Union Budget 2020 is presented in the Lok Sabha by Finance Minister Nirmala Sitharaman on Saturday. In this blog, we will analyze the Finance Bill 2020-21, and I will try to do an in-depth analysis of it.

The provisions of the Finance Bill are applicable only when the Bill is passed by both the Houses of Parliament. And it is assented to by the President of India. Each proposal in the Finance Bill might have different effective date of applicability which is mentioned in the Finance Bill itself. Generally, the amendments by the Finance Acts are made applicable from the first day of the next financial year.

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Major Highlights Of Finance Bill 2020-21

Following are the Major Highlights of the Finance Bill 2020-21 related to Direct Taxes as introduced in the Lok Sabha

New Income Tax Slabs for 2020

According to my analysis, the new Tax Regime is a Trap, and I will give an example to prove it. First, let us quickly compare the slab rates under earlier Tax Regime and the New Tax Regime

Taxable Income Slab Existing Tax Rates New Tax Rates
0-2.5 Lakh Exempt Exempt
2.5-5 Lakh 5% 5%
5-7.5 Lakh 20% 10%
7.5-10 Lakh 20% 15%
10-12.5 Lakh 30% 20%
12.5-15 Lakh 30% 25%
Above 15 Lakh 30% 30%

New Section 115BAC has introduced in the Act which has provided an option to the individual and HUF to opt for the new tax regime which has the following key conditions: –

(1) This Scheme is Optional and is for an individual or an undivided Hindu family

(2) The income-tax payable in respect of the total income of a person, for any previous year starting from 2020-21 and onwards

(3) Another condition is that the assessee should not set off any brought forward losses and unabsorbed depreciation of past years if the same is attributable to any deduction specified above. Moreover, the assessee is also not allowed to set off the loss from House Property with any other head of income.

(4) The option can be withdrawn only once where it was exercised by the individual or HUF having business income for a previous year other than the year in which it was exercised (i.e. First Year) and thereafter, the individual or HUF shall never be eligible to exercise option under this section. However, the above rule is not applicable to any assessee who does not have/ creases to have business income

List of important deductions excluded from New Tax Regime:

  • Leave travel concession as contained in clause (5) of section 10
  • House rent allowance as contained in clause (13A) of section 10
  • Allowance for the income of minor as contained in clause (32) of section 10
  • Exemption for SEZ unit contained in section 10AA.
  • The standard deduction, a deduction for entertainment allowance and employment/professional tax as contained in section 16
  • Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23
  • Additional deprecation under clause (iia) of sub-section (1) of section 32
  • Deductions under section 32AD, 33AB, 35,33ABA, 35AD.35CCC,
  • Deduction from family pension under clause (iia) of section 57
  • Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA,80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc

Now here is an example why I believe that this New Tax Regime is a Trap

Consider Mrs Mehak who is running a consulting business and is investing Rs.150000/- in PPF, paying Rs. 25000/- towards Medical insurance and also availing deduction u/s 24(b) on account of Interest of Housing Loan of Rs. 200000/-. I have taken a simple example so that everyone could understand this Trap. Now consider different sets of income. Since up to Rs. 500000/- she is not required to pay any Tax on account of Sec 87A, let us consider Mehak’s Income above 500000/-

Case 1 Mehak’s Total Income Rs. 750000/-

Old Regime New Regime
Total Income 750000 750000
Less: 80C PPF 150000 Nil
Less: 80D   25000 Nil
Less: 24(b) 200000 Nil
Taxable Income 375000 750000
Tax Payable Nil 37500/- ( 12500+25000)

Case 2 Mehak’s Total Income Rs. 1000000/-

Old Regime New Regime
Total Income 1000000 1000000
Less: 80C PPF  150000 Nil
Less: 80D    25000 Nil
Less: 24(b)  200000 Nil
Taxable Income 625000 10000000
Tax Payable 37500/- (12500+25000) 75000/- (12500+25000+37500)

Case 3 Mehak’s Total Income Rs. 1500000/-

Old Regime New Regime
Total Income 1500000 1500000
Less: 80C PPF   150000 Nil
Less: 80D    25000 Nil
Less: 24(b)   200000 Nil
Taxable Income 1125000 1500000
Tax Payable 150000/- (12500+100000+37500) 187500/- (12500+25000+37500+50000+62500)

** 4% cess has not been considered in any of the cases.

So Mehak tends to lose under the New Regime!!!!!!!!

