FM Nirmala Sitharaman announced the Budget 2020 on 1st February and made groundbreaking changes. Trying to target tax evasions by changing Residential Status conditions.

Four major changes were proposed in regard to the Residential Status.

• Criteria for determining residential Status Changed

• Change in RNOR

• New Clause added to Section 6 IA

• Change in the Dividend Distribution Tax (DDT)

Criteria for determining Residential Status changed

Prior to the Finance bill 2020, Individuals staying in India up to 181 days were not classified as Resident. Ergo avoid paying Taxes.

High Networth Individuals leveraged this to avoid paying tax on income earned in a foreign country. This was because they were never deemed a Resident.

Once an individual is deemed a Resident, the income that accrues or arises outside India is also Taxable In India. This loophole was amended in the Budget 2020.

The Primary condition of 182 days for determining Residential Status has been changed to 120 days in the Union Budget 2020. This change would mean that Indian nationals Residing outside India will be deemed a Resident of India — if they stayed 120 days in a financial year.

Following this revision, the number of people who qualify for being a Resident of India will increase. Subsequently, Tax Revenue will increase.

Change for RNOR

Along with Government tightening the grip on Residential Status Criteria, it also gave a breather to some ‘genuine cases’.

Earlier to be an RNOR (Resident but Not Ordinary Resident) of India, one had to be a Resident for 2 out of 10 Previous Years and had to be in India not more than 729 days in all these years.

In Finance Bil 2020, the requirement of being a Resident was increased to 4 out of 10 Previous Year. So people who genuinely visit the country on personal visits like meeting family, or vacations — should not worry.

New Clause added to Section 6 IA

Any Indian Citizen will be deemed as a Resident of India if he/she isn’t a Resident in any other country.

Now, Indian Citizens that managed to evade taxes on Foreign Income — since they were not a Resident of any country — will be deemed as a Resident of India. They will now be liable to pay tax in India.

Another key change announced that if an Individual is a Deemed Resident of India, he/she will be required to disclose information of all the Assets and Finances in a foreign land. Individuals failing to do so will be listed under the Black Money Act. This change is expected to help curb the outflow of unregistered Income outside India.

Changes on similar lines have been made in the US. For instance: Tech Giant Apple Inc avoided paying taxes in the US, as their establishments were in countries with zero tax or very less tax. The US Finance Department couldn’t allow to forgo such tax revenue and introduced an amended law. (obviously duh…)

Introduction of the new clause under Section 6 IA created a lot of panic among expatriates living abroad. But there isn’t anything to worry about as India has a Double Taxation Avoidance Agreement (DTAA) with most countries.

For Example…

• Fatema is a Resident of the USA and India and has an Economic Interest in the US, but also enjoys Income from shares (LTCG) in India. In that case, She will need to pay tax on LTCG in India. She can get a rebate for the same amount when she files her return in the US. Adding on, any income she earned in the US will not be taxed in India as per the DTAA.

• The second Scenario, If her permanent home is in the US, then Fatema will be only liable to pay taxes there. But in case Fatema is having a permanent home in both the countries, Tax will be deducted in the country where she has Economic Interest.

Dividend Distribution Tax (DDT) for NRIs

Up to FY 19–20, DDT was deducted by the companies on dividend paid to its shareholders. In the Finance Bill, FM Nirmala Sitharaman abolished DDT paid by the companies. The Dividend is not taxable in the hands of the shareholders. However, companies will deduct TDS on dividend distributed.

As the old saying goes, “One never forgets one’s roots” many Indians living overseas hold shares of Indian Companies. Since there is no DDT, TDS will be applicable to Investors. TDS will be deducted u/s 195 in the case of NRI shareholders and dividend income will be taxed at slab rates.

NRI’s can claim a refund of deducted TDS by filing ITR. With this change, the Income Tax Department is expecting an increase in the number of foreign investors. Hence, reviving the slow Investment rates in the country.

