Income Tax Updates: April 2020 to September 2020

Varun Hariharan

29 Sep, 2020

The year 2020 has been beneficial for taxpayers as well as companies. The finance and income tax ministry has come up with many amendments which ease the burden of tax compliance by individuals and companies. The Covid-19 pandemic has also urged the government to come up with solutions for the benefit of taxpayers. This article is going to cover the significant income tax updates made by the government of India from April 2020 to September 2020.

For interpretation and understanding income tax updates, it is crucial to understand the following terms:

• Assessment Year- Assessment year is understood as a year which comes after the financial year. For example, the assessment year for 2020-21 will be the following year, i.e. 2021-22.
  
• Financial year- A financial year in India starts from 1 April and ends on 31^st March in the following year.  For tax purposes, an individual or company taxable income would be in the financial year.

On 1^st February 2020, the Ministry of Finance^[1] (MOF) came out with a different form of income tax updates. This will, directly and indirectly, affect taxpayers as well as companies. While there were few amendments, which were hailed as beneficial to taxpayers, but many amendments were considered against the development of foreign investment in the country. The MOF brought out these income tax updates by introducing them in the Finance Act, 2020.

Major Income Tax Updates

• Change of Residential Status of an Individual

One of the significant income tax updates was the change of residence status of a Non-Resident Indian. Under section 6(1) of the Income Tax Act, 1961, the definition of a non-resident Indian would include a person who has stayed outside India for more than 182 days. This meaning is also present under the Foreign Exchange Management Act, 1999.

The update was related to the change in the number of days a person resident outside India visited India. If the person resident outside India visited India for 120 days, then the individual’s income would be taxable under Income Tax Act, 1961. This amendment is present under section 6(1) explanation 1(b) of the Income Tax Act, 1961.

However, this amendment would only be applicable if the amount of taxable income earned in India extended more than INR 15 Lakhs. Taxable income earned in India would include the income which is accrued in India from an Indian company or dividend income earned by the individual.

Income from different sources has been provided a meaning under the Income Tax Act, 1961 and includes the income which is earned only from taxable income in India. This was one of the significant income tax updates in time, as it affected the NRI community within India.

Under the Finance Bill, 2020, this amendment was introduced through Clause 1A.  There were a lot of issues created by this amendment, particularly for individuals who go outside India for a short period and come back.

To clarify the issues brought about on income tax updates, the government of India brought out a press release in February 2020 stating that a resident outside India and NRI would not be affected by this amendment, if they earn only foreign income. However, this amendment would be applicable only if the Indian income is earned and taxed in India.  Any income which is earned in India would only be applicable for being taxable in India. So, if an Indian receives foreign income, this would not be taxable. However, if Indian income is received from an Indian source aboard, then the same would be taxable.
This is one of the significant income tax updates under the Finance Act.

• Classification of RNOR and ROR

Other income tax updates would include the provision where the government classified residents under the categories of RNOR (Resident but not Ordinary Resident) and ROR (Resident but Ordinary Resident). To be considered as an RNOR, then an individual has to satisfy the criteria of staying in India for a period of more than 120 days but lesser than 182 days.

Consideration for transfer of assets other than any form of Capital Assets in Specific cases (section 43 CA)

The Government brought out Income Tax Updates when it involves the consideration received when specific capital assets are transferred.  These income tax updates amended the variation from 5% to 10% for the consideration which is received from the transfer of a specific capital asset. This would mean that the value of the consideration received from the transfer of such capital assets such as land or immovable property would include the full value.

Apart from this other sections of the Income Tax Act 1961 have been amended. Such sections will include 50 C and 56 (2) XB of the act which increases the transfer or value or consideration to 10%.

Change in Threshold for Audited Accounts for Business or Profession [Section 44AB (a)]

Income tax updates have been brought out regarding the auditing standards which are required for a particular business or profession. Section 44 AB (a) has been included under this act as a result of these income tax updates.

Apart from the above, the government has brought major income tax updates dealing with the threshold criteria for an individual having some form of business or profession. This threshold has been increased from 1 Crore Rupees to 5 Crore Rupees. Hence audit requirements are only for a business that has a turnover of 5 Crore Rupees.

However, there are specific conditions that have to be satisfied with this:

• All the form of aggregates which include the turnover, sales aggregates in the previous year, does not exceed 5%.
• Amount of aggregates for the purposes of expenditure does not exceed 5%.
• For prefiling of returns, the individual having the business or profession have to furnish their tax audit report one month before to the filing of returns.

Full Value Consideration (Section 50 C)

The variation of consideration for the transfer of capital assets such as immovable property has been increased from 5% to 10% on the value, which is accrued or received.

Change in the meaning of adjusted, cost of improvement and acquisition (Section 55)

Another income tax update brought out by the ministry is the change in the meaning of adjusted, cost of improvement and acquisition. This update would relate to capital assets which are held by the individual. Such assets would include land, plant and machinery.

In case of any form of capital assets, the fair market value of such assets will not exceed the rate of stamp duty applicable to the capital assets. The stamp duty will be the same for such assets which are acquired on 01 April 2001.

