Finance Act 2020 notified by Finance Ministery

Posted on 27-03-2020:

The Finance Bill 2020 introduced in Union Budget 2020-21 was passed by both Houses of Parliament, with certain amendments including relaxation of ‘deemed residency’ rule for Indian citizens not liable to tax in any other country, enlargement in the scope of Equalization levy to include e-commerce supply or services, etc. Finance Act 2020 has been notified by Finance Ministry. Here are the key amendments of this Act:

1. Tax Rates:

A. TAX RATES APPLICABLE TO INDIVIDUAL AND HINDU UNDIVIDED FAMILY (HUF)

a) Option – I (OLD SCHEME)

Income (Rs.)	Proposed rate of tax (AY 2021-22)
Upto 2,50,000*	Nil
2,50,001-5,00,000	5%
5,00,001-10,00,000	20%
10,00,001 and above	30%

* For Senior Citizen Exemption Limit is Rs.3,00,000 and for Super Senior Citizen (80 years and above) Exemption Limit is Rs. 5,00,000

b) Option – II (NEW SCHEME)

Income (Rs.)	Proposed rate of tax (AY 2021-22)
Up to Rs 2.5 lakh	Nil
From 2,50,001 to Rs 5 lakh	5 per cent.
From 5,00,001 to Rs 7.5 lakh	10 per cent.
From 7,50,001 to Rs 10 lakh	15 per cent.
From 10,00,001 to Rs 12.5 lakh	20 per cent.
From 12,50,001 to Rs 15 lakh	25 per cent.
Above Rs 15 lakh	30 per cent.

*NOTE –

i. Refer Para 2 for other terms & conditions of new scheme.

ii. Cess @ 4% is leviable on the amount of income tax and surcharge, if any.

iii. Rebate under Section 87A continues for a resident individual whose total income does not exceed 5,00,000. The amount of rebate is 100% of income tax calculated before cess or 12,500 whichever is less (There is no mention of amendment of Section 87 A in Finance Bill; Accordingly it appears that deduction under the said section will still be available).

c) Surcharge to be added 

Income (Rs.)	(AY 2021-22)
Upto 50 Lakhs	Nil
50 Lakhs –  1 Crore	10%
1 Crore –  2 Crores	15%
2 Crore –  5 Crores	25%
Above 5 Crores	37%

B. CORPORATE TAX RATES

Turnover Particulars	Tax Rate
Gross turnover upto 400 Cr. in the FY 2017-18	25%
Gross turnover exceeding 400 Cr. in the FY 2017-18	30%
Where the company opted for Section 115BA	25%
Where the company opted for Section 115BAA	22%
Where the company opted for Section 115BAB	15%

In addition cess and surcharge is levied as follows:

Cess: 4% of corporate tax

Surcharge applicable:

Income Limit	Surcharge Rate on the amount of income tax
Net income exceeds Rs.1 Crore but doesn’t exceed Rs.10 Crore	7%
Net income exceeds Rs.10 Crore	12%

However, the rate of surcharge in case of a company opting for taxability under Section 115BAA or Section 115BAB shall be 10% irrespective of amount of total income.

C. FIRMS

Flat tax rate of 30% and surcharge @ 12% of income tax if income exceeds Rs. 1 Cr. ; Further cess @4% will be levied.

2. Exemptions removed under new tax regime

Individual or HUF opting for taxation under the newly inserted section 115BAC of the Act shall not be entitled to the following exemptions / deductions :

(i) Leave travel concession as contained in clause (5) of section 10;

(ii) House rent allowance as contained in clause (13A) of section 10;

(iii) Some of the allowance as contained in clause (14) of section 10;

(iv) Allowances to MPs/MLAs as contained in clause (17) of section 10;

(v) Allowance for income of minor as contained in clause (32) of section 10;

(vi) Exemption for SEZ unit contained in section 10AA;

(vii) Standard deduction, deduction for entertainment allowance and employment / professional tax as contained in section 16;

(viii) Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23. (Loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law);

List of Exemptions/Deductions available under new tax regime – Budget 2020

(ix) Additional deprecation under clause (iia) of sub-section (1) of section 32;

(x) Deductions under section 32AD, 33AB, 33ABA;

(xi) Various deduction for donation for or expenditure on scientific research contained in sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35;

(xii) Deduction under section 35AD or section 35CCC;

(xiii) Deduction from family pension under clause (iia) of section 57;

(xiv) 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). However, deduction under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.

Following allowances shall be allowed as notified under section 10(14) of the Act to the Individual or HUF exercising option under the proposed section :

a) Transport Allowance granted to a divyang employee to meet expenditure for the purpose of commuting between place of residence and place of duty

b) Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office;

c) Any Allowance granted to meet the cost of travel on tour or on transfer;

d) Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

3. Finance Act 2020 abolished Dividend Distribution Tax (DDT) on dividends. Instead, it made dividends taxable in the hands of investors at their slab rate.

4. Tax Audit Threshold increased.

In wake of ease of doing business, Tax Audit threshold has been increased to 5 crores from existing 1 crore by Finance Act 2020.