Refer to the image below for further clarity…

To wrap up, it looks like FinMin has had her patience tested with Individuals who dodged paying taxes. With these changes, she has made it clear that the Indian Government will not allow Residents to run loose. While she tried to make sure that no one is treated unfairly or pays double taxes. We feel that these changes will help to limit the outflow of unregistered Income and help to curate it for the greater good.

Well, this was the question lingering in the minds of traders when the Finance Minister Nirmala Sitaraman announced her 2nd budget on 1st February 2020. The budget created a lot of confusion for taxpayers. One of many is the increase in threshold limit for Tax Audit turnover from INR. 1 Cr. to INR. 5 Cr. for a tax audit applicability. Let’s try and understand it.

The Three Raging Confusions…

First Confusion

Whether this limit is only increased for MSMEs just like FM said in her speech. The answer is No. The increased limit is applicable to small retailers, traders and shopkeepers who earn Business Income….Rejoice, not.

Second Confusion

There’s a catch here…Increased audit limit applicable for those whose Cash Sales/receipts and Cash purchases/payments are less than 5%.

Otherwise limit will remain INR. 1 Cr. Also, worth keeping in mind that the words used are sales/receipts and purchase/payments. Hence professionals are confused about whether to take into account 5 % of total sales or 5% of total receipts.

Because in normal business practice a lot of times it happens that your sales are not the same as your receipts (duh…)

Our Opinion: The condition should be 5% of total receipts and payments and not 5% of total sales and purchase. Hence a clarification is awaited from CBDT on the same.

Third Confusion

The impact of this change is given in the new finance bill by amending Section 44AB of the Income Tax Act. FinMin left a loophole while doing so, causing more confusion. Let’s try and understand Section 44AB of the Income Tax Act with examples.

This section specifies the conditions for the applicability of audit. For applicability of tax audit in case of Individual/HUF, the following factors play a vital role:

1. Turnover from Business/ Trading.
2. Profit/Loss incurred during the year.
3. The conditions of section 44AB read with the conditions of section 44AD.

Having made that clear, let us understand how Tax Audit was applicable up to FY 19–20 and how the applicability of Tax Audits have changed since FY 20–21.

Tax Audit Applicability Up to FY 19–20 :

Situation 1: Total Trading Turnover is less than or equal to INR.1 Cr.

In case of losses = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is less than 6% of turnover = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is more than or equal to 6% of turnover = Tax Audit Not applicable and can file ITR-4.

Situation 2: Total Trading Turnover is more than INR. 1 Cr. but less than or equal to INR.2 Cr.

In case of losses = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is less than 6% of turnover = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is more than or equal to 6% of turnover = Taxpayer has two options

• A taxpayer opts for the Presumptive Taxation Scheme = Tax Audit not applicable and can file ITR-4.
• A taxpayer doesn’t opt for the Presumptive Taxation Scheme = Tax Audit is applicable, need to maintain books of accounts and file ITR-3.

Situation 3: Total Trading Turnover is more than INR. 2 Cr. Tax Audit is applicable irrespective of profits/losses. A taxpayer needs to maintain books of accounts and file ITR-3.

Changes in Tax Audit Applicability from FY 20–21:

Keeping in mind the turnover limit of INR. 5 Cr. and total sales/receipts and total purchase/payments in cash are less than 5%. Following are the possible scenarios:

Situation 1: Total Trading Turnover is less than or equal to INR. 1 Cr.

In case of losses = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is less than 6% of turnover = Tax Audit Applicable (Due to conditions of sec 44AD)
If the profit is more than or equal to 6% of turnover = Tax Audit not Applicable and a taxpayer can file ITR-4.

Situation 2: Total Trading Turnover is more than INR. 1 Cr. but less than or equal to INR.2 Cr.

In case of losses = Tax Audit Applicable
If the profit is less than 6% of turnover = Tax Audit Applicable
If the profit is more than or equal to 6% of turnover = Taxpayer has two options

• A taxpayer opts for the Presumptive Taxation Scheme = Tax Audit not applicable and can file ITR-4.

