State of Economy

Corporate Tax

Personal Tax

International Tax

Business Tax

Agenda

Goods & Services Tax

Customs Duty

India Budget 2020

State of Economy

GDP growth for FY 2018-19 slashed from 6.8% (budget estimate) to 6.1% (revised estimate)

India’s GDP growth in FY 2019-20 estimated at 5% based on first advance estimates

GDP growth moderated to 4.8% in H1 FY 2019-20 as compared to 6.2% in H2 FY 2018-19

Decline in fixed investment induced by a sluggish growth in consumption

Weakness in global demand with world output estimated to grow at 2.9% in 2019 as compared to 3.6% in 2018

Slowing bank credit growth despite easing of repo rate by RBI by 110 basis points

India’s GDP is expected to grow in the range of 6% to 6.5% in FY 2020-21

National Infrastructure Pipeline of projects worth INR 102 lakh crore over the next 5 years

Reduction in corporate income tax rates for domestic companies

Speeding up of recoveries under IBC and easing of credit to real estate and NBFC sectors

India to regain its spot as the 5th largest economy in terms of GDP at US$ 2.9 trillion in 2019 (surpassing UK and France) per IMF’s estimate

GDP growth

GDP growth

7.2% 6.8%5.0% 4.5%

8.6% 8.3%

4.1%

6.9%

9.3% 10.0%

4.0%

1.0%0%

2%

4%

6%

8%

10%

12%

2017-18 2018-19 (PE) Q1 2019-20 Q2 2019-20

GDP growth rate Total consumption Fixed investment

GDP growth (revised estimate)

7.2%6.1%

5.0%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

2017-18 2018-19 (RE) 2019-20 (AE)

GDP growth rate

Fiscal deficit for FY 2019-20 was budgeted at 3.3% of GDP as compared to 3.4% of GDP in FY 2018-19 (revised estimates)

Fiscal deficit for Apr-19 to Nov-19 (8 months) stood at 114.8% of the annual budget

Reduction in corporate income tax rates to put pressure on fiscal deficit for FY 2019-20

In order to revive growth, the Government may have to relax fiscal deficit target for the current year

Revenue receipts during the first 8 months of FY 2019-20 grew by 13% as compared to the same period last year

Driven by non-tax revenue (primarily dividends and profits led by transfer from RBI)

Gross tax revenue showed a modest growth of 0.8% during the aforesaid period

GST monthly collections crossed INR 1 lakh crore mark for 5 times in the first 9 months of FY 2019-20

Total expenditure increased by 12.8% during the first 8 months of FY 2019-20

Fiscal position

India’s external sector gained stability as Current Account Deficit (CAD) narrowed to 1.5% of GDP in H1 FY 2019-20 as compared to 2.1% in H2 FY 2018-19

Imports contracted more sharply than exports led by the easing of crude prices

Increase in foreign exchange reserves from US$ 302 billion in Mar-19 to US$ 461 billion as on 10-Jan-20

Net FDI inflows at US$ 24.4 billion in the first 8 months of FY 2019-20 as compared to US$ 21.2 billion during the same period last year

Net FPI inflows at US$ 12.6 billion in the first 8 months of FY 2019-20 as compared to a net outflow of US$ 8.7 billion during the same period last year

External sector

External sector

424.5 412.9 457.5

64.5

69.9 70.4

61.0 62.0 63.0 64.0 65.0 66.0 67.0 68.0 69.0 70.0 71.0

390400410420430440450460470

2017-18 2018-19 (PE) 2019-20 (AE)

INR

/U

S$

US$

bill

ion

Foreign exchange reserves (US$ bn) Average exchange rate (INR/US$)

Note for 2019-20: Foreign exchange reserves as at 31-Dec-19; Average exchange rate for the period Apr-19 to Dec-19

Headline (CPI) inflation increased from 3.3% in H1 FY 2019-20 to 7.4% in Dec-19 driven by a temporary increase in food inflation

Wholesale Price Index (WPI ) inflation moderated from 3.2% in Apr-19 to 2.6% in Dec-19

Core inflation (CPI excluding food and fuel) declined from 6.3% in Q1 FY 2018-19 to 4.3% in Q2 FY 2019-20

While declining Core CPI and WPI reflected weakening of demand in the economy, the recent rise in inflation suggests a build up in domestic demand

Inflation

Wealth creation by ethical means is not a bad thing. India has always been a major economic power.

