The Indian Finance Minister, as a part of Union Budget, presented the Finance Bill, 2020 (‘FB 2020’) on February 1, 2020. The same was passed by the Lok Sabha, the lower house of the Indian Parliament, on March 23, 2020 with certain amendments. This client alert summarizes the key direct tax amendments to the FB 2020, as passed by the Lok Sabha.

1.        Tax residency requirements for individuals

1.1.     A citizen or person of Indian origin, who, being outside India, comes on a visit to India in any previous year, will be said to be tax-resident in India, if: (a) his or her total income during the previous year, other than income from foreign sources, exceeds ₹ 1,500,000 (approx. US$ 20,000); and (b) he or she having, within the four years preceding that year, been in India for a period or periods amounting in aggregate to at least 365 days, is in India for a period (or periods) amounting in all to 120 days or more in that year. However, such person would be treated as a resident but not ordinarily resident (‘RNOR’) in India if his or her stay in such previous year exceeds 120 days but is less than 182 days, though, to avoid any ambiguity, staying less than 120 days is be most advisable.

1.2.     Such an Indian citizen, will, if his or her total income during the previous year, other than income from foreign sources, exceeds ₹ 1,500,000 (approx. US$ 20,000), be deemed to be an Indian tax resident for a Financial Year (‘FY’), notwithstanding his or her period of stay in India during such FY, if he or she is not liable to tax in any other country or territory by reason of his or her domicile or residence or any other criteria. However, such person would be treated as a RNOR in India. As a consequence, as a ‘deemed resident’ but RNOR, such person will be taxable in India only on: (a) India sourced income, and (b) income from an offshore business controlled in or a profession set up in India. Additionally, RNORs also are not required to disclose their offshore assets in the Indian tax returns.

1.3.     These changes will be effective from FY 2020-21, i.e. Assessment Year (‘AY’) 2021-22.

2.        Taxation of dividends

2.1.     Dividend continues to be taxed in the hands of the shareholder, as proposed by the original FB 2020.

2.2.     A new Section 80M had been inserted by the original FB 2020 in the Income-tax Act, 1961 (‘IT Act’), which provided that where the income of a domestic company includes dividend from any other domestic company, such domestic company will be allowed a deduction of the amount of dividend so received while computing its tax liability. This deduction, however, will be limited to the amount of dividend distributed by it to its shareholders on or before the ‘due date’ (which has been defined to mean the date falling one month prior to the date of filing of return of income).

2.3.     While the original FB 2020 restricted this set off only to the extent of dividend received by a domestic company from another domestic company, the amended FB 2020 allows a domestic company to claim a deduction of dividend received from a foreign company and business trust as well. This Section will be effective from FY 2020-21, i.e. AY 2021-22.

2.4.     Further, Section 10(34) of the IT Act (which provided that any income by way of dividends which is subject to dividend distribution tax (‘DDT’) would be exempt in the hands of the shareholder), had been amended by the original FB 2020 to withdraw this exemption from FY 2020-21. However, it has now been clarified that any dividends received on or after April 1, 2020 where DDT and tax under Section 115BBDA, wherever applicable, has been paid (which may be the case where the dividend is declared up to March 31, 2020) will be exempt from tax in the hands of the shareholder.

2.5.     The withholding tax rate on dividend payments to non-residents will be 20% (as increased by applicable surcharge and cess). Further, for the purposes of withholding tax as well as substantive tax liability, income from dividends will not be included for levy of surcharge at the rates of 25% and 37%.

3.          Exemption of dividend, interest and long-term capital gains to certain persons

3.1.     The FB 2020 had proposed insertion of a new Section 10(23FE) (effective from FY 2020-21) to exempt certain incomes. The scope of such exemption is proposed to be widened. As per the amended Section 10(23FE), dividend, interest and long-term capital gains arising from investments made by a ‘specified person’ in India, whether in the form of debt or equity, would be exempt from tax, where such investment is:

(i)         made on or after April 1, 2020 but on or before March 31, 2024;

(ii)        held for a period of 3 years; and

(iii)       is in:

(a)        a business trust; or

(b)        a company or enterprise carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining any specified infrastructure facility as may be notified; or

(c)       a Category I or Category II Alternative Investment Fund regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, having 100% investment in one or more of the company or enterprise referred to in (b) above.

3.2.     Originally, this exemption was proposed for a wholly owned subsidiary of the Abu Dhabi Investment Authority and sovereign wealth funds, upon satisfaction of certain conditions. However, now, the definition of ‘specified person’ under Section 10(23FE) has also been widened to include a ‘pension fund’, which:

(i)         is created or established under the laws of a foreign country, including the laws made by its political constituents being a province, state or local body, by whatever name called;

(ii)        is not liable to tax in such foreign country;

(iii)       satisfies such other conditions as may be prescribed; and

(iv)        is specified by Central Government by way of a notification.

