Impact of amendments by Finance Act, 2020 - Effective from TODAY (1st April 2020)

Amidst the pandemic outbreak of COVID19, it is necessary that we keep the business operations and vital functions on-the-go from the comfort of our homes to the extent possible and feasible. While we are still adjusting to the fact that the world around is facing major economic downtrends, we should also be appreciative of the various measures that governments are taking to ease the sailing in these turbulent waters. While we are simultaneously tackling more than a handful of problems, we should also be aware of the implications of Finance Act, 2020, on business organizations, which largely will be effective from today viz. 1st April 2020.

On 27th March, the Finance Bill, 2020, with some amendments, received the President’s assent and has now become the Finance Act, 2020. This article tries to highlight only such provisions contained in Finance Act, 2020, that needs immediate heed by Companies. Accordingly, Finance Act impacts on individuals, banks, trusts, non-residents, LLPs, Firms, MF houses, etc. have been kept outside the purview of this article. This article also enables the readers to understand the major changes made to the originally presented budget proposals on 1st Feb 2020 via the Finance Act, 2020, to the extent it affects Companies. Organizations need to gear up and implement the following changes effective today.

A. Dividends

·      No need to pay Dividend Distribution Tax on dividend declared or distributed or paid, whichever earlier, if such date falls on any day from today (Section 115O).Example - there will be no tax liability in respect of dividend received by a shareholder after 1st April, 2020, if such dividend has been distributed by the company before 1st April, 2020 and DDT has been paid by the company while distributing such dividend.

·      TDS applicable on cases covered above at the rate of 10%

·      Dividend pass-through provisions applicable to avoid cascading effect

·      Change made by Finance Act, 2020 - TDS rate on payment of dividend to non-resident and foreign company is 20%. The Finance Bill had not provided any specific rate of TDS in respect of such dividends.

B. Changes to various TDS provisions

·      TDS at 2% on Fees for Technical services: TDS at 10% under Section 194J, hitherto, was applicable for both professional services and fees for technical services. Now, businesses need to be careful to bifurcate such expenses as while the former continues to attract 10% TDS, the fees for technical services shall attract a reduced rate of 2%. Some examples of professional fees are fees paid to a chartered accountants, lawyers, doctors, engineers, architects, advertisers, interior decorators, etc. Technical services would include the rendering of managerial, technical or consultancy services. The terms managerial, technical and consultancy are not defined anywhere in the Income Tax Act, 1961. In the absence of definition under Income Tax Act the common and general meaning of these terns should be taken into consideration. This could be a potential area for complexities if not interpreted properly.

·      Deferring of the deduction of TDS on ESOP by an employer: In case of employees of start-up registered employers, the incidence of tax at source shall be he earlier of expiry of 48 months from end of relevant AY, date of sale of ESOP or the date on which such employee ceases to be an employee of such employer.

·      Section 194C Works Contract: This Section provides for TDS in case of any works contract even when the material is being purchased from other party, but such party is an associate under Section 40A(2)(b). Previously, TDS was applicable only if the material is supplied by the same party who is engaging the contractor and not in other situations.

·      Applicability of TDS provisions: Though Tax audit applicability limit has been increased to Rs. 5 Crores wef FY 20-21, the limit for TDS provisions applicability shall continue to be Rs. 1 Crore or Rs. 50 Lakhs (goods and services respectively).

·      TDS on Cash withdrawals under Section 194N: TDS at 2% shall be applicable on withdrawals of cash from Bank or Co-operative Bank or Post Office if such withdrawal exceeding Rs. 1 Crore in aggregate during the year. Finance Act, 2020, has amended this to further state that in case of a person who has not filed the returns for preceding 3 FYs then tax will be deducted at 2% on withdrawals exceeding Rs 20 lakhs (and not Rs. 1 Crore) and at 5% on withdrawals exceeding Rs 1 Crore. This new change has been made applicable from 1st July, 2020.

C. Changes to TCS provisions

·      In case of any persons requiring outward remittances under Liberalized Remittance Scheme exceeding Rs. 7.5 Lakhs through an authorized dealer of forex, then the latter is required to collect TCS at 5%.

·      Every seller is required to collect a tax at source amounting to 0.1% of the value of goods being sold if it exceeds Rs. 50 Lakhs. This provision does not apply in cases where TDS under other provisions is already applicable. This provision is applicable only for those sellers whose turnover or gross receipts exceeds Rs. 10 crores in the previous FY.

Relief through Finance Act, 2020 – TCS exemption on Export Sales and relaxation has been provided on the date of applicability, that is, TCS on foreign remittance & on Sale of Goods will be applicable from 1st October, 2020, as against 1st April, 2020, proposed earlier.

·      All tour operators are now required to collect tax at source at 5% on any amount received from his customers on overseas tour package.

D. Tax Audit and Income Tax Return filing

·      The Finance Act 2020 has brought in an increased threshold limit of Rs. 5 Crores for tax audit applicability under Section 44AB for the persons carrying on business. This comes with a condition that the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and the taxpayer’s cash payments are limited to 5% of the aggregate payments.

·      The due date to file the income tax return, where the due date was 30th September, is now extended to 31st October.

E. Impact on Start-ups

·      Section 80-IAC deduction: Presently, this beneficial Section allows a deduction of amount equal to 100% of the profits and gains derived from an eligible business by an eligible start-up for 3 consecutive assessment years out of 7 years, at the option of the assessee, subject to certain conditions. Now, the said 7 years is increased to 10 years. Also, the total turnover of companies, to claim benefit under this Section has been increased from Rs. 25 Crores to Rs. 100 Crores.  

F. Impact on Ecommerce Industry

·      TDS at 1% on payments to Ecommerce participants: A person owning, operating or managing ecommerce platform shall withhold tax on sums paid to persons selling goods through such platform at the rate of 1% (Section 194O). This provision shall apply only for those ecommerce participants whose value of the goods or services in a financial year exceeds Rs. 5,00,000. This is subject to amended Section 206AA at 5%.

The applicability of withholding tax provisions on E-commerce transactions is deferred from 1st April, 2020, to 1st Oct, 2020.

·      Finance Act, 2020, has enhanced the scope of Equalization Levy to cover consideration received / receivable for following e-commerce supply / service made on or after 1 April 2020 - Online sale of goods owned by the e-commerce operator, or online provision of services provided by the e-commerce operator, or online sale of goods or provision of services or both, facilitated by the e-commerce operator, or any combination of above-mentioned activities.