I have considered these deductions because these are very common, but there can be other permutation and combinations as well. But in most of the cases assessee will lose according to my calculation, so be very careful while giving consultancy and Tax Professionals will now have to do the calculation under two options before giving any advice.

2) Sec 115AD Inserted

New Section 115AD has been inserted via Finance Bill 2020 to provide an option to co-operative societies to pay tax at the rate of 22%+10% Surcharge+4% Cess without claiming any exemption, deduction or incentive available under Act. Also, provision of AMT shall not apply to the co-operative society.

**It should be noted that at present co-operative societies are required to pay Tax @30% if the income exceeds Rs. 20000/-.

3) Amendment in Section 115BAA and Section 115BAB

In a move that surprised many, in September 2019, the Central Government announced significant changes in corporate tax rates via the Taxation Laws (Amendment) Ordinance, 2019. I had already done an in-depth analysis of Ordinance in my earlier blog which you can read here https://ca91.in/income-tax-rates-updated-as-per-finance-act-and-taxation-ordinance-2019/

The Finance Bill, 2020 proposes that companies opting for the concessional rates shall not be allowed a deduction under any provisions of Chapter VI-A other than section 80JJAA or section 80M. Further, Section 115BAB shall include within its ambit the companies engaged in the business of generation of electricity.

4) Dividend Distribution Tax Abolished

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It has proposed to carry out necessary amendments so that dividend from the domestic company or income from units of a mutual fund shall be taxable in the hands of shareholders or unitholders at the applicable rate. And the domestic company or mutual funds shall not be required to pay any distribution tax. Further, it has proposed to provide a deduction of expense u/s 57 for earning such income, but this shall be restricted to 20% of dividend or income from units.

Section 194 is also amended to include dividend for tax deduction at the rate of 10% with the threshold limit of Rs. 5,000 instead of Rs. 2,500 for the dividend paid other than cash.

5) Deferring TDS or tax payment in respect of income pertaining to Employee Stock Option Plan (ESOP) of Startups

Currently, ESOPs are taxed as perquisites under section 17(2) of the Act. The taxation of ESOPs is split into two components:

a Tax on perquisite as income from salary at the time of exercise.

b tax on income from capital gain at the time of sale.

The difference between the fair market value of the shares as on exercise date & the amount that employee has paid for the exercise or subscription to the shares is calculated & taxed as Perquisite value.

In order to ease burden of payment of taxes by the employees of the eligible startups or TDS by the startup employer, it is proposed to amend section 192 of the Act to provide that a person, being an eligible startup responsible for paying any income in the nature of ESOPs to the assessee being perquisite shall be taxable and tax on such income shall be collected within fourteen days —

(i) after the expiry of 48 months from the end of the relevant assessment year (i.e. 5 years from the end of P.Y.) or

(ii) from the date of the sale of such ESOPs by the assessee; or

(iii) from the date of which the assessee ceases to be the employee of the Start Up;

WHICHEVER IS EARLIER.

6) Filing of statement of donation by the donee to crosscheck claim of donation by the donor

Now, this is a welcome step, and this mechanism will be similar to TDS/TCS. Entities receiving donation will be required to furnish the statement in this respect and to issue a certificate to donor/payee. The claim for donation will be pre-filled in Income Tax return and will be allowed only on this basis only.

7) Tax Incentives for Startups

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As per the existing provisions of section 80-IAC of the Act deduction of 100% of profits and gains derived from an eligible business by an eligible startup is allowed for three consecutive years out of seven years at the option of assessee.

Section 80-IAC has been proposed to be amended to provide that deduction to an eligible startup shall be available for a period of 3 consecutive assessment years out of 10 years. Further, the turnover limit for claiming such exemption has been proposed to raised to Rs. 100 crore which was earlier Rs. 25 crores.

