Ring In The New (Financial) Year: Corpoarte Tax Considerations

As the world is trying to respond to the COVID-19 pandemic, there is a visible impact on the global economy as businesses are facing a bout of fiscal recession. Companies are responding to this financial stress through work force protection, supply chain stabilisation, customer engagement, financial stress testing, business continuity planning and other similar steps. Amidst this crisis, corporate India entered a new financial year on 01 April 2020. Income tax provisions were amended by Union Budget 2020 and by the ordinance, passed in the wave of the current pandemic. In this article we discuss key changes to tax provisions that corporates need to be mindful of in the new financial year.

A. Withholding Tax

TDS under section 194J on professional or technical services

In order to reduce litigation in relation to classification of services, section 194J is amended w.e.f. 01 April 2020, to provide reduced TDS rate of 2% in case of fees for technical services and royalty in the form of consideration for sale, distribution or exhibition of cinematographic films. The rate of TDS on professional services continues at 10%.

TDS under section 194-O on e-commerce transactions

Sec.194-O has been inserted w.e.f. 01 October 2020, to levy TDS on e-commerce transactions. TDS is required to be deducted @ 1% on payments made by e-commerce operators (platform operator, whether resident or non-resident) to resident e-commerce participants (typically Indian vendors listing goods/services on the platform) for the sale of goods or provision of services or both at the time of payment or credit to account, whichever is earlier.

TCS under on sale of goods

As per the newly introduced provisions of section 206C(1H), w.e.f. 01 October 2020, the ‘seller’ of goods with turnover exceeding INR 10 crores during the previous fiscal year, is required to collect tax at source @ 0.1% from sale to a buyer, where sale to the said buyer exceeds INR 50 lacs in a fiscal year. In case PAN or Aadhaar is not provided by the buyer, the seller is required to collect tax at 1%. This provision will not apply in respect of goods exported from or imported into India.

B. Employer Obligations

New simplified personal tax regime

Individual taxpayers now have an option to choose between the existing tax slabs with all applicable deductions/ exemptions or new simplified personal tax regime with lower tax rates without certain deductions/ exemptions. While the employees would be required to analyse & elect the tax regime, onus will be on the employers who would need the review their payroll process to ensure that the taxes are withheld as per the option selected by the employee.

ESOP perquisite taxation timeline relaxed

In order to ease the tax burden of employees of eligible start-ups, the obligation of TDS on perquisites arising upon exercising ESOPs is deferred to the time when an employee exits from the company, the time of selling the shares, or on completion of five years period from date of exercise, whichever is earlier.

Tax on employer’s contribution to EPF, NPS, superannuation fund

Tax benefit in respect of employer’s contribution to EPF, NPS and superannuation account is now restricted to INR 750,000 in a financial year. The contribution in excess will be taxed in the hands of the employee as perquisite, thereby restricting the tax-free benefits provided to employees in the high-income segment.

C. International Tax

Equalisation levy on e-commerce transactions

In 2016, Equalisation levy @ 6% was introduced on any payment to a non-resident for online advertisement and digital advertising space. Recently, the Finance Act 2020 has enhanced the scope of Equalisation Levy w.e.f. 01 April 2020 to cover consideration received by a non-resident e- commerce operator for online sale of goods and/ or services. It shall be charged at the rate of 2% from consideration received by an e-commerce operator from a person resident in India, non- resident who buys such goods/ services using an IP address located in India, or non-resident from sale of advertisement or data.

Applicability of Multilateral Instruments (‘MLI’)

The Organisation for Economic Cooperation and Development (‘OECD’) in its efforts to put an end to tax avoidance strategies recommended the use of MLI to amend over 1500 tax treaties covering 90 jurisdictions. India was amongst the first round of signatories to the MLI. Tax treaties with certain countries such as Singapore, Japan, Canada, Denmark and the United Kingdom, shall now be read along with the MLI w.e.f. 01 April 2020. Businesses would now need to understand implications of MLI in respect of interpretation of provisions of tax treaties, determining tax withholding from overseas remittances, determining taxability of its foreign sourced income, etc.