• A taxpayer doesn’t opt for the Presumptive Taxation Scheme = Tax Audit is applicable, need to maintain books of accounts and file ITR-3.

Situation 3: Total Trading Turnover is more than INR. 2 Cr. but less than or equal to INR. 5 Cr.

Tax Audit is Not Applicable irrespective of profits/losses. Since the turnover limit in Sec 44AD is INR. 2 Cr. or less. And the turnover limit of Sec 44AB has been increased from INR. 1 Cr. to INR. 5 Cr.

Note: This is an anomaly, where neither Sec 44AB nor Sec 44AD gets hit. Hence under this turnover limit, a tax audit is not applicable to taxpayer/trader irrespective of profits/losses. Here a taxpayer will not be able to file ITR-4. But will have to file ITR-3 without audit. Hence an amendment in the turnover limit of section 44AD is expected from INR. 2 Cr. to INR. 5 Cr. from CBDT.

Situation 4: Total Trading Turnover is more than INR. 5 Cr. Tax Audit is applicable irrespective of profits/losses. A taxpayer needs to maintain books of accounts and file ITR-3.

To wrap it up, as per the Budget 2020, CBDT is yet to clarify the confusion around tax audit applicability.

Its time to rid traders/proprietors off tax audit burden when cash transactions do not exceed 5% of purchases(payments)/sales(receipts). If goverment really wants to encourage digital economoy, it needs to start appreciating the agents of change. Its highly likely that CBDT will issue clarification amending sections 44AD(Presumptive Business) & 44ADA (Presumptive Profession)increasing limit.

The Budget 2020 was announced on 1st February 2020 with the aim to revive our slowing Economy. Introducing an optional Tax Regime was the biggest highlight. However, other notable announcements having an effect on Businesses were also made. Let’s take a look!

From the Business point of view, these announcements stole the show!

• Option to choose between Current Tax Regime and New Tax Regime

• TDS For Professional and Technical Services u/s 194J

• Taxability of Dividend Income

• Taxability of sales through E-commerce platforms

• Applicability of Tax Audit

• Extension in the due date to file Income Tax Return in case of Tax Audit

Let us look at them one by one.

Option to choose between Current and New Tax Regime

Finance Minister Nirmala Sitharaman announced an ‘Optional’ Tax Regime for Taxpayers. This Tax Regime allows Taxpayers and Businesses to have more take-home income.

Several Deductions like Leave Travel Allowance and Standard Deduction on Salary were canceled out in the New Tax Regime. But deductions like Voluntary Retirement Schemes and rebate u/s 87A were still covered.

The New Tax Regime aims to give more financial freedom to Individuals and Businesses without a compulsion to invest in sections like 80C to avail Tax benefit.

TDS For Professional and Technical Services u/s 194J

Section 194J of the I-T Act deals with TDS on payments for services such as — fees for professional services, fees for technical services, royalty, and non-compete fees. The TDS applicable for both was at 10%. However, Finance Minister Nirmala Sitharaman announced changes of TDS on the fee for technical services.

The TDS for Technical services was slashed from 10% to 2%. However, for all other services such as professional services, royalty, non-compete fees etc, TDS Rate is still 10%. Thus, it is important to understand the difference between technical services and professional services.

It is hoped that this change will reduce litigations arising due to the difference in opinion between assessee and tax officers to deduct TDS on certain services under 194C at 2% or 194J at 10%.

Taxability For Dividend

To understand the change made, we need to have a History Lesson!

Up to F.Y. 2019–20

Domestic Companies were liable to pay DDT (Dividend Distribution Tax) at 15% on the amount of Dividend distributed to a shareholder. This dividend included

• Dividend on equity shares

• Dividend on equity mutual funds.

The dividend income up to INR 10 Lakh u/s 10(34) was exempt in the hands of the shareholder. Since that income was not taxable, there was no applicability of TDS.

