The Finance Bill 2020 was presented as the Union Finance Budget on 1 February 2020 and subsequently introduced in the Lower House of Parliament (for further details please see "Federal budget 2020-21: impact on Indian promoters"). It was finally passed on 23 March 2020, with certain key amendments. Notably, the bill was passed with no discussion in Parliament and received presidential assent on 27 March 2020. Accordingly, the Finance Act came into effect on 1 April 2020.
The Finance Act must be viewed in light of the ongoing COVID-19 pandemic. As India underwent lockdown following the act's passing, the government is undertaking proactive measures by way of press conferences to address the needs of society. First, the government announced an extension of various statutory requirements for taxpayers (discussed below). The finance minister subsequently announced a COVID-19 relief package for the underprivileged, which primarily covers food security and direct cash transfers. Finally, on 27 March 2020 Reserve Bank of India (RBI) Governor Shaktikanta Das slashed the key lending rate by 75 basis points in an emergency move designed to counter the economic fallout from the lockdown. The RBI also permitted all commercial banks and lending institutions to allow a three-month moratorium on loans, stressing that they "should do all they can to keep credit flowing".
The steps taken by the government and the RBI are extremely helpful and proactive. The private sector is now hoping for a suitable stimulus package, in line with what is playing out in jurisdictions such as the United States and Canada.
Meanwhile, the Union Finance Budget's goals of wealth creation are unlikely to be fulfilled given the havoc that COVID-19 has wreaked on economic stability both in India and worldwide. Most of the budget's proposals focused on increased scrutiny of high-net-worth individuals (HNIs) and non-resident Indians (NRIs). For instance, the proposals regarding residency rules and taxation being levied based on residency widened the scope of the Indian tax net and came as no relief to HNIs or NRIs.
Following the proposals in the budget, the government received feedback and representations from various stakeholders. The government appears to have taken some of these representations into consideration in amending the bill before its passing.
This article sets out the key changes to the bill.
Changes to residency rules for citizens and PIOs
In India, tax is levied based on the taxpayer's residence and source of income. An Indian resident is taxed on their worldwide income, while a non-resident is taxed only on income accruing from India.
The Income Tax Act 1961 specifies certain tests to determine tax residency. Under the previous regime, an individual was a resident in India in the previous year if they were in India for:
- a total of 182 days or more; or
- 60 days or more and 365 days over the course of the four years preceding that year.
Where the taxpayer was an Indian citizen or a person of Indian origin (PIO), the requirement to have spent 60 days or more in India in the previous year was extended to 182 days.
Under the new regime, where the taxpayer is an Indian citizen or a PIO, the requirement to have spent 60 days or more in India in the previous year is extended to 120 days.
This change was introduced because many Indian HNIs had taken advantage of the provision to carry on substantial economic activities within India without qualifying as residents in India. Thus, pursuant to the budget, any Indian citizen or PIO who meets the above criteria will qualify as an Indian tax resident and be subject to tax in India on their worldwide income.
However, by way of relief, the government has clarified through the amendments to the bill that the reduced 120-day criteria will apply only to Indian citizens or PIOs whose total income (excluding foreign-source income) exceeds Rs1.5 million. For the sake of this provision, 'foreign-source income' means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). This will come as a relief for NRIs and PIOs whose India-sourced income is less than Rs1.5 million; all other persons should continue to re-examine their period of stay in India.
Tax based on citizenship
In the budget, the government proposed to add a new section to the Income Tax Act which provided that Indian citizens would be deemed Indian tax residents if they were not liable to pay tax in any other country by reason of domicile or residency or any other criteria of a similar nature, regardless of whether such individual met the above residency test. Further, on 2 February 2020 the Central Board of Direct Taxation issued a press release clarifying that any person who qualifies as an Indian resident pursuant to the proposed amendment would be subject to tax in India only on their income which derives from an Indian business or profession.
The Finance Bill has now been amended to provide that the proposed deemed resident provisions apply only to Indian citizens whose total income (excluding foreign-source income) exceeds Rs1.5 million.
Further relaxation for residents not ordinarily resident in India
The Income Tax Act provides that an individual or Hindu undivided family (HUF) will be treated as not ordinarily resident in India in the relevant financial year if they:
- were a non-resident in nine of the 10 financial years preceding the relevant financial year; or
- were not in India for an overall period of 729 days during the seven financial years preceding the relevant financial year.
