The Big Bang Tax Reforms

Since the formation of “Modi 2.0” Government, it has spearheaded a lot of fiscal measures to ensure that India’s economy continues to tread the path of high growth. to make sure that India stays globally competitive and a favoured destination for investment, the Government took a bold historic decision of reducing the corporate tax rate for new companies in the manufacturing sector to an unprecedented level of 15%. Similarly, for the existing companies, the rate has also been brought down to just 22%. As a result of these steps taken in September last year, India’s corporate tax rates are now amongst the lowest in the world.

In continuation of the reform measures already taken so far, the tax proposals in this budget introduced further reforms to stimulate growth, simplify tax structure, bring ease of compliance, and reduce litigations primarily for the individual taxpayers and the people of the India. Currently the Indian Income Tax Act is riddled with various exemptions and deductions which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process. It is almost impossible for a taxpayer to comply with the Income-tax law without taking help from professionals. With an objective to provide significant relief to the individual taxpayers and to simplify the Income-tax law, it is proposed to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo their claim for certain deductions and exemptions available in the law.

For the taxpayers, who wish to make their tax compliances simple and easier, the FM has proposed a completely new tax regime. Under the new regime, the individual taxpayers can pay income tax on their total income and make their compliances without any complication. However, since the objective is to make the compliances easy, the various deductions available under the old regime, will not be available under new regime. However, to reduce the tax burden of individuals and make the new regime attractive one, significantly reduced income tax rates has been announced by the FM in her speech.

The new tax regime, as explained above shall be optional for the taxpayers. An individual who is currently availing more deductions & exemption under the Income Tax Act, may choose to avail them and continue to pay tax in the old regime. However, it has been estimated that the implementation of new regime will cost Central Government INR 40,000 Crore per annum.

As per the Finance Ministry’s calculations, a person earning INR 15 lacs in a year and not availing of any deductions whatsoever, the benefit of tax cut would be INR 78,000 a year under the new optional tax regime. INR 78,000 is a maximum limit, an individual may be benefitted from, by opting for the new regime. However, in few scenarios, it is also possible for an individual to end up paying more tax on shifting to the new regime if the deduction and exemptions foregone are more than the savings under the new regime. However, it may become a complication for common man to analyse which regime to be opted. since new regime has been announced to make taxation simplier, it may become even more complicated in actual. In absence of awareness a taxpayer may end up paying even more taxes in new regime as many deductions will not be available and loss of same may be greater than saving from lower tax slabs.

As another bold step of reform, the Government has decided to abolish the Dividend Distribution Tax (DDT), which is currently required to be paid by a domestic Company on the dividend distributed by it among the shareholders. It was a long-standing demand of the Industry to abolish the same.

However, a classical system of dividend taxation, under which the dividend shall be taxed in the hands of the recipients at their applicable rate.

The Finance Minister proposed to settle down 4,83,000 direct tax cases pending in various appellate forums i.e. Commissioner (Appeals), ITAT, High Court and Supreme Court through implementation of new ‘Vivad se Vishwas’ Scheme. The new scheme is similar to the ‘Sabka Vishwas Scheme’, as announced in the preceding budget to reduce the litigation in Indirect taxation.

Taxpayers in whose cases appeals are pending at any level can avail benefit from this new scheme. Under the proposed scheme, a taxpayer would be required to pay only the amount of the disputed taxes and will get complete waiver of interest and penalty provided he avails the scheme by March 31, 2020. Those who avail this scheme after March 31, 2020; will have to pay some additional amount. The scheme will remain open till June 30th, 2020.

In a relief to the bank customers and also to revive confidence in the Indian Banking system, the hon’ble FM has increased the insurance cover on bank deposits by five times to INR 5 lacs. In simple terms, it means, the savings of an account holder will be insured upto INR 5 lacs, in case the bank fails. As of now, such guarantee is available upto INR 1 lakh for all types of deposits in a single bank. Such guarantee is being provided through the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the Reserve Bank of India (RBI).

There was a huge demand from public to increase the cover against the bank deposits After the recent crisis that hit the Punjab and Maharashtra Co-operative (PMC) Bank. It is important to mention that the amount of guarantee was last revised in the year 1993 and now it is the first revision since 1993.

Another bold move, which is aimed to give Micro, Small and Medium Enterprises (MSMEs) a boost was announced by the FM in its budget speech.

“Currently, only businesses having a turnover of more than ₹1 crore are required to get their books of accounts audited by an accountant. In order to reduce compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, I propose to raise by five times the turnover threshold for audit from the existing rupees one crore to five crore,” finance minister Nirmala Sitharaman said while presenting the Union budget. However, with another objective of reduction in cash transactions by such businesses, she further announced that the new threshold is applicable only to those businesses which carry out less than 5% of their business transactions in cash.