F.Y 2020–21 Onwards

Section 115-O has been abolished in the Budget. Thus, Domestic Companies are not liable to pay DDT (Dividend Distribution Tax) on the Dividend distributed on Equity Shares/Mutual Funds to the shareholder.

Now that the Dividend isn’t paid by the company, it becomes natural that it becomes taxable in the hands of the shareholder as per the applicable slab rate…What a Bummer! Ergo, TDS on dividend income was introduced.

In Budget 2020, these changes were announced to introduce TDS on Dividend Income:-

• Amendment of Section 194
  Domestic Company should deduct TDS @ 10% on dividend on equity shares in excess of INR 5,000.

• Introduction of Section 194K
  Asset Management Company (AMC) will deduct TDS @10% on dividend on equity mutual funds in excess of INR 5,000.

Taxability For E-commerce platforms

Since the last few years, we have witnessed the emergence in popularity of E-Commerce Platforms. Websites like Amazon, Myntra are slowly but surely reforming how we shop! Prior to the Budget, TDS wasn’t anywhere in the picture. Income earned by E-Commerce Sellers was just liable to be taxed as per income tax slab rates. But on 1st February, FinMin announced that TDS shall be deducted on Income from E-Com platforms.

Individuals and HUFs will enjoy exemption from TDS until Sales of INR 5 Lakh in a year. However, if the gross sales exceed INR 5 Lakh, TDS is required to be deducted at 1% if PAN or Aadhar is provided by the e-commerce seller. Subsequently, if an E-Com seller does not provide PAN or Aadhar, the e-commerce operator needs to deduct TDS @ 5% on the gross sales.

For any business other than Individual or HUF, TDS is required to be deducted @ 1% irrespective of the sales amount. TDS is required to be deducted at 5% in the absence of PAN.

Applicability of Tax Audit

Prior to the Budget 2020, Tax Audit was applicable to an assessee whose turnover was more than 2 Crore or if turnover was less than 2 Crore, the profits were less than 6% of turnover.

Under Budget 2020, the limit of 2 Crore was increased to 5 Crore for assessee who fulfills the below condition:

• Cash Sales does not exceed 5% of Total Sales 

• Cash Expenses does not exceed 5% of Total Expenses

Refer to the image below for further clarity

Extension in the due date to file Income Tax Return in case of Tax Audit

Before Budget 2020, the date of submitting the Tax Audit Report and Income Tax Return was the same i.e on 31st July. However, in order to reduce chaos and to give valuable breathing time to the Businesses and Finance Department, the Due date for submitting Tax Audit Report was extended.

The date to submit the Tax Audit was extended to 31st September 2020. Likewise, the date for filing Income Tax Returns was also updated to 31st October 2020.

It is hoped that this extension will help avoid the usual delays in the Tax Auditing and Return filing process.

Finance Minister Nirmala Sitharaman announced the Budget 2020 on 1st February and Salaried Individuals are very confused as to what this Budget means for them. Worry not!

We are here to simplify the Budget for you. The FinMin introduced an optional New Tax System which excluded all major Deductions. The Budget as deemed by FinMin will simplify Personal Taxes, but it seems like it has done the exact opposite!! There is a lot of confusion and chaos as to which Tax System to follow. Let us understand what this Budget could mean for you.

It’s the classic Blue Pill- Red Pill Conundrum!

Looks like we, the taxpayers have been given a Blue Pill-Red Pill Choice…

Under the Budget 2020, Taxpayers have been given a choice:

• To follow the Current system and continue to claim deductions

or

• To follow the New system and have no exemption or deduction.

Let us understand this further by example.

Incumbent Tax System

Suppose your Annual Income is INR 7.5 Lakh. Now, should you choose to follow the Current System, you are entitled to avail 80C, 80D and Standard Deductions amounting to INR 2,25,000

Under the Current System, Income up to INR 2.5 Lakh was exempted from being taxed. That leaves INR 2,75,000 (7,50,000- 2,50,00- 2,25,000) to be taxed. Now, the income between INR 2.5 Lakh- INR 5 Lakh is to be taxed at 5%,i.e INR 12,500 (5% of INR 2.5 Lakh). And the remaining INR 25,000 is to be taxed at 20%, i.e INR 5,000. Which ads up as INR 17,500 in Taxes and the amount that you take-home salary will be INR 7,32,500 (7,50,000- 17,500). Note: This figure is without making 80C, 80D investments.