8) Variation Limit increased to 10% from earlier 5% u/s 43CA, 50C and 56

As per Sec 50C where the consideration as a result of the transfer of land or building or both, is less than the SDV, the SDV shall be deemed to be the full value of the consideration and capital gains shall be computed on the basis of such consideration under section 48 of the Act.

The said section also provides that where the stamp duty value does not exceed 105% of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration. Similar, provision was also there u/s 56(2)(x) and 43CA.

Present provisions allow a variation of up to 5%. It is, therefore, proposed to increase the above-mentioned limit to 10%.

9) Tax Audit Limit Increased to 5 Crore

Under section 44AB of the Act, every person carrying on business/profession is required to get his accounts audited, if his total sales, turnover or gross receipts, in business exceed or exceeds Rs. 1 crore/50 Lakh in any previous year.

It is proposed to increase the threshold limit for a person carrying on business from Rs. 1 cr to Rs. 5 crores in cases where, –

  1. a) the aggregate of all receipts in cash during the previous year does not exceed 5% of such receipt, and
  2. b) aggregate of all payments in cash during the previous year does not exceed 5% of such payment

So, in a nutshell if cash payment/ cash receipts are up to Rs. 25 Lakhs and Turnover/Gross Receipt is up to 5 crores then there is no requirement of Tax Audit.

10) New Residency Rules for Individuals

Image result for new residency rule"

One of the conditions, to check the residential status of an individual in India, is that his period of stay in India should be more than 60 days. However, in case of an Indian Citizen or a person of Indian origin, the Income-tax Act provides relaxation of up to 182 days for residency check. It has been proposed to decrease the said limit to 120 days from existing 182 days.

An individual or a HUF shall be said to be “not ordinarily resident” in India in a previous year if the individual or the manager of the HUF has been a non-resident in India in 7 out of 10 previous years preceding that year. (Earlier it was 9 out of 10)

11) New Scheme of E-Assessment

E-Assessment Scheme 2019 was notified under section 143(3A) of the Act. Now the scope of Section 143(3A) has been expanded to include reference of Section 144 of the Act relating to best judgement assessment in the said sub-section.

12) New Scheme of E-Appeal has been Introduced

It is proposed to insert new sub-section (6A) in section 250 of the Act eliminating the interface between the CIT (A) and the appellant in the course of appellate proceedings to the extent technologically feasible.

13) New Penalty Introduced for Fake Invoices

It is proposed to introduce a new provision to levy penalty on a person if it is found during any proceeding under the Act that in the books of accounts maintained by him there is a

(i) false entry or

(ii) any entry relevant for computation of total income of such person has been omitted to evade tax liability.

The penalty payable by such person shall be equal to the aggregate amount of false entries or omitted entry.

14) TDS on Fees for Technical Services (Other than Professional Services) reduced to 2% from Existing 10%

The TDS rate in other cases under section 194J would remain the same at 10%.

15) TDS on E-commerce Transactions

Sec 194-O has been introduced in the Act to provide a new levy of TDS at the rate of 1% of the Gross amount of sale of goods or services. The TDS is to be paid by e-commerce operator for sale of goods or provision of service facilitated by it through its digital or electronic facility or platform

Any payment made by a purchaser of goods or recipient of services directly to an e-commerce participant shall be deemed to be amount credited or paid by the e-commerce operator.

16) New TCS on sales Exceeding Rs. 50 Lakhs

A new levy of TCS on sale of goods above specified limit has introduced. Seller of goods is liable to collect TCS at a rate of 0.1 per cent on the consideration received from the buyer in a previous year in excess of Rs. 50 Lakh

Only those sellers whose total sales, gross receipts or turnover from the business carried on by it exceed Rs. 10 crores during the financial year immediately preceding the financial year, shall be liable to collect such TCS.

17) Scope of Section 194C Has Widened

The definition of work has proposed to be amended to provide that if any product is supplied or manufactured according to requirements of the customer, it shall fall under the category of ‘work’ even if the associated enterprise of such customer supplies the raw material.

I have tried my level best to share major highlights of the Finance Bill related to Direct Taxes and at the same time to keep it as short as possible. You can write in the comment box below in case of any error/suggestions/contrary views.