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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:
On 1st February 2020, the Ministry of Finance (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.
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.
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.
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%.
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:
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.
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.
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:
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.
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.
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.
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.
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.
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.
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:
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.
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%.
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.
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.
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.
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 crucial income tax updates include the following:
Read our article:Section 194-H of the Income Tax Act, 1961