Entrepreneurship at grassroot levels is taking seed and needs to be nurtured and developed.

Capitalist model must move from pro-crony to pro-business through the Invisible Hand and the Hand of Trust.

Government must move away from interventionalist model and let market forces determine the equilibrium.

Creation of jobs in the Global Value Chains (GVC) by filling the void created by China.

Certain lagging parameters in the ease of doing business needs immediate attention such as availing construction permits, trading across borders, enforcing contracts, etc.

Key takeaways

PSBs must pull their weight as financial sector is the lever to economic growth.

Systemic shocks in the NBFC sector needs to be closely monitored to prevent financial crisis.

Privatization of CPSE is the way forward for unbundling shareholder value.

GDP growth being overstated is more of a myth than reality.

Inflation seen from the eye of a Thali, coined as “Thalinomics”, indicating that the growth in income of an individual at a faster pace than the food inflation.

Key takeaways

India Budget 2020

From the Budget Speech

Five new Smart Cities to be developed in collaboration with States in PPP Model

Manufacturing of Networked Products

Scheme to encourage investment in Electronics Manufacturing Industry

To attract large investments in electronic value chain

Mobile phones

Electronic equipment

Semi-conductor packaging

Medical Devices

National Technical Textiles Mission

Four-year implementation period from 2020-21 through 2023-24

Plans to set up an International Bullion Exchange at GIFT City

Promises –meant to be fulfilled!

India Budget 2020

Corporate Tax

No Changes in Tax Rates proposed now

New Regime of 25% Tax introduced in September

17% Tax Regime for New Manufacturing Company introduced in September

MAT Rate reduced to 15% from 18.5% in September

Dividend Distribution Tax abolished

Dividend will be taxed in the hands of Shareholders as normal income

DDT on dividends from Mutual Fund also abolished

Dividends will be taxable in the hands of unit-holder

TDS @10% provisions also introduced

Buyback Tax remain unchanged

Corporate Tax Regime

Dividend Distribution Tax has been abolished from FY 2020-21

Shareholders will be subjected to tax in their hands as ordinary income

Expenses incurred for earning dividend cannot be claimed as deduction except Interest Exp

Even interest deduction limited to 20% of dividend income

Section 14A kind of issues – whether resolved or would continue?

Dividend income would not be taxable in case of domestic companies (Section 80M)

To the extent they distribute the dividend to their shareholders before one month prior to due date of Return

Applies only in case of dividend received from domestic companies

Double Deduction to the extent of interest deduction and Section 80M deduction

Dividend Taxation

Non-Residents would be taxed @ 20% u/s. 115A

However, they can claim Treaty Benefits for concessional withholding tax

Also credit of taxes paid in India would be available in their country

Thus, overall tax cost of investing by Foreign Company is set to be lowered

With expectation that it should improve foreign investments

TDS on dividends to Resident @ 10%

Non-Resident TDS – ambiguity need to be resolved

With abolition of DDT, pass-through status of dividend from foreign subsidiary gone

Would result into significant higher taxes for repatriating the same to the ultimate shareholders

For Indian promoters, it is set to increase the tax cost due to high HNI surcharge

In respect of dividend to small investors, typically overall tax burden should be reduced

Dividend Taxation

25% Corporate Tax Regime

All companies eligible to opt

Liable to be taxed @ 22% (ETR ~ 25%) as against current rate of 25%/30% (ETR ~ 29% / 35%)

Not be eligible to claim Specified Tax Incentives / Deductions

Investment-linked or profit-linked incentives other than Sec 80JJAA and now Sec 80M (Dividend from Subsidiary)

Additional Depreciation

Weighted deduction of R&D Expenditure

MAT Provisions not to apply

Existing MAT credit would lapse

Brought forward unabsorbed additional depreciation shall be adjusted in WDV as on 1st April 2019

Existing companies need to evaluate feasibility of structures vis-à-vis possible tax savings

