India: Direct Tax highlights for 2020

By Sachin Garg, Partner- Direct Taxation, Nangia Andersen LLP

Sachin.garg@nangia-andersen.com
+91 93502 93097

The year 2020 has already become an unforgettable year to the unprecedented global pandemic across the world, nation-wide lockdown in India as well as various other countries, investments in health infrastructure to protect people from the virus effect, development of vaccines at super-fast speed, etc. Some of these events will have immediate, whereas others will have long-lasting effect on the way human beings lead their lives going forward.

In the area of Income tax law in India too, the year has seen various major changes which will have some immediate and some will have long-term effect on the way, how income tax laws are implemented in India. Abolition of DDT on companies and taxing the same in hands of shareholders will bring a paradigm shift how dividends are taxed and will also enable shareholders (especially foreign shareholders) claim credit of such taxes paid on dividends in their home countries. Vivad se Vishwas scheme is a landmark scheme for settlement of tax litigations pending as on 31st January 2020 and will help in substantially reducing pending income tax litigation in India. The faceless assessments and faceless appeals system will bring a paradigm long term shift in the way tax assessments are completed and tax appeals are heard in India and expected to reduce the personal subjectivity and bias in these proceedings. However, training and ability of tax authorities to understand and appreciate complex business transactions and structures in faceless proceedings without any personal explanation, will be key to success of the faceless scheme. New provisions such as Equalisation Levy on non-resident e-commerce operators, TDS on e-commerce operators, TCS on overseas remittances under LRS scheme, payments for overseas tour packages and sale of goods, increased reporting in Form 26AS is likely to widen the tax net and bring more taxpayers under the purview of income tax compliances. At the same time, with relaxation of timelines, temporary reduction in interest rates and TDS/TCS rates, the Government has also shown they understand and are flexible to amend laws to facilitate and reduce pain of taxpayers. In summary, the year 2020 will remain unforgettable for various landmark changes in the Income tax provisions as well.

1. Taxation of dividends

Taxability of dividends in India, underwent a major overhaul, with Finance Act 2020 abolishing Dividend Distribution Tax (DDT) payable by domestic companies on declaration of dividend and re-introducing the conventional regime of taxation of dividends in the hands of shareholders. Prior to the amendment, the Company declaring dividends was required to pay DDT @ 20.56% (including surcharge and cess), irrespective of the residential status of the shareholder receiving the dividend income. After the amendment made by Finance Act, 2020, the Company must withhold tax @10% on dividend paid or payable to a resident shareholder, subject to some exceptions. Such dividend income is taxable in hands of resident shareholders at the normal rate of tax applicable to them. Further, dividend income in hands of a non-resident shareholder is taxable @ 20% (plus applicable surcharge and cess) in terms of the provisions of the Income tax Act, 1961 (the Act) and a Company must withhold taxes accordingly. However, such non-resident shareholders are eligible to be taxed at a lower rate under the provisions of Double Tax Avoidance Agreement (DTAA), between India and the country of which such shareholders are residents.

2. Vivad Se Vishwas Scheme (VSV Scheme)

Post the success of Sabka vishwas scheme, which was an amnesty scheme for indirect tax related disputes, the Finance Minister in her Budget speech mentioned her proposal to introduce a similar scheme for reducing litigation in direct taxes as well. VSV scheme is a kind of resolution / amnesty scheme, for direct tax disputes, where-in, by payment of taxes on issues/ matters under litigation one can get the interest and penalty completely waived off and get immunity from prosecution.

The main objective of the scheme from the Government’s perspective is to reduce pending litigation, generate revenues for the government by freeing up funds stuck-up in litigation and from tax payer’s standpoint to end litigation, waiver of interest and penalties and immunity from prosecution.

Assessee have the option to opt for VSV scheme by 31^st December 2020 (without payment of excess tax). As per the recent clarification by CBDT, payment of tax under VSV scheme opted by 31^st December 2020, can be made uptil 31^st March 2021.

3. Faceless Assessment

The Government through Finance Act 2020 introduced the faceless scheme of assessments. This new system of faceless assessments would bring a paradigm shift in the entire approach and way, in which assessments are presently undertaken and concluded. In the earlier system of face-to-face assessments, assessments were conducted by one assessment officer and reviewed by a Senior officer only in exceptional circumstances. Further there was personal inter-face with the assessing officer to discuss the information provided during the course of assessment proceedings and close the assessments.

However, in the new systems of faceless assessment, the entire approach and methodology shall undergo a drastic change. There would be no personal interface between the assessment unit and the assessee. The assessment may go through 4 levels and may need to pass through scrutiny of 4 different units, if the assessment made by 1 Assessment Unit is referred to the Technical Unit, Review Unit or Verification Unit.

