Reforms in Direct Taxation Announced in Budget 2020

Aspirational India, Economic development, A Caring Society. These were the words used by the esteemed Finance Minister, Nirmala Sitharam while introducing the Budget for the period of 2020-21. The minister has proposed numerous changes in the finance policies of India, in hope to reverse economic slowdown. But, the Budget proposed, shined a lot of light on the policies pertaining to Direct Taxation. It is hoped and prayed by each one of us that this would result into increase in influx of money in the economy and diminish the effects of economic slowdown that had happened in the previous years. Major reforms are:

Relief in personal income-taxation and simplification of taxation:-

The Finance Minister, in her speech for budget 2020, highlighted that compliance of the Income Tax Act is a burdensome process and not only for the tax payer but also for the tax authorities. Furthermore, she said that the tax payer depends upon the professionals to comply with the Income Tax Law.

In order to make the process simple and easy, it is proposed to introduce a separate slab of taxations.

As and when we compare the new slab rates with the existing slab rates, it clearly shows that the burden of tax to be paid by the payer is significantly reduced, thus, leaving more disposable income in the hands of the tax payer.

For example, a person earning 15 Lakh in a year had to pay Rs 2,73,000.00 as tax before as compared to Rs 1,95,000.00 as per the current budget, thus reducing his tax liability by Rs 78,000.00

However, the above slabs are only available when the tax payer does not avail any deduction or exemption under the Income Tax Act.

The introduction of the current slab rates will shorten the tax collection of the government by 40,000 crore.

Change in definition of Residents in India:-

Previously, a person of Indian origin stayed more than 182 days in India become liable to pay direct tax in India. In the proposed budget, the period of 182 days is reduced to 120 days, meaning that a person of India origin staying in India for more than 120 days will be deemed as a resident of India and shall be liable to pay tax in India. This step has been taken by the Finance Minister to increase the tax base.

Vivadh Se Vishwas Scheme:-

At present, 4,83,000 litigations pertaining to Income Tax Act are pending at various appellant forums, in order to declutter the cases, the Finance Minister in her budget has introduced an amnesty scheme by the name of ‘Vivadh Se Vishwas’ scheme. Under this scheme, if the taxpayer pays the amount of disputed tax by 31-03-2020, there is a complete waiver of interest, penalty and cess which was payable along with tax. In the previous budget also, the FM introduced a similar scheme by the name of Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019, under that scheme 16,007 cases were admitted and settled. The government must expect the same response from this scheme also. This scheme is believed to change the dynamics of the of all the litigations pending pertaining to the Income Tax Act.

Faceless compliance:-

In the budget 2019, ‘E-Assessment’ was introduced. It is a form of faceless assessment in which the assessee and the tax officer do not have to physically meet, every assessment proceedings were to be online wherein the assessee will submit the documents with written explanations and the tax officer will draw inferences from those written applications and passes the assessment order. In line with this assessment, the government has undertaken to introduce faceless appeals or e-appeals, wherein the appellant authority and the taxpayer will not meet and the whole appellant proceedings will be completed online.

Removal of certain exemptions:-

The FM in her speech said that currently, the Income Tax Law provides for more than 100 exemptions, in the new regime of Income Tax, more than 70 of such exemptions will be removed.

Incentives for Start-ups:-

The government continues to follow its ideology of ‘ease of doing business’ by formulating and implementing such policies even in this budget. For an emerging economy, start-ups are considered as growth engines of the economy, they introduce, new innovations and inventions in the economy and also generate employment. In recent years, the government has introduced various schemes to boost the start-up economy. Start-up companies offer ESOP options to the employees in order to retain them, the ESOP was taxable as a perquisite in the hands of the employee. The Minister in this budget has deferred the tax payment on ESOP by five years or when they leave the company or when they sell their shares, whichever is earlier.

Taxpayer Charter:-

With the objective of enhancing the efficiency of the delivery system of the Income Tax Department, it is proposed to provide that CBDT(Central Board of Direct Taxation) shall adopt a taxpayers charter and issue necessary directors for implementation of this charter.

Abolishment of Dividend Distribution Tax:-

Whenever a company proposed, distributed or paid dividend to its shareholder, it had to pay a dividend distribution tax. This dividend was exempt in the hands of the shareholder. In this budget it has been proposed to abolish the Dividend Distribution Tax and correspondingly tax the dividend in the hands of the shareholder at applicable rates.

Concessional Tax Rate of Electricity generation companies:-

The Minister has reduced the tax rate applicable to electricity generation companies to 15%.

The above-mentioned amendments will take effect from 01-04-2020 and are likely to be applicable for FY 2020-21.

[Authors Profile: Manu Gawri is a practising Chartered Accountant in New Delhi]