Deductions on Dividend Income (Section 57)

The government has brought about income tax updates on the deductions which are applicable to the dividend. All dividends are taxed. Hence the government inserted provisions whereby deductions would be allowed for dividends.

Deductions on Dividend would be applicable to the following:

• Any form of interest which is earned on the dividend;
• Interest accrued on the dividend;
• Any form of interest which is accumulated on the income due to mutual funds;
• These deductions would also be applicable to units of dividends which are offered by companies to individuals receiving the dividend.

This form of deduction will not exceed more than 20% of the income that is accrued or received by the individual receiving the amount of dividend.

Interest Loan Deduction (Section 80 EEA)

In these income tax updates brought out by the government, is related the interest deducted on the loan or mortgage taken on the house property. Previously, this deduction was only applicable for loans which are issued or availed on or before 31 March 2020. Now this deduction will include any loan which is sanctioned before 01 April 2021.

Donation Deductions- for Scientific Technology and other purposes

Under these income tax updates, any form of cash donation is allowed to be deducted. The threshold for deduction of cash donation was allowed to Rs.10, 000. However, this deduction for any form of cash donation is only allowed up to Rs. 2,000.

Inter-Corporate Dividends

Under the eyes of the law, a company is treated as an artificial legal person. Any individual is permitted to receive dividends. Similarly, companies are also allowed to receive a dividend.  Any form of an intercorporate dividend would be taxable at the hands of the receiver of the dividend.

Reduction of Taxable Income for Domestic Companies (Section 115 BAA)

The amount of domestic tax has also been reduced as a result of this amendment.  The amount of tax payable by domestic companies stands at 22%. This rate of corporate tax has been reduced from 30% to 22%. Income tax updates such as this will improve the ease of doing business in India.

Manufacturing Companies (115 BAB)

All manufacturing companies which have established production activities in India will have to pay only 15% on income. These companies which have established production will be able to claim the deductions which are made under section 80M of the Income Tax Act, 1961. Deductions can be claimed by manufacturing companies that are paying income under this section.

Individual Tax Slabs (115 BAC)

One of the government major income tax updates would be pertaining to the amount of deductions on the income earned by the individual.

The following shows the slabs of tax rates chargeable on the income:

• For any income up to Rs. 2,50,000 there is a nil tax rate charged.
• For any income between Rs. 2, 50,001 – 500000 there is a 5% tax rate charged.
• For any income between Rs. 5, 00,000– 7, 50,000 there is a 10% tax rate charged.
• For any income between Rs. 7, 50,001 – 10, 00,000 there is a 15% tax rate charged.
• For any income between Rs. 10, 00,001– 12, 50,000 there is a 20 % tax rate charged.
• For any income between Rs. 12, 50,001 – 15, 00,000 there is a 25 % tax rate charged.
• For any income above 15, 00,000, there is a 30% tax rate charged.

This was one of the major income tax updates brought out by the government as it affects all sections of society. These income tax updates would be applicable to individuals as well as Hindu Undivided Families.

The above tax slab and rates will be applicable if an individual does not claim any form of deductions and benefits.

Threshold for Taxable Dividend Received by Domestic Companies

Apart from inter-corporate dividends, the government also brought out income tax updates on the taxable dividend, which is received by a company or entity.
As per the income tax update, any form of dividend what is received by the company which is more than Rs. 10, 00,000/- will be taxable at the rate of 10%.

Provision related to AMT (Alternative Minimum Tax)

If any form of tax is paid under section 15 BAC or 15 BAD, then no form of alternative minimum tax would be applicable to the assessee.

Dividend Distribution Tax [DDT] (Section 115-O)

One of the major income tax updates which are brought out by the government is the removal of dividend distribution tax. This means that a company which is paying any form of a dividend would not be taxed. The tax amount would be paid by the recipient and not the company. In this case, the recipient would be the shareholders.

E-Commerce Operator to E-Commerce Participant (Section 194-O)

Any e-commerce operator is required to reduce tax deductible at source at the rate of 1 % when there is a credit for any form of sale rendered or service provided to the e-commerce participant. This deduction must be made at the earliest possible opportunity.

• Deduction which is made is 1%.
• The amount which includes the payment which is made by the purchaser to the e-commerce participant.

Transparent Taxation

Another scheme was introduced in August 2020, which increased the amount of transparency, governance and accountability of tax in India. Under this system, new features such as AI and data analytics would be used for the benefit of taxpayers. The main aim of this reform was to increase transparency between the IT authorities and the government.

Other Income tax Updates

Other crucial income tax updates include the following:

• Amidst the lockdown, the Income Tax Department has extended the date of filing (ITR filing) till November 2020. Earlier this date was considered as 30 June 2020. However, in order to ease the burden of taxpayers, the government has extended the date to November.
• Apart from this, the government has also brought out major relaxations for verification with respect to individual taxation for the five previous assessment years.

Conclusion- Income Tax Updates

Read our article:Section 194-H of the Income Tax Act, 1961