5. Changes in provision determining Residential Status of any individual

6. Time limit for approval of affordable housing project extended : In order to incentivise building affordable housing to boost the supply of such houses, the period of approval of the project by the competent authority to be extended by one more year i.e., from 31st March 2020 to 31st March, 2021 for availing deduction under section 80-IBA.

7. Tax Deduction at Source & Tax Collection at Source

A. Tax to be deducted at source by co-operative society on interest paid under section 194A

The scope of section 194A is proposed to be expanded by requiring tax to be deducted at source by a co-operative society whose –

(a) the total sales, gross receipts or turnover exceeds Rs.50 crores during the financial year immediately preceding the financial year in which the interest is credited or paid; and

(b) the amount of interest credited or paid during the financial year is more than

(i) Rs. 50,000 in case of payee being a senior citizen and

(ii) Rs. 40,000, in any other case.

Such co-operative society is required to deduct tax under section 194A on interest credited or paid by it –

– to its member or to any other co-operative society; or

– in respect of deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank or

– in respect of deposits with a co-operative bank other than a co-operative society or bank engaged in carrying on the business of banking

B. Definition of “Work” under section 194C expanded

The scope of definition of “work” for the purpose of tax deduction under section 194C to be expanded to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate. “Associate” means a person related to the customer in such manner as defined under section 40A(2)(b), as if the customer is an assessee for the purpose of that section.

C. TDS on E-commerce transactions : New section 194-O to be inserted to provide that E-commerce operator is required to deduct tax at source at the time of credit of amount of sale or service or both to the account of e-commerce participant or at the time of payment to such participant, whichever is earlier. Tax is required to be deducted @1%. However, where PAN/Aadhar is not furnished, tax @5% is required to be deducted at source.

Moreover, no tax would be deducted at source in case of an e-commerce participant (being an individual or HUF) whose gross amount of sales or services or both does not exceed Rs. 5 lakh and furnishes PAN/ Aadhaar.

D. Reduced rate of TDS on fees for technical services : Rate of TDS under section 194J in case of fees for technical services other than professional services is proposed to be reduced from 10% to 2%.

E. TCS on overseas remittance, sale of overseas tour package and on sale of goods above certain limit:

• Section 206C to be amended to require an authorised dealer to collect tax at source @5% on the amount or aggregate of amounts received by him under the Liberalised Remittance Scheme of the RBI for overseas remittance from a buyer, being a person remitting such amount out of India, if such amount or aggregate of amounts is Rs. 7,00,000 or more during the financial year. However, where PAN/Aadhar is not furnished, tax @10% is required to be collected at source.

• The seller of an overseas tour package is also required to collect tax at source@5% on the amount received from the buyer who purchases the package. In case PAN/Aadhar is not furnished, tax @10% is required to be collected at source.

Note – In both such cases, covered under sub-section (1G) of section 206C, tax is required to be collected at the time of debiting the amount payable by the buyer or at the time of receipt of such amount, whichever is earlier.

• TCS is also proposed to be levied on sale of goods [not covered under sub-sections (1)/(1F)/(1G)] in excess of Rs.50 lakhs in a year by a seller whose turnover is more than Rs.10 crore during the financial year immediately preceding such financial year in which sale has taken place. Tax is to be collected at source @0.1% of the sale consideration exceeding Rs.50 lakhs, at the time of receipt. In case of non-furnishing of PAN/Aadhar, tax @1% is required to be collected at source.

Other Key Highlights:

Expenditure: The government proposes to spend Rs 30,42,230 crore in 2020-21, which is 12.7% higher than the revised estimate of 2019-20. 

Receipts: The receipts (other than net borrowings) are expected to increase by 16.3% to Rs 22,45,893 crore, owing to higher estimated revenue from disinvestments. 

GDP growth: The government has assumed a nominal GDP growth rate of 10% (i.e., real growth plus inflation) in 2020-21. The nominal growth estimate for 2019-20 was 12%. 

Deficits: Revenue deficit is targeted at 2.7% of GDP, which is higher than the revised estimate of 2.4% in 2019-20. The fiscal deficit is targeted at 3.5% of GDP, lower than the revised estimate of 3.8% in 2019-20. Note that the government is estimated to breach its budgeted target for fiscal deficit (3.3%) in 2019-20 and the medium-term fiscal target of 3% in 2020-21. This does not include off-budget borrowings (0.9% of GDP in 2020-21). 

Ministry allocations: Among the top 13 ministries with the highest allocations, the highest percentage increase is observed in the Ministry of Communications (129%), followed by the Ministry of Agriculture and Farmers’ Welfare (30%) and the Ministry of Home Affairs (20%). 

Tax proposals in the Finance Act:

In addition to changes in tax laws, the Finance Act, 2020 also proposes certain non-tax changes to the Prohibition of Benami Properties Transactions Act, 1988. 