New Tax System

Now, Let’s say that your Annual Income is INR 7.5 Lakh and you decide to follow the New Tax System. In this case, the Tax calculation becomes very easy. Income between INR 0- INR 2.5 Lakh is exempted from being taxed. Income between INR2.5- INR 5 Lakh is to be taxed at 5% i.e 12,500. Subsequently, the remaining amount of INR 2.5 Lakh (income bracket of INR 5 Lakh- INR7.5 Lakh) is to be taxed at 10%, i.e INR 25,000.

So, you’ll be paying a total of INR 37,500 in Taxes and your take-home salary will amount to INR 7,12,500 (7,50,000- 37,500).

Take a look at the image below to have a better understanding.

Current Tax system

Pros

• Individuals get to invest in their preferred investment schemes and get a benefit of deduction while paying taxes.

• Salaried Individuals who live in a rented property can claim a benefit of HRA and Standard Deduction.

Cons

• The Income Tax slabs rates are higher.

• It is very complicated for a common man to understand all the applicable deductions out of 100 or more deductions.

• Individuals often end up making investments without keeping in mind their financial goals just to get a tax benefit.

• Complexity while filing ITR.

New Tax System

Pros

• The Income Tax Slab rates are lower.

• It allows individuals to have more Take Home Salary.

• A simplified Tax Structure i.e, Ease in filing ITR.

• Individuals can invest freely according to their financial goals without any compulsion to make an investment to avail deduction.

Cons

• Discourages New Homebuyers since no benefit will be available on Interest paid on Home Loans.

• Salaried individuals who live in rented properties will not be able to claim Exemption on HRA which will increase their tax burden.

• Discourages the ‘Savings’ Culture since investment schemes will not provide any tax benefits under 80C.

For comparison take a look at the image below.

Finance Minister Nirmala Sitharaman has tossed the ball into our courts. Now, it is our turn to make a choice. Looks like, it all boils down to what your Personal Finance goals are? If you want to have more cash on hand, the New System is the way to go. But if you want to plan for the long run and make periodical Investments, the Current System is the answer.

To summarize, before hastily deciding which system to follow, We suggest you understand the nitty-gritty of the same and how it might affect your personal finance goals.

The Budget 2020 was deemed as a Do or Die Budget for the Incumbent Finance Minister Nirmala Sitharaman. Considering the recent Economic Slowdown, the Budget was expected to provide relief for the Tax Payers.

There we have it… The Budget has been announced and New Tax Reforms have been made. Let’s take a look…

Direct Tax

Personal Income Tax Slab!

The FinMin took a mid-route on the much-awaited Income Tax Slab rate. FM Nirmala Sitharaman gave taxpayers 2-options(or are these “options” creating more confusion?).

1. Claim deductions and pay tax under the Older Income Tax slab rate.

2. Don’t claim deductions and pay tax as per the New Income Tax slab rates. The new Income Tax Slab rates are:

• INR 2.5 Lakh – INR 5 Lakh 5% Tax: Individuals earning between INR 2.5 Lakh — INR 5 Lakh will get a complete rebate. The Tax Cut s particularly beneficial for the Middle class as India, since a huge number of citizens who earn between INR 2.5 Lakh- INR 5 Lakh.

• INR 5 Lakh- INR 7.5 Lakh 10% Tax: Contrary to the previous tax regime, the new tax regime eases Tax Pressure on Citizens as the Slabs have been reduced. Now you will be required to pay INR 12,500+ 10% Tax on income earned between INR 5 Lakh- INR 7.5 Lakh.

