India Finance Act 2020: Key changes to Indian tax regulations

Vadim Krasovskiy Business News, India, Taxation

In the midst of the global coronavirus crisis, India’s Parliament, just before adjourning, passed the Finance Bill 2020 as the Finance Act 2020. The law contains a number of tax-related and other changes that affect business firms for the Financial Year 2020-21. The new act received Presidential assent on March 27, 2020. The provisions of the Finance Act 2020 will be incorporated into the national regulations — most of them in the Income-tax Act — and will come into force on April 1, 2020. 

Nearly 104 amendments have been made, either through changes or omissions to existing sections or by insertion of new ones. Highlighted below are the important changes introduced by the new law that affect Indian companies and individuals.

Changes to Tax Residency Rules for Non-Residents

Persons of Indian Origin

Earlier, the Income-tax Act provided that Indian citizens or persons of Indian origin who were resident outside India would qualify as a tax resident of this country only if they spent 182 days or more in India in the relevant year.

However, these provisions have often been misused. Individuals carrying out substantial economic activities from India kept their stay in the country below 182 days and thus were not required to declare their global income in India. To counter such tax abuse and discourage the situation of stateless persons for tax purposes, the new law reduced the period from 182 days to 120 days. The 120-days rule will apply only in cases where the individual’s total income arising outside India exceeds INR 1.5 million during the fiscal year. 

Indian citizens not taxable in other jurisdictions

In recent years, individuals have often tried to arrange their affairs in such a way that they were not liable to taxation in any jurisdiction during a given year and thus not paying taxes in any country.

The new law introduces the provision that an Indian citizen will be considered resident of India if that person is not liable to taxation in any other country by reason of domicile or residence rules; or any other criteria of similar nature. This amendment will apply only if total income, other than the income from foreign sources, of such an Indian citizen exceeds INR 1.5 million during the tax year.

Tax Changes for Start-Ups

Currently, start-ups in India enjoy a full tax waiver on profits for any three consecutive years out of their first seven years, if incorporated between April 1, 2016, and March 31, 2021. Another important condition is that their turnover should not exceed INR 250 million. The new law has extended the waiver to apply to any three years out of the start-up’s first ten years. Additionally, the turnover threshold has been increased from INR 250 million to INR 1 billion.

Abolishing the Dividend Distribution Tax (DDT)

Earlier, companies distributing dividends to shareholders carried the burden of paying a dividend distribution tax of 15% on those dividends (after taking into account the surcharge and cess, the effective rate was in fact 20.56%). Such dividend income was exempt in the hands of the respective shareholders. The DDT has now been removed, and from now on dividend income will be taxable in the hands of the recipients, at the rate of 10% for dividends paid to shareholders resident in India and 20% if paid to foreign investors.

Deduction for Inter-Corporate Dividends

This new section is introduced in conjunction with the shift of dividend taxability from the payer to receiver. The new regulation provides a deduction to companies that receive dividends from another company. Thus, where the gross total income of a domestic company in a year includes income by way of dividends from any other domestic company, a deduction equal to the amount of dividends received is allowed in computing total income.

Concessional Tax Regime for Individuals and HUF

The new law has provided an option to individuals and Hindu Undivided Families (HUF) to be governed either by the current tax regime or the concessional tax regime. The new personal tax rates are optional and persons may avail these rates only if they satisfy certain conditions, such as not claiming certain exemptions or deductions. These include standard deductions, leave travel allowance, house rent allowance, interest payment on housing loan, and deductions under Chapter VI-A of the Income Tax Act (investments in a provident fund, insurance premium, donations to charities, etc.). Once the option is exercised, it will be applicable for all subsequent years. The table below compares the conditions of the new and the old regimes.