Change in income tax rates: The income tax rates have been changed. Table 1 below compares the current tax rates with the proposed tax rates. Note that the new personal tax rates are optional and may only be availed if the person satisfies certain conditions, such as if they do not claim 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 (investments in provident fund, insurance premium, donations to charities, etc.). Once the option is exercised, it will be applicable for all subsequent years. 

Option for lower tax rates: The Income Tax Act was recently amended to give an option to domestic companies to avail of 22% tax rate if they did not claim certain deductions. The list has been expanded to include other deductions, such as those under Section 80G (donations to charities). Also, a similar facility has been provided to co-operatives. 

Benefits to corporates: Currently, domestic manufacturing companies have an option to pay income tax at the rate of 15% if they do not claim certain deductions under the Act. This benefit has been extended to domestic companies engaged in electricity generation. 

Dividend Distribution Tax: Currently, companies have to pay a tax of 15% on dividends distributed by it to shareholders. This has been removed and the dividend income will now be taxable in the hands of the recipient. 

Limit on deductions for social security contributions: Currently, there is no combined limit for the purpose of deductions on the amount of contribution made by an employer towards a recognised provident fund, an approved superannuation fund and the National Pension Scheme. A combined ceiling of Rs 7.5 lakh is being introduced on deductions which may be claimed towards such contributions. 

Residence in India: The Income Tax Act, 1961 specifies various conditions for determining the resident status of an Indian citizen or a person of Indian origin. A person will be considered a resident, i.e. their global income is taxable in India, if they are in India for more than 182 days. This has been reduced to 120 days. In addition, any Indian citizen who is not liable to tax in any other country or territory by reason of domicile or residence shall be deemed to be a resident of India. 

TDS on e-commerce transactions: TDS of 1% will be levied on e-commerce transactions. Housing incentives: Currently, an exemption is provided on profits or gains arising out of building affordable houses if the project was approved by March 31, 2020. Further, an additional tax deduction of up to Rs 1,50,000 is provided on interest paid on loans for self-occupied house owners if the loan was sanctioned by March 31, 2020. The deadline in both cases has been extended to March 31, 2021. Tax changes for start-ups: Start-ups are allowed to get a full tax waiver on profits for any three consecutive years out of their first seven years, if they are incorporated between April 1, 2016, and March 31, 2021, and their turnover does not exceed Rs 25 crore. The waiver has been extended to start-ups for any three years out of their first ten years. In addition, the turnover threshold has been increased from Rs 25 crore to Rs 100 crore. 

Further, the tax on ESOPs (stock options) held by employees of start-ups will be payable only on the earliest of the following events: (i) expiry of 4 years from the end of the assessment year, (ii) sale of the options, or (iii) till the employee leaves the company. 

Excise: The rate of central excise duty on certain tobacco products such as cigarettes, chewing tobacco, and tobacco extracts has been increased. For example, the rate of duty on chewing tobacco has been increased from 10% to 25% per kg. Further, crude petroleum has been included at a rate of duty of Rs 50 per tonne. 

Customs: Customs duty has been raised on some items such as tableware and kitchenware, footwear, fans, and toys. 

Health cess on customs: A health cess will be levied (in addition to customs duty) on certain medical devices, such as X-ray machines, imported into India. This cess may be utilised for the financing of health infrastructure and services. 

Obligations on charities: Charitable organisations get an exemption from taxation under Section 12AA, and donations to them get exemptions under Sections 10(23C), 35, and 80G. From now, the approvals under these sections will be valid for a maximum of five years. Any entity having these approvals has to get them re-issued. 

Commodities Transaction Tax: Currently, the commodities transaction tax on commodity derivatives is 0.01%. The Bill creates three tax rates: (i) 0.01% payable by the seller on the sale of commodity derivatives based on its price or price index, (ii) 0.0001% payable by the buyer on the sale of an option in goods resulting in the delivery of the goods, and (iii) 0.125% payable by the buyer on the sale of an option in goods resulting in a cash payment. 

Indian Stamp Act, 1899: Stamp duty will not be charged in the case of transactions in stock exchanges and depositories established in international financial centres set up under the Special Economic Zones Act, 2005. 

Sovereign wealth funds: Income arising out of investments made by the Abu Dhabi Investment Authority and other notified sovereign wealth funds in certain infrastructure facilities will be exempt from tax. This exemption is available if the investment was made before March 31, 2024, and with a minimum lock-in period of three years. 

The Prohibition of Benami Property Transactions Act, 1988: The Act constitutes an adjudicating authority on issues related to Benami properties. The qualifications for the chairperson and members of the authority are that they must have been: (i) a member of the Indian Revenue Service as Commissioner of Income-tax or equivalent, or (ii) a member of the Indian Legal Service as Joint Secretary or equivalent. The Bill states that an individual qualified for the position of District Judge may also be the chairperson or a member of the authority. 

Removal of tax exemptions on certain allowances: Certain exemptions on facilities to current and former members of the Union Public Service Commission and the Election Commission such as rent-free residence, conveyance allowance, and medical facilities are exempt from tax. This exemption has been removed.

Click here to download Finance Act 2020