4. TDS on E-commerce operators

The Finance Act 2020 had inserted a new section 194-O to the Income Tax Act (the Act) stipulating that with effect from October 1, 2020, e-commerce operators shall be liable to deduct income tax at the rate of 1% of the gross amount of sale of goods or provision of services or both, facilitated through its digital or electronic platform. E-commerce participants being Individuals and Hindu Undivided Families (HUFs) are exempted from such deduction where gross amount of sale or services or both does not exceed INR 5 Lakh and where such persons have furnished their PAN to the e-commerce operator. Further, the Act directed the deduction of tax at the time of credit or payment to the e-commerce participant, whichever is earlier.

5. TCS on Tour Operators and remittances under LRS

As per Finance Act 2020, Authorised Dealers (AD) and Tour operators are required to collect and deposit tax at source at the rate of 5% in respect of overseas remittances under LRS exceeding INR 7 Lakhs and in case of sale of overseas tour program packages irrespective of any amount. These provisions came into effect from 1^st Oct 2020.

Relaxation has been given to individuals remitting money overseas for overseas education, (funded by loan), where rate of TCS has been reduced from 5% to 0.5% for amount exceeding INR 7 lakhs in a FY. Authorised dealer shall not collect tax if aggregate amount being remitted by buyer is less than INR 7 lakhs in a FY and is for purpose other than purchase of overseas tour package.

Further in cases where the threshold of 7 lakh applies, the TCS at the rate of 5% would be on the amount exceeding 7 lakh in a financial year. Overseas tour programme package” means any tour package which offers visit to a country or countries or territory or territories outside India and includes expenses for travel or hotel stay or boarding or lodging or any other expenditure of similar nature or in relation thereto.

6. TCS on sale of goods

Finance Act 2020 had also introduced Section 206C (1H) to the Act. Herein, it was stipulated that with effect from October 1, 2020, a seller receiving an amount as consideration for sale of goods (aggregate value of which exceeds INR 50 Lakhs in any previous year) to collect tax from the buyer at the rate of 0.1% (0.075% up to 31st March 2021) of the sale consideration exceeding INR 50 Lakhs. The provisions of the sub-section apply to goods other than goods being exported out of India. Further, the collection has been directed to be collected at the time of receipt of sale consideration.

The term ‘seller’ and ‘buyer’ had been defined under this sub-section.

It may be noted that TCS is not an additional tax but is in the nature of advance income-tax/TDS for which the buyer is eligible to get credit against his actual income tax liability. If the amount of TCS is more than his tax liability, the buyer would be entitled for refund of the excess amount along with interest.

7. Equalisation Levy on E-commerce supply or services

As per Finance Act 2020, the Government of India has introduced a levy, known as ‘Equalisation Levy’ (EL), which is applicable to all foreign e-commerce operators, generating revenues from India (either from selling goods/ services to Indian resident customers or other customers using Indian IP addresses or sale of data collected from Indian residents/ Indian IP address or from sale of advertisement targeting Indian customers), which operate or manage digital or electronic facility or platform for online sale of goods or online provision of services or both.

Non-resident e-commerce operators/ service providers are required to pay equalization levy at the rate of 2% on their turnover/ gross receipts from India. Such equalization levy is required to be paid to Indian government on quarterly basis in the months of July, October, January and March. These provisions are applicable from 1st April 2020.

Equalisation levy shall not be applicable in the following cases:

Where e-commerce operator has PE in India and e-commerce service is connected to such PE
Levy falls under the earlier Equalisation levy provisions (i.e. specified services other than e-commerce)
Sales/ turnover of the e-commerce operator is less than INR 2 crores

8. Replacement of Form 26AS by Annual Information Statement (AIS)

The Act requires Income Tax Authority to prepare and deliver a statement in Form 26AS, which is a tax credit statement containing details of various taxes deducted from the income of taxpayers and tax collected from the expenditure of the taxpayer. It also contains details of advance tax or any self-assessment tax that has been paid or income tax refund received during the financial year.

Budget 2020 proposed to extend the mandate of Form 26AS beyond the information about tax deducted/ collected. Consequently, a new Section 285BB was introduced in the Act, requiring the Income Tax Authority to incorporate certain other information (such as sale/purchase of immovable property, share transactions etc.) in addition to the existing information about tax deducted, in the ‘Annual Financial Statement’ (AIS).

Apart from general information such as PAN, Aadhar Number, Name, Date of Birth/ Incorporation, Mobile No, Email ID, Address, the AIS shall contain details such as :