Hits and misses of Budget 2020

There was a need to remove long term capital gains tax on shares.

Any analysis of the Union Budget done without understanding the backdrop against which it was presented would be incomplete and improper. It would be akin to deciding to bat or bowl upon winning the toss in a cricket match without looking at the condition of the pitch. The Indian economy was plagued by one of the slowest growth rates and the highest unemployment in last many decades. Coupled with a slowing world economy, rising protectionism including the Us-china trade war and Brexit, it was one of the most challenging times to present a Budget. Expectations amongst people were high for the Government to present a Big Bang Budget to kick-start the economy by pushing domestic consumption and the investment cycle in the economy. The Budget has, however, come with several incremental measures for various sections of society: as termed by the Finance Minister, it is a “janjan ka budget” and which in aggregate would provide the necessary impetus to the economy. The Government has been very clear that it wasn’t willing to breach the fiscal deficit target by contravening the FRBM Act 2003 and thereby with falling tax revenues, perhaps the Government had only so much legroom. On the tax front, therefore, there is very little in the Budget in terms of simplification, but a lot on widening the tax base and increasing the compliance burden on the taxpayer.

Hitherto, sale and purchase of goods was outside the ambit of any Tax Deduction at Source (TDS) or Tax Collection at Source (TCS). The Finance Bill now proposes to levy a TCS of 0.1%, whereby the seller (whose sales/turnover in the preceding year exceeds Rs 10 crore) would collect the aforesaid tax from the buyer if the goods sold to the buyer during a financial year exceed Rs 50 lakh. Another proposal to cast the TCS net wider is the proposed levy of TCS at the rate of 5% on remittances sent abroad under the Liberalised Remittance Scheme (LRS) and on selling of overseas tour packages by tour operators. The proposal to collect tax on LRS is particularly harsh and needs to be revisited. This also adds to the compliance burden as another return would have to be filed by the person collecting the tax.

In addition to the TCS net being cast wider, TDS at the rate of 1% is proposed to be levied on e-commerce transactions. From the language in the Bill it appears that even non-resident e-commerce operators must comply with the provisions if they deal with resident e-commerce participants.

For charitable trusts and other institutions taking benefit under various sections of the Act, the Bill proposes that all such trusts and institutions apply for a fresh registration which shall be valid for a period of five years and thereafter apply for a fresh registration after every five years. The Bill also casts a responsibility on the trusts receiving donations to file a statement (to be prescribed) on the strength of which the donor would get a deduction under Section 80G of the Act. It may be argued from the tax department’s perspective that they need to check whether such trusts and institutions are carrying on activities in accordance with its objects, but this adds to another compliance burden and harassment of the assessee trust/ institution.

One of the demands of the industry was to remove Dividend Distribution Tax (DDT), which the Bill proposes to do away with and revert to the classical system of taxation wherein dividend would now be taxable in the hands of the shareholder. This would enable the foreign shareholder to take credit of the tax paid in India, though on the flip side would add to the tax burden of HNIS. The proposal exempting sovereign funds from taxability of their interest, dividend and capital gains income on investment made in Indian companies carrying on the business of infrastructure will also definitely boost investments in India.

Lowering personal tax rates (but without any exemption/ deduction) with an option to the taxpayer to be governed by the old regime might be a step towards tax simplification, but discourages investment and savings, which is not good for the country. Our analysis shows that most individuals would still be better off under the existing regime.

The amendment related to taxability of ESOP granted by eligible start-ups is complex. It is proposed to defer the collection of tax on ESOP while the taxability of perquisite continues to be in the year in which option is exercised. For the employee, the unpaid tax therefore will be like a hanging sword on his head till the tax is not paid by the employer or the employee.

The Finance Minister, like a seasoned leg spin bowler has thrown a googly by proposing an amendment to change determination of residential status of Indian citizens staying abroad. Though the intention of government is to tax a stateless person, but the language of the proposed section and the later press release have confused us as to what the government is intending to tax. Also reducing the number of days of stay in India from 182 days to 120 days for Indian citizens living abroad is not a good step.

The proposal regarding eappeal and e-penalty seems to be a premature step. Once the e-assessment or faceless assessment proceedings stabilise then the government could have thought of moving to the next step of e-appeal and e-penalty. In an appellate proceeding or penalty proceeding, the taxpayer wants to be heard and make the authorities understand their stand, which is not possible in a faceless scenario.

The most important proposal to garner revue seems to be the announcement of the “Vivad se Vishwas” scheme, which will help in ending prolonged litigation. The success of the Sabka Vishwas Samadhan Scheme brought in last year under the indirect taxes seems to have played heavily on the minds of the policymakers while drafting this provision. Another important step which is proposed to be taken is for giving statutory recognition to a taxpayer’s charter. If followed in letter and spirit this would certainly reduce tax harassment and ensure accountability of the officers of the tax department which at present is lacking.

In terms of the misses, the most important point seems to be the rationalisation of long-term capital gains tax. In our view there was a need to remove long term capital gains tax on shares and reduce the tax rate of long-term capital gains tax on the sale of immovable property. Any reduction in this rate would only lead to higher inflow of money in the formal economy and discourage transactions outside the books. It should be remembered that the intent to evade tax goes hand in hand with a high tax rate and therefore there is a need to reduce the rate on sale of immovable property. We hope that the government considers this in next year’s budget.

Sachin Vasudeva and Parul Jolly are senior Chartered Accountants.