New Manufacturing Companies Regime

Eligible Companies

Registered on or after 01 October 2019 and which commence production on or before 31 March 2023

Only engaged in eligible activities

Liable to be taxed @ 15% (ETR ~ 17%) as against current rate of 25%/30% (ETR ~ 29% / 35%)

Tax on other income (Not derived from nor incidental to manufacturing or production) @ 22%

Eligible activities

Manufacture or production of any article or thing; and

Research in relation to, or distribution of, such article or thing manufactured or produced by it

“Generation of electricity” now included

Business should not be formed by splitting up or reconstruction of a business already in existence

Certain restrictions on use of previously used plant and machinery

New Manufacturing Companies Regime

Not be eligible to claim Specified Tax Incentives / Deductions

Investment-linked or profit-linked incentives other than Sec 80JJAA and now Sec 80M (Dividend from Subsidiary)

Additional Depreciation

Weighted deduction of R&D Expenditure

MAT Provisions not to apply

Option cannot be withdrawn

Non-fulfilment of conditions – option shall become invalid

India Budget 2020

Personal Tax

Residence in India for citizens

NRIs visiting India were eligible to remain Non Resident even if their stay was up to 181 days

Threshold now reduced to 120 days

Global non-residents who are Indian citizens to be considered resident in India and liable to tax

Not liable to tax in any other country by reason of his domicile or residence or any other criterion of similar nature

Attempt to tax Global Non Residents, however, could lead to taxation of Citizen working in territories which does not levy Income Tax especially GCC

Press Release to clarify that it is not the intention and suitable changes will be incorporated

Need to see how the amendment is carried out

Tax Residency for Individuals

Not ordinarily resident in India

Individuals - if non-resident in India in 7 / 10 preceding previous years

Condition of 730 days in previous 7 years removed

Effectively someone coming to India for the first time (or after long gap of 10 years) would be Not Ordinarily Resident for first 4 years (in some cases 5 years)

HUF – manager has been non-resident in India in 7 / 10 preceding previous years

Tax Residency for Individuals

Individuals and HUF can opt to pay tax at lower tax rates if they give up certain deductions

Deductions not permissible

House Rent Allowance & Standard Deduction

Housing Loan Interest on Self Occupied House

Section 80C – Investment Deduction

Section 80 D – Medical insurance & Section 80G – Donation

Section 80CCD (1B) - Contribution to National Pension Scheme

No set off in respect of loss under income from house property / depreciation

No perquisites or deduction or allowances under any act

Return to be filed before due date

Illusionary Benefit of approx. Rs. 78,000 for person earning Rs. 15,00,000

Simplified (?) tax structure for individuals

India Budget 2020

International Tax

SEP provisions deferred by 1 year

Not Applicable for FY 2020-21 and will be introduced from FY 2021-22

Distinction between ‘business in India’ and ‘business with India’ fast disappearing

Aim to tax portion of profit that are generated by Non Residents by transactions with India

Thresholds for transactions / interactions will be prescribed

Underlying presumption that India is market and profits are function of market

Profits attributable to SEP shall be taxable in India

Profit attribution methodology shall be prescribed

Draft Rules for Discussion indicated significant shift of Government Policy

Advance Pricing Agreement and Safe Harbour Rules would be available for Profit attribution

Recognition of principle that Profit Attribution is not covered by current TP Regime

Significant Economic Presence

Principal Purpose Test for Treaty Benefit introduced in the Act

Benefit of treaty cannot be taken to create non-taxation or reduced taxation through tax evasion or avoidance (including treaty shopping)

Non-residents exempted from filing return of income if

Total income consists of dividend or interest or royalty / FTS

Tax to be deducted as per provisions of the Act and no treaty benefit has been availed

No relief from filing of Transfer Pricing Report

Interest paid or payable to Indian branch of foreign bank excluded from scope of Thin Capitalisation

Loans by Indian branches backed by guarantee from AE would now be excluded

Taking it to right conclusion to apply Section 94B only in case of Base Erosion

International Tax

India Budget 2020

Business Tax

Current provisions

Deduction up to 100% of profits of eligible business for 3 consecutive years out of 7 years