• INR 7.5 Lakh- INR 10 Lakh 15% Tax: Individuals earning between this slab will need to pay 37,500+ 15% Tax on income earned between INR 7.5 Lakh- 10 Lakh.

• INR 10 Lakh- INR 12.5 Lakh 20% Tax: Taxpayers earning between this slab will be entitled to pay 75,000+ 20% Tax on income earned between INR 10 lakh- 12.5 Lakh

• INR 12.5 Lakh- 15 Lakh 25% Tax: Anyone earning between INR 12.5 Lakh-INR 15 Lakh will need to pay the Government INR 1,25,000+ 25% Tax.

• INR 15 Lakh and Above 30% Tax: The Tax for this slab hasn’t changed and it remains the same as the Old Tax Regime i.e 30%. However that Calculations would be INR 1,87,500 + 30% Tax on income above 15 Lakh.

Under the New Tax Regime announced, the taxpayer can choose which Income Tax slab rate should their income be taxed. However, they might have to forgo the deductions they can claim.

Contracting the Deductions

From available deductions have been reduced from previously 100 to now early 30. That was a real Shocker!

FinMin announced that Individuals opting for New Tax System will not be able to claim Deductions. But, if you choose to follow the Old Tax System, you will still be able to claim deductions. This is made people thinking as to what tax system is better for them?

Dividend Distribution Tax abolished

The controversial DDT, which companies had to pay on Dividend Distribution to shareholders, is abolished.

The dividend is now taxable for the shareholders. Failing to do so would mean that violators will receive Income Tax Notices.

Indirect Taxes

According to Nirmala Sitharaman, “GST has integrated the country economically”. Announcements made in Budget 2020

• SMS based NIL returns can now be filed for GST.

• Simpler/Automated way to file GST return will be introduced from April.

• GST Collections crosses INR 1.1 Lakh crore in January

Three Spearhead Schemes for India

The Finance Minister announced three Schemes under which the Budget was classified.

Aspirational India

• Focus is on Agriculture, Rural Development, Education, Sanitation

• PM KUSUM to cover 20 lakh farmers for stand-alone solar pumps and further 15lakhfor grid-connected pumps

• For seamless logistic, “Kisan Rail” and “Krishi Udaan” have been introduced

• Agriculture credit target set at INR 15 Lakh Crore for 2020–2021

• Raise Fish Exports by INR 1 Lakh Crore by 2024–2025

• A goal of doubling the income of farmers by 2022

• About 150 higher educational institutions will start apprenticeship embedded courses

• Internship opportunities to fresh engineers by urban local bodies

• INR 12,300 crore for Swacch Bharat

• INR 99,300 crore for Education Sector

Economic Development

• Scheme to encourage the manufacturing of mobile phones, electronic equipment, and semiconductor packaging

• Allocating INR 23,000 Crore for Industrial Development

• Allocating INR 100 Lakh Crore for investments in Infrastructure by 2025

• Plan of Building 100 New Airports by 2024.

• INR 1.7 Lakh Crore to be allocated for betterment of Transport Infrastructure by 2021

• Nearly 1 Lakh Panchayats to be connected by optical fiber

• INR 8,000 crore announced for the Quantum Technologies and applications.

Caring Society

• More than 6 lakh Aanganvadi workers to be equipped with smartphones

• INR 85,000 crore allocated for the betterment and upliftment of Schedule Tribe and Schedule Class

• INR 35.600 Crore for the fight against malnutrition

• INR 9,000 crore allocated for the welfare of Senior Citizens

• Plan to build 100 more hospitals in Lower-tier cities

• INR 4,400 crore to be allocated to fund programs to purify the air quality

I feel that contrasting to what Finance Minister wanted to do with this Budget, the effect is entirely opposite. She aimed to simplify Income tax but ended up making it more confusing. There are discussions everywhere as to what is the better way to file Taxes…With or Without Deductions?

If individuals decided to pay taxes without claiming deductions under “New Regime”, they will end up paying more. Then again, it all boils down to what your personal finance goal is?