Income Tax Slab Tax Rates
As Per New
Regime
Tax Rates
As Per Old
Regime
INR 0 – 250 000 NilNil
INR 250 001 – 500 000 5% 5%
INR 500 001 – 750 000 10% 20% 
INR 750 001 – 1 000 000 15% 20%
INR 1 000 001 – 1 250 000 20%30% 
INR 1 250 000 – 1 500 000 25% 30% 
Above INR 1 500 000 30% 30% 

Equalisation Levy

The equalisation levy is a tax charged by India from June 1, 2016, on some specified services provided by non-residents in the ‘hard to tax’ digital sector.

Finance Act 2020 has extended the scope of this levy to cover consideration received for the following e-commerce supplies or services provided after April 1, 2020:

  • Online sale of goods owned by the e-commerce operator; or
  • Online provision of services provided by the e-commerce operator; or
  • Online sale of goods or provision of services or both, facilitated by the e-commerce operator.

E-commerce operator refers to a non-resident who owns, operates or manages an electronic facility or platform for online sale of goods or online provision of services.

The tax will be charged at the rate of 2% from funds received by an operator for goods or services provided by it primarily to persons resident in India.

Corporate Tax for Certain Domestic Companies

The new Indian Tax Act gives the benefit of a reduced corporate tax rate to certain domestic companies. It states that domestic companies have the option to pay tax at the rate of 22% (plus applicable surcharge and cess) from FY 2019-20 (AY 2020-21) onwards if such domestic companies adhere to certain conditions.

The main condition is that such companies should not claim any exemptions or incentives under other income tax provisions. These include:

  • Deductions available for units established in special economic zones;
  • Additional depreciation and investment allowance towards new plant and machinery made in notified backward areas;
  • Deductions for tea, coffee, and rubber manufacturing companies;
  • Deductions for deposits made towards a site restoration fund by companies engaged in extraction or production of petroleum, natural gas, or both, in India;
  • Deductions for expenditures made for scientific research, etc.

Such companies will have to exercise the option to be taxed under the new rate on or before the due date for filing income tax returns, i.e., usually September 30 of the assessment year. Once the company opts for the 22% rate in a particular financial year, that choice cannot be withdrawn in any subsequent year.

Taking into account the applicable surcharge of 10% and cess of 4%, the new effective tax rate will be 25.168%.

Corporate Tax for New Manufacturing Companies

The new law introduces a favorable tax regime for new manufacturing companies in India. From now on, a domestic company satisfying the specified conditions can claim the beneficial income tax rate of 15% (plus applicable surcharge and cess). The benefit is available from the financial year 2019-20 (AY 2020-21).

A domestic Indian company will be entitled to the low corporate tax if it satisfies the following conditions:

  • It has been set up and registered on or after October 1, 2019, and has started manufacturing on or before March 31, 2023.
  • It should be engaged in the business of manufacture of any article or thing, and research in relation to such article or thing. The company can also be engaged in the distribution of such goods produced by it.
  • It should not be formed by the splitting up and reconstruction of an already existing business.
  • It does not exploit any previously used plant or machinery, unless used outside India or its value does not exceed 20% of the total value of the company’s plant or machinery; it does not use a building previously used as a hotel or a convention centre, etc.

The total income of such manufacturing companies will be calculated without claiming tax exemptions and incentives, as well as in the case of certain domestic companies as described in the section above.

Taking into account the applicable surcharge of 10% and cess of 4%, the effective tax rate for such manufacturing enterprises will be 17.16%.

Summary

The Finance Act 2020 of India has introduced a number of progressive tax treatment changes beneficial for Indian businesses, making the country more attractive for foreign investments. In addition, one of the amendments — the abolition of the Dividend Distribution Tax — will benefit Singapore-based holding company structures. Singapore’s efficient tax system allows businesses to enjoy low tax rates and take advantage of numerous reliefs as well as double taxation agreements. One such provision is Singapore’s full taxation relief for resident holding companies receiving foreign-sourced dividends from subsidiary companies that have been taxed abroad at a corporate income tax rate of at least 15% (which is satisfied in the case of India). Therefore from now on, it becomes very attractive for an Indian venture to create a Singapore holding company structure. Contact our specialists if you are running a business in India and want to benefit from new tax changes by incorporating a holding company in Singapore.

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