Incorporation – after April 1, 2016 and before April 1, 2021

Total turnover does not exceed Rs. 25 Crores

Eligible period extended to 3 consecutive years out of 10 years

Total turnover limit updated to Rs. 100 Crores

ESOP tax payment in case of Start-ups deferred by 5 years from the date of exercise

Unless transfer of shares or cessation of employment happens earlier

Start-up taxation

Time limits for certain deductions have been extended

Development and building affordable housing project – timeline of approval by competent authority extended to March 31, 2021

Interest on loan for acquisition of affordable housing – timeline of sanction of loan extended to March 31, 2021

Claim of deduction u/s 35AD made optional

Corresponding amendment in Section 32 to provide for Depreciation in such cases

Employer’s contribution to funds of more than Rs. 750,000 made taxable

Annual accretion on above by way of interest, dividend, etc. also taxable

Incentives & Exemptions

TCS provisions applicable on sale of goods

TCS @ 0.1% (1% in case of absence of PAN / Adhaar) – annual consideration from a buyer > Rs. 50 lakhs

Possibility of being applied to Exports also

Applicable to seller whose annual total sales > Rs. 10 Crores in year preceding PY

Shall not be applicable where other TCS provisions apply / TDS provisions apply

TCS provisions applicable on sale of foreign exchange for remittance outside India

Liability on authorised dealer where amount > Rs. 700,000

Applicable rate is 5% (10% in case of absence of PAN / Adhaar)

Shall not be applicable where TDS provisions apply

TCS provisions applicable on sale of tour packages for travel outside India

Applicable rate is 5% (10% in case of absence of PAN / Adhaar)

Shall not be applicable where TDS provisions apply

Tax collection at source

TDS rate for technical services (other than professional services) reduced from 10% to 2%

Aimed at reducing litigation under 194C and 194J

TDS on e-commerce transactions introduced at 1%

Liability to deduct tax on e-commerce operator

Tax to be deducted at the time of credit of amount of sale / service to e-commerce participant

Annual sale value more than Rs. 500,000

Liability to deduct TDS on interest other than interest on securities extended to large co-operative societies

Sales, gross receipts or turnover exceeds Rs. 50 Crores

Interest to payee is more than Rs. 50,000 (Rs. 40,000 in case of senior citizens)

Loan agreement period for reduced rate of TDS u/s. 194LC extended up to June 30, 2023

Tax deduction at source

No Tax Audit for turnover up to Rs. 5 crores in case of business

If cash expenditure as well as revenue less than 5% of total expenditure and revenue respectively

Effectively, self-certified tax Return without Audit for assessee with turnover up to Rs. 5 crores

Due Date for filing Tax Return extended to 31st October (Non-TP cases)

However, Tax Audit and all other Audit Reports need to be filed by 30th September

TP Audit Report due by 31st October

Tax Return continue to be filed by 30th November in such cases

Re-registration / fresh registration of charitable / educational / medical institutions

Mandatory renewal after 5 years

Statement to be filed for every donation before Tax Return, else penalty and fee would be payable

Donor would get deduction u/s. 80G based on such Statement only

Filing & Compliances

Litigation Resolution Scheme

Payment of disputed tax by March 31, 2020 and no interest or penalty

No details in the Finance Bill, Details expected separately

Mandatory payment of 20% demand or equivalent security for seeking stay of demand from ITAT

e-Appeals

To be introduced for CIT(A) on lines of e-Assessments

Penalty procedure would also be faceless

Tax Litigations

Concessional tax regime for co-operative societies similar to corporate tax regime

Concessional tax rate of 22% to existing resident co-operative societies

Certain deductions shall not be claimed to avail the benefit

Exemption to newly established units in SEZ;

Additional depreciation;

Deduction in respect of new plant & machinery in notified backward areas, tea or coffee or rubber development, site restoration fund, scientific research, any specified business, agricultural extension project

Carry forward of loss / depreciation pertaining to above deductions from preceding PY shall not be allowed

AMT (including carry forward and set-off of pending credit) shall lapse

Incentives to resident Co-operative societies

Period of concessional rate of TDS @ 5% for interest to non-residents u/s 194LC extended to July 1, 2023