D. Tax Litigation & Dispute Resolution

Vivad se Vishwas Scheme

The Scheme provides a window for the taxpayer to settle income tax disputes by paying a portion of tax arrears. As per the original proposition, an additional amount of 10% was payable in cases where the tax arrears determined were paid after 31 March 2020. The Government has now extended the window to 30 June 2020 whereby the tax disputes can be settled without paying the additional 10%. Taxpayers now have a window to evaluate tax disputes and opt for settlement under this scheme (barring a few exclusions), which also provides immunity from interest, penalty and prosecution.

Faceless appeals

In line with the faceless tax assessment introduced previously, the Government has introduced the process of faceless communication to appeal proceedings. While this would improve the transparency, taxpayers will need to adapt, maintain and furnish adequate and clear communication to ensure positive outcome to their appeals.

E. Other Key Changes

Abolishment of dividend distribution tax (‘DDT’)

Domestic companies declaring dividends on or after 01 April 2020, will no longer be required to pay DDT. W.e.f. 01 April 2020, dividend will now be taxed in the hands of the recipient shareholders.

Section 80M has been restored to provide that where a domestic company declares dividend, out of dividend received from another company, it shall be eligible to claim a deduction of the amount of dividend received.

Finance Act 2020 has prescribed 20% tax withholding from dividend distributed to a foreign company, non-resident Indian or other non-resident shareholders. Foreign investors would need to assess tax treaties to examine claim for lower tax rate of tax ranging from 5% to 15% prescribed in the tax treaties.

Rationalisation of filing requirements

The due dates of corporate tax compliances for FY 2019-20 have been rationalised as under:

Measures announced by Government

• The deadline for filing the belated/ revised tax returns for fiscal year 2017-18 has been extended from 31 March 2020 to 30 June 2020.
• Interest at the reduced rate of 9% (i.e. 0.75% per month instead of 1/1.5 percent per month) to be paid on delay in payment towards income tax, TDS, TCS, equalisation levy, STT and CTT between 20 March 2020 and 30 June 2020. Penalty and late fees in relation to such payments are also waived off
• The due date falling between 20 March 2020 and 29 June 2020, with respect of issue of notice, intimation, notification, approval order, sanction order, appeal filing, furnishing of return/ statements/ applications/ reports, completion of proceedings by authority and investment in savings instruments and investment for roll over benefit of capital gains has been extended to 30 June 2020
• The timeline for linking Aadhaar with PAN has been extended to 30 June 2020
• Given the current situation of lockdown, most taxpayers may face difficulties in obtaining certificates for NIL/lower TDS for the new financial year 2020-21. Considering the hardships faced by taxpayers as well as tax authorities, the Central Board of Direct Taxes (‘CBDT’) has announced that certificates issued for fiscal year 2019-20 will continue to apply till 30 June 2020, and fresh applications can be made through email
• Contribution to PM Cares Fund is eligible for 100% deduction under section 80G of the IT Act
• Government to issue all pending Income tax refunds upto INR 5 lacs immediately

Fallout of Economic Crisis

Corporates would also need to take into consideration the tax impact of various steps they may have to initiate on account of the current financial scenario:

• Tax impact due to cancellation / non-performance / breach of contract
• Allowability of expenses related to workforce downsizing
• Tax impact of business restructuring / discontinuance on existing losses
• Permanent establishment exposure due to over-stay by expatriate employees
• Changes to Transfer Pricing policies in wake of economic crisis

The beginning of this new (financial) year has commenced under unusual circumstances. Businesses, big & small, are now strategising on how to keep their operations afloat and ensure business continuity to all their stakeholders. They need to be mindful of the changes that are introduced either as part of budget or as part of relief measures announced by the Government. Keeping track of all changes would help businesses plan resources, manage liquidity, ensure compliances and mitigate tax risks.