4.           Equalisation levy on e-commerce supply or services by an e-commerce operator

4.1.     Chapter VII of Finance Act, 2016, which provides for imposition of equalisation levy, has been amended. A new Section 165A has been introduced, effective from April 1, 2020, which provides for equalisation levy of two percent on the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services provided or facilitated by it to:

(i)          a person resident in India;

(ii)        a non-resident in ‘specified circumstances’, which term means:

(a)        sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement through internet protocol address located in India; or

(b)        sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.

(iii)       to a person who buys such goods or services or both using internet protocol address located in India.

4.2.       The term ‘e-commerce operator’ has been defined to mean ‘a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both’. Further, the term ‘e-commerce supply or services’ has been defined to mean:

(i)          online sale of goods owned by the e-commerce operator; or

(ii)         online provision of services provided by the e-commerce operator; or

(iii)       online sale of goods or provision of services or both, facilitated by the e-commerce operator; or

(iv)        any combination of activities listed in clause (i), (ii) or (iii) above.

4.3.        Section 165A further provides that the above equalisation levy will not be charged in the following cases:

(i)         where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment (‘PE’) in India and such e-commerce supply or services are effectively connected with such PE; or

(ii)         where equalisation levy is leviable under Section 165 (i.e. in relation to provision of digital advertisement space); or

(iii)      where the sales, turnover or gross receipts of the e-commerce operator from the e-commerce supply or services made or provided or facilitated is less than ₹ 20,000,000 (approx. US$ 270,000) during the previous year.

4.4.     Consequential amendment has been proposed in Section 10(50) to provide that any income from e-commerce supply or services chargeable to equalisation levy would be exempt.

5.           Tax withholding on certain royalty payments

Section 194J has been further amended to extend the withholding tax rate of two percent (proposed by FB 2020 for fee for technical services) to royalty, where such royalty is in consideration for sale, distribution or exhibition of cinematographic films.

6.           Tax withholding on payments by e-commerce operator to e-commerce participant

Section 194-O, which had been proposed to be inserted by the FB 2020 (to provide for new levy of withholding tax @1% on payments made by e-commerce operators to resident e-commerce participants) has been further amended to provide that the Central Board of Direct Taxes may issue guidelines for removing any difficulties in giving effect to this provision. This section is now proposed to be effective from October 1, 2020.

7.           Amendments to Section 194N – Payments in cash

7.1.     Existing Section 194N of the IT Act has been substituted by a new Section 194N. As per this new Section 194N, every person, being (a) a banking company; or (b) a co-operative society engaged in carrying on the business of banking; or (c) a post office, who is responsible for paying any sum to a recipient in cash and in aggregate of ₹ 10,000,000 (approx. US$ 135,000) during the previous year, from one or more accounts maintained by the recipient with it, is required to deduct tax @ 2% at the time of payment of such sum.

7.2.       It is further provided that where the recipient has not filed returns of income for all three assessment years relevant to the three previous years immediately preceding the previous year in which payment is made, and the time limit for filing returns has expired, in such cases:

(i)        threshold limit of aggregate cash sums of ₹ 10,000,000 (approx. US$ 135,000) for tax deduction will stand reduced to ₹ 2,000,000 (approx. US$ 27,000); and

(ii)       tax would be deducted @ 2%, where amount paid in cash exceeds ₹ 2,000,000 (approx. US$ 27,000) but does not exceed ₹ 10,000,000 (approx. US$ 135,000), and @ 5%, where the amount paid in cash exceeds ₹ 10,000,000 (approx. US$ 135,000).

8.          Tax withholding on payments to resident towards income in respect of certain units

The FB 2020 had introduced a Section 194K to the IT Act, which provided for tax deduction at source on payment of income by any person to a resident in respect of units of a mutual fund etc. It is proposed to amend the said Section to clarify that no tax deduction at source under this provision would apply where the income of the resident from the specified units is in the nature of capital gains.

9.          Tax collection at source (‘TCS’) in certain cases

9.1.      Section 206C of the IT Act was sought to be amended by the FB 2020 to provide for TCS @ 5% by (a) an authorised dealer (‘AD’), who receives any amount in aggregate of ₹ 700,000 (approx. US$ 9,500) or more in a financial year for remittance out of India under the Liberalised Remittance Scheme; or (b) a seller of overseas tour package.

9.2.      The said provisions have not been amended to further provide as under:

(i)        AD will not collect TCS if aggregate of amounts being remitted by a buyer is less than ₹ 700,000 (approx. US$ 9,500) in a financial year and is for purposes other than for purchase of overseas tour program package.

(ii)       AD to collect TCS @ 5% on the aggregate amounts in excess of ₹ 700,000 (approx. US$ 9,500) remitted by the buyer in a financial year, where the purpose is other than for purchase of overseas tour program package.

(iii)     AD to collect TCS @ 1.5% on the aggregate amounts in excess of ₹ 700,000 (approx. US$ 9,500) remitted by the buyer in a financial year, if the amount being remitted is a loan obtained from any financial institution for the purposes of pursuing any education.

(iv)      AD will not collect TCS on the sum in respect of which TCS has been collected by the seller.