Money borrowed under loan agreement after July 1, 2012 and before July 1, 2020

Borrowing by way of issue of long-term infrastructure bond after July 1, 2012 and before July 1, 2014

Borrowing by way of issue of bonds including long-term infrastructure bond after October 1, 2014 and before July 1, 2014# Concessional rate of TDS @ 4% on interest to non-resident on borrowing through issue of rupee-denominated bonds (after April 1, 2020 before July 1, 2023) listed on recognised stock exchange in any IFSC

Period of concessional rate of TDS @ 5% on interest payment to FII / QFI extended to July 1, 2023

Investment in government securities and rupee denominated bond of Indian company

Concessional withholding rate also extended to interest payable to FII / QFI for investment in municipal debt security

Extension of timelines

Safe harbour of 5% in case of valuation by stamp valuation authority increased to 10% in case of –

Computing profits or capital gains from transfer of land or building or both

Computing income from other sources from transfer of immovable property

For Capital Gains, where value as on April 1, 2001 is adopted for immovable property

Fair value cannot exceed Stamp Duty value

Penalty for false entry or omission of an entry to evade tax liability

Amount equivalent to transaction value for both assessee and advisor

Other Important Changes

India Budget 2020

Goods & Services Tax

The date of issue of debit note is relevant for claiming Input Tax Credit (ITC) (Section 16(4))

To notify the list of specified services/supplies for which tax invoice to be issued, time and manner of issuance. (Section 31)

To make rules, form and manner of issuance of certificate of tax deduction at source. (Section 51)

Proposed penalty on recipient of ITC on account of any fraudulent transactions (introduced new section 122A)

Proposed punishment and imprisonment on recipient for availment of input tax credit without invoice or bill

Time limits and manner for availing ITC of certain unavailed credit under erstwhile law shall be prescribed (Section 140 - retrospective amendment)

Reduced rate of 12% tax on supply of pully, wheels and other parts (falling under heading 8483) compared existing rate of 18%.

Goods & Services Tax

Exclusion for eligibility of composition scheme (section 10)

Supplier of service not leviable to tax

Inter-state supply of services

E-commerce operator

Goods & Services Tax

India Budget 2020

Customs Duty

Following schemes for export incentive will be announced:

Export Credit Insurance Scheme

Niryat Rin Vikas Yojana (NIRVIK)

RODTEP (Remission of Duties or Taxes on Export Product) which will digitally refund local taxes to exporters and will replace the current Merchandise Exports from India Scheme (MEIS).

Levy of Health Cess at the rate of 5% ad valorem

Duty of customs levied on goods being medical & surgical instruments falling in Customs Tariff HSN 9018 to 9022. This is specified in fourth schedule.

Cess will be computed on value of goods imported

Goods exempt from Customs duty are also exempt from it.

Export promotion script(s) shall not be used for payment of it.

Customs

Administration of verification of Country of Origin

To be applied to goods imported under preferential tariff Free Trade Agreements

Proposed to set out procedure (Inserted new Section 28DA)

Importer shall require to furnish detail declaration in Certificate of Origin(COO)

Make a declaration that the goods qualify for the preferential duty treatment by virtue of their origin;

Furnish additional such further information, as may be prescribed in the rules.

Exercise reasonable care as to the accuracy and truthfulness of the information

If Country of origin criteria has not been met then the importer to furnish further information, consistent with the trade agreement

Preferential Treatment under FTA

Suspension of Preferential treatment (Inserted new Section 28DA)

Release of goods subject to furnishing security

Difference between the duty provisionally assessed and the preferential duty claimed

Commissioner may require deposit of duty instead of furnishing security

Authority may ask additional information in case of incomplete or non-specific information.

Upon receipt of necessary information, final order regarding eligibility of preferential treatment to be passed

Preferential Treatment under FTA

Refusal of Preferential Treatment

Request for Verification of Preferential treatment Within 5 years from the date of Claim

Refusal without Verification if

i. the tariff item is not eligible for preferential tariff treatment;

ii. complete description of goods is not contained in the certificate of origin;

iii. any alteration in the certificate of origin is not authenticated by the Issuing Authority;

iv. the certificate of origin is produced after the period of its expiry, and in all such cases, the certificate of origin shall be marked as ‘‘INAPPLICABLE’’."

