exercise the option to pay tax under section 115BAC. However, in case such individual or HUF having business income later on ceases to have any business income, then such individual or HUF will again be eligible to exercise this option on year to year basis at the time of filing the return.
In the original proposal, in sub-section (5) of section 115BAC, the restriction of one time option was made applicable to such individual or HUF having ‘business income’ and there was no reference to income from profession. This led to ambiguity as to whether individuals or HUF’s having income from profession are required to opt to pay tax under section 115BAC on year to year basis or are required to opt once and for all similar to those having business income. Considering the intent of the provision, the income from profession has now been included in the approved Bill along with business income and thus, in the case of individual or HUF having professional income as well, the option is required to be exercised only once and the option once exercised shall be irretrievable for all times to come similar to those having business income.
- Clarificatory amendment to provide that dividend income that is subject to DDT in accordance with 115-O not to be taxable in the hands of shareholder
Further, there is no change on abolition of DDT and taxing dividend income in the hands of shareholders. Dividend income will be taxable in the hands of shareholders. However, it has been clarified that in respect of transition which is effective from 1st April, 2020, there will be no tax liability in respect of dividend income received by a shareholder on or after 1st April, 2020, in case such dividend has been declared or distributed by the company before 1st April, 2020 and DDT has been paid by the company in respect of such dividend in accordance with section 115-O.
- Section 80M benefit to be given in respect of dividend received from foreign companies and business trust as well
Provision of section 80M have also been amended to give exemption not only in respect of dividend received from domestic company and distributed but also dividend received from foreign companies or business trusts also and distributed further by the company to avoid multiple taxation. Now, such dividend received by a company will not be taxed in the hands of the company to the extent it is distributed by such company to its shareholders.
- TDS withholding rate of 20% prescribed in respect dividend payable to non-residents
The TDS rate in respect of dividend payable to non-residents and foreign company has now been prescribed at 20%. Earlier, the Finance Bill, 2020 did not provide for any specific rate of TDS in respect of payment of dividend to non-residents and foreign companies with the result such dividend would have fallen in residual clause of 30% in respect of Individuals and 40% in respect of companies. However, now, TDS at the rate of 20% will be required to be deducted in respect of dividend payable to non-residents including foreign companies. It may be relevant to point out that the TDS rate of 10% in respect of dividend payable to residents was already prescribed in the Finance Bill, 2020 under section 194 which has been approved by the Parliament without any changes.
- No TDS on Growth oriented Units on redemption.
Vide the Finance Bill, 2020, section 194K was proposed to be inserted to provide that any person responsible for paying to a resident any income in respect of units of a Mutual Fund shall be liable to deduct TDS at the rate of 10%. As the provision requires one to deduct TDS in respect of any income payable in respect of units of a mutual fund, an interpretation was possible that TDS shall be deductible even where units are purchased back by the mutual fund under growth scheme which are taxable under the provision of the capital gain. However, the same was not the intention of the Legislation. Accordingly, the provision of section 194K has been further amended to clarify that no TDS shall be required to be deducted if the income is of the nature of capital gains. Thus, no TDS shall be deductible under the said provision on growth oriented units on redemption which are chargeable as capital gain in the hands of the unit holder.
- TCS on sale of goods retained in the approved Bill – Exports and imports now exempt from such TCS provision – provision now applicable from 01.10.2020 as against 01.04.2020 proposed earlier
Vide the Finance Bill, 2020, a draconian provision was proposed to be inserted to provide for collection of TCS on sale of goods. It was provided that a seller of goods shall be liable to collect TCS at the rate of 0.1 % on consideration received from a buyer in a previous year in excess of fifty lakh rupees. Against the expectations of the Industry to do away with the said provision at the time of passage of such Bill, the said proposal to levy TCS on sale of goods has been retained in the Bill approved by the Parliament despite the fact that such provisions entails huge paperwork and compliance obligations.
However, to provide some relief, exemption in respect of export sales have been provided in the approved Bill i.e. no TCS shall be required to be collected by the seller in respect of the exported out of India. Further, in the approved Bill, the sellers have also been absolved from the requirement to collect TCS in respect of any goods sold to India i.e. where the goods are being imported in India.
Furthermore, this provision will now be applicable from 1st October, 2020 as against 01.04.2020 proposed earlier.
- TCS provision in respect of overseas remittance under LRS and sale of overseas tour package to be effective from 1st October, 2020 as against 1.4.2020 proposed earlier
Vide the Finance Bill, 2020, sub-section (1G) was proposed to be inserted in section 206C to provide for levy TCS on overseas remittance under LRS and for sale of overseas tour package with effect from 01.04.2020. It has now been provided that the said provision shall be applicable from 01.10.2020 as against 01.04.2020 proposed earlier.
- Scope of requirement to deduct TDS on cash withdrawal under section 194N expanded
The Finance (No.2) Act, 2019 introduced section 194N making it obligatory for banks including Cooperative Banks and post offices to deduct tax at source at the rate of 2% on cash payments in excess of Rs.1 Crore in aggregate during a year from one or more account maintained with it. No amendment was proposed in the initial proposal. However, in the approved Bill, the said provision has been substituted by a new provision 194N. Earlier, 2% was to be deducted on withdrawal in the year in respect of the amount in excess of Rs 1 crore. Now, in the amended section, while no deduction shall be required to be made if the total withdrawals does not exceed Rs. 1 crore, however, once the withdrawals exceeds the threshold of Rs. 1 crore, then TDS shall be applicable on total amount including Rs 1 crore. Further, the scope of the said provision has further been enhanced as the new provision now provides that in case of a person who has not filed the returns for preceding 3 years, then tax will be deducted @ 2% in case withdrawal exceeds Rs 20 lakhs and @ 5% in case withdrawal exceeds Rs 1.00 crore. It may be noted that on exceeding threshold of Rs. 1 crore, the deduction will be on entire amount including the threshold amount. The threshold will be computed on yearly basis. This provision will be applicable from 01.07.2020.
- Scope of equalization levy introduced vide Finance Act, 2016 in respect of payment to a non-resident service provider for online advertisements or digital advertising space or facilities expanded to include payment for services for e-commerce trade and services.
The Finance Bill, 2016 introduced a new tax called Equalization Levy. It provided that every non-resident who receives a consideration exceeding Rs. 1 lakh for online advertisement or any provision for digital advertising space or any other facility or service for the purpose of online advertisement from a person resident in India and carrying on business or profession or from a non-resident having a Permanent Establishment in India, shall be charged an Equalization Levy at the rate of 6% of the amount of the consideration if the total amount of consideration. Every person who was required to pay consideration for such services that were leviable to equalization levy were required to deduct the same from the amount paid or payable to the non-resident in respect of such services.
Now, as per the approved Bill, equalization levy @ 2% shall be charged on the amount of consideration received or receivable by an e commerce operator from e commerce supply or services made or provided or facilitated by it to a person resident in India or to a person who buys goods or services using protocol address located in India. It may be noted that the requirement to pay the equalization levy in respect of such services is on the e-commerce operators. The equalization levy need to be paid by the e-commerce operator within 7 days from the end of every quarter except last quarter where it is to be paid by the last day of the quarter i.e. 31st March. However such equalization levy will not be applicable where e commerce operator or provider or facilitator has a permanent establishment in India and such e-commerce is effectively connected with such permanent establishment in India or where the gross receipts of such e commerce operator is less than Rs 2 crore during the previous year.