Under the proposed regime, an individual or HUF would be treated as not ordinarily resident in India in the relevant financial year if they were a non-resident in seven of the 10 financial years preceding the relevant financial year.
Such persons would not be subject to tax in India on their worldwide income, but rather only on their income arising in India. These proposals were set to take effect from 1 April 2020. However, the Finance Act has scrapped this relaxed rule entirely.
Further, based on the proposed changes (ie, if an Indian citizen or a PIO becomes a resident of India on exceeding a 120-day stay or an Indian citizen is deemed to be a resident in India as they are not liable to be taxed in any other country, as discussed above), it has now been clarified that such persons would qualify as not ordinarily resident in India.
By removing the above relaxation, which was sought to be introduced earlier, the Finance Act has removed the only positive for NRIs. The change in the budget came as a major relief for citizens who need flexibility to decide whether to stay in India or return to other countries. However, as can be noted from the various new proposals, the government's intent to scrutinise Indian HNIs and NRIs continues. Thus, careful planning may be required for NRIs who frequently visit India or whose income arises out of various sources in India.
Clarifications in relation to abolition of DDT
The budget had proposed to abolish the dividend distribution tax (DDT) and sought to tax dividends at the hands of the respective shareholders. It was proposed that these changes would take effect from 1 April 2020; however, various ambiguities existed, including the applicable tax rate for non-residents.(1)
Relaxation of scope of tax collected at source
The existing provisions of the Income Tax Act provide for a tax collection at source (TCS) mechanism for certain businesses, such as those which trade in alcohol, forest produce and scrap materials. The budget had expanded the scope of the TCS provisions to transactions such as foreign remittance under the Liberalised Remittance Scheme (LRS), subject to a minimum threshold of Rs700,000 in a financial year for remittance outside India. Any amount exceeding this threshold would still be chargeable at 5% TCS.
The amendments to the bill state that the changes will take effect on 1 October 2020. Further, they clarify that the exemption threshold will not apply to amounts being remitted for purchasing an overseas tour package. Further, for LRS remittances of an education loan obtained from a financial institution, the government has reduced the TCS rate from 5% to 0.5%.
Relaxation of compliance obligations
Based on representations from various stakeholders, the government has extended the last day of filing income tax returns for the 2018-19 financial year, which is otherwise 31 March 2020, as well as the deadline for filing goods and services tax returns, which must be done on a monthly basis until 30 June 2020.
Accordingly, at the recent press conference, the finance minister stated as follows:
- For delayed payments of taxes, interest will be levied at a reduced rate of 9% instead of 12%.
- For delayed deposits of tax deducted at source for the current financial year, interest will be charged at a reduced rate of 9% until 30 June 2020. However, the finance minister stated that this deadline will not be extended.
- The deadline for linking Aadhaar and permanent account numbers will also be extended to 30 June 2020.
- The Vivad se Vishwas tax dispute resolution scheme introduced by way of the budget will be extended by three months to 30 June 2020. Those availing of the scheme under the extended deadline will not have to pay 10% interest on the principal amount.
The government's objective of respecting India's wealth creators, as seen from the economic survey and the finance minister's budget speech, was perceived as a nod to the possible introduction of significant promoter-friendly policies. However, the actual proposals in the budget did not reflect this goal, but rather represented increased scrutiny and taxability of such wealth creators. The Finance Act thus comes as a relief to NRIs who have been working abroad and frequently visit India. While there have been no major reversals of the budget proposals, the changes shed some light on the fate of Indian HNIs and ultra-HNIs.
However, like most countries, the government's current primary focus is fighting the COVID-19 pandemic and prescribing stringent safety measures to curb its spread and reduce the resulting economic shock. As such, further economic measures, relaxations or stimuli to ease this shock may be forthcoming. The budget was passed during a different economic scenario and will have to be periodically refined to factor in the pandemic. The bedrock of the Indian economy is its family businesses, which will need to be resilient.
Due to the increasing complexity of the tax regime and the various options provided to each taxpayer under the old and new regimes, careful planning and legal advice should be a top priority to avoid being blindsided by an expensive tax bill. Further, in light of the revised deadlines announced by the finance minister, individuals should approach an attorney as soon as possible for advice on any change in their tax filings.
Endnotes
(1) A detailed analysis of the changes and clarifications provided in the Finance Act is available here.