Goods imported in contravention of the provisions shall be liable to confiscation.

Preferential Treatment under FTA

Customs

Changes in Customs duty to promote Make in India under Phased Manufacturing Programme (PMP) for Electric Vehicles:

Manufacturing Programme for Electric Vehicles From To

Completely Built Units of Bus and Trucks

(with effect from 01.04.2020)

25% 40%

Semi Knocked Down (SKD) units of bus, trucks and two wheelers

(with effect from 01.04.2020)

15% 25%

Semi Knocked Down (SKD) units of passenger vehicles and three wheelers

(with effect from 01.04.2020)

15% 30%

Completely Knocked Down (CKD) units of passenger vehicles, three

wheelers, two wheelers, bus and trucks (with effect from 01.04.2020)

10% 15%

Customs

Changes in Customs duty to promote Make in India under Phased Manufacturing Programme (PMP) for Cellular Mobile Phones

Manufacturing Programme for Cellular Mobile Phones From To

PCBA of Mobile phones (with effect from 01.04.2020) 10% 20%

Vibrator/Ringer of Mobile phones (with effect from 01.04.2020) Nil 10%

Display Panel and Touch Assembly (with effect from 01.10.2020) Nil 10%

Customs

Changes in Customs duty to in Electronics sector:

Product From To

Motors like Single Phase AC motors, Stepper motors, Wiper Motors etc. 7.5% 10%

Specified chargers and power adapters Applicable Rate 20%

Fingerprint readers for use in cellular mobile phones Nil 15%

Earphones and headphones Applicable Rate 15%

Chapter Heading Product From To

Household goods

and appliances

Tableware and kitchenware of porcelain or china, ceramic, clay, iron,

steel, copper and aluminium, glassware, padlocks, brooms, hand-

sieves, combs, vacuum flasks, etc.

10% 20%

Electrical

Appliances

Fans, food grinders/mixers, shavers and hair removing appliances,

water heaters, hair/hand drying apparatus, ovens, cookers, toasters,

coffee/ tea makers, insect repellents, heaters, irons, etc.

10% 20%

Footwear ▪ Footwear

▪ Parts of footwear

25%

15%

35%

20%

Furniture goods Seats, articles of bedding including mattresses, lamps, lighting,

illuminated signs, and other articles of furniture

20% 25%

Stationery items Filing cabinets, paper trays, binders, clips, staples, sign-plates, name

plates, numbers and symbols etc. made from base metal

10% 20%

Customs

Increase in custom duty rate

Chapter Heading Product From To

Toys Tricycles, scooters, scale models, dolls, etc. 20% 60%

Machinery ▪ Specified goods used in high voltage power transmission

project

5% 7.5%

▪ Railway carriage fans 7.5% 10%

▪ Compressors of refrigerators and air conditioners 10% 12.5%

▪ Commercial freezers 7.5% 15%

▪ Welding and plasma cutting machine 7.5% 10%

▪ Rotary tillers/weeder 2.5% 7.5%

Customs

Increase in custom duty rate

Category Raw materials

Product From To

Fuels, Chemicalsand Plastics

Very low sulphur fuel oil meeting ISO 8217:2017 RMG380 Viscosity in220-400 CST standards/Marine Fuel 0.5% (FO)

10% Nil

Calcined Petroleum Coke 10% 7.5%

Calendared plastic sheets used in manufacturing of smart cards 10% 5%

Polyester Liquid Crystal Polymers for use in manufacture ofconnectors

7.5% Nil

Precious Metals Platinum or Palladium used in manufacture of:a) Colloidal precious metals, inorganic or organic compounds ofprecious metal, amalgams of precious metalsb) Catalyst with precious metal or precious metal compounds as theactive substance

12.5% 7.5%

Spent Catalyst or Ash containing precious metal, subject tospecified conditions

12.5% 11.85%

Customs

Reduction in customs duty rate

AhmedabadArpit JainLevel 11, Tower B,Ratnaakar Nine Square,Vastrapur,Ahmedabad 380 015, IndiaEmail: arpit.jain@kcmehta.com

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