The FM unveiled the plan of Central Government to sell a partial stake in Life Insurance Corporation of India (LIC) through an initial public offering (IPO). The LIC is the country’s largest insurer and institutional investor in India. The news of IPO brought an excitement among the investors to own the shares of such reputed Company.

In order to give boost to the manufacturing sector, a new Section-115BAB, as introduced in September, 2019, provides that new manufacturing domestic companies set up on or after October 1st, 2019, which commences manufacturing or production by March 31st, 2023 and do not avail of any specified incentives or deductions, may opt to pay tax at a concessional rate of 15%, in place of normal rate of 22%.

In order to attract investment in power sector, it is proposed to amend the Section-115BAB, to provide that “manufacturing or production of an article or thing shall include generation of electricity”.

In simple terms, it means that the reduced rate of income tax @15% will also be available for the Companies engaged electricity .

There was separate package for the affordable housing projects in the budget scheme of hon’ble Finance Minister. Such package includes benefits for both the developer as well as buyer of affordable housing projects.

For developer: In order to boost the supply of affordable houses in the country, a tax holiday is provided on the profits earned by the developers of affordable housing project approved by March 31st, 2020. In order to promote the affordable housing projects further, it is proposed to extend the date of approval of affordable housing projects for availing this tax holiday by one more year. Therefore, such tax holiday will be available for the projects getting approval on or before March 31st, 2021.

For buyer: For realisation of the goal of ‘Housing for All’ and affordable housing, in the last budget, it was announced an additional deduction of up to INR 1.50 Lacs for interest paid on loans taken for purchase of an affordable house. The deduction was allowed on housing loans sanctioned on or before March 31, 2020. In order to ensure that more persons avail this benefit and to further incentivise the affordable housing, it is now proposed to extend the date of loan sanction for availing this additional deduction by one more year i.e. upto March 31st 2021.

Currently, while taxing income from capital gains, business profits and other sources in respect of transactions in real estate, if the consideration value is less than the circle rate by more than 5%, the difference is counted as income both in the hands of the purchaser and seller.

This was causing the genuine hardship to the persons dealing in real estate transactions. In order to minimise hardship in real estate transaction and provide relief to the sector, it is proposed to increase the tolerable limit of 5% to 10%.

In order to attract the investment by the Sovereign Wealth Fund of foreign governments in the priority sectors, it is proposed to grant 100% tax exemption to their interest, dividend and capital gains income, in respect of investment made in infrastructure and other notified sectors before March 31, 2024 and with a minimum lock-in period of 3 years. It means, if Sovereign Wealth Fund of foreign governments will invest into the sectors notified by the Indian Government, need not pay any tax against the income from interest, dividend and capital gains.

The FM, in her budget speech, reiterated that “the Start-ups have emerged as engines of growth for our economy. Over the past year, our Government has taken several measures to hand-hold them and support their growth”.

This is very obvious that, during their formative years, Start-ups generally use Employee Stock Option Plan (ESOP) to attract and retain highly talented employees. ESOP is a significant component of compensation for these employees. Currently, ESOPs are taxable as perquisites at the time of exercise. This leads to cash-flow problem for the employees who do not sell the shares immediately and continue to hold the same for the long-term.

In order to give a boost to the start-up ecosystem and to incentivise the employees in start-ups, it is proposed to ease the burden of taxation on the employees by deferring the tax payment. Now employees will need not to pay tax on ESOP for five years the end of FY or till they leave the company or when they sell their shares, whichever is earliest.

Another incentive to the start-ups is to provide 100% tax deduction for 3 consecutive assessment years out of initial 7 years. However, this benefit is available only to the eligible start-ups having turnover upto 25 Crores in a financial year. The said benefit is available under Section-80IAC of Income Tax Act.

To extend the scope of Section-80IAC, it is proposed to increase the threshold of INR 25 Crore to INR 100 Crore. Such increase in threshold will result in benefit to larger start-ups. Additionally, the start-ups now can choose 3 consecutive assessment years for deduction, out of initial 10 year (in place of 7 years).

The Finance Minister was in an unenviable position as she got ready to present the Union Budget. This comes at a very difficult time for the Indian economy, which is on a downward spiral for the past six consecutive quarters.

In such a crucial position of the economy, the budget overall was good in intent and is welcomed by the public at large. The Finance Minister has touched upon all important and necessary sectors and a growth trajectory was chalked out.