We recently witnessed that the Taxation Laws (Amendment) Act, 2019 gave a boost to the corporate sector by reducing the corporate tax rates for new manufacturing companies incorporated from October 1, 2019 and existing companies to 15% and 22% respectively (excl. surcharge and cess). Various measures have been introduced over the years to stimulate the growth of start-ups in India. Further, issues in connection with angel tax issue were addressed in the previous Budget.
Finance Minister Nirmala Sitharaman in her Budget speech today has introduced another batch of reforms to provide an impetus to the corporate sector. Some of the major reforms are as under:
Abolition of Dividend Distribution Tax (DDT)
One of the biggest expectations of the corporate sector was abolition of DDT. It was originally introduced in 1997. However, it was scrapped in 2002 only to be re-introduced again in 2003 on grounds of ease of tax administration.
“History repeats itself”. History has indeed repeated itself thereby leading to abolition of DDT. As per the Finance Bill, 2020, all types of dividend income viz. dividend income received from mutual funds and equity shares will now be taxable in the hands of taxpayers. With the proposed amendment, India will move to the classical system of taxing dividends in the hands of shareholders.
Consequential amendments on account of abolition of DDT are as under:
- No deduction other than interest expense shall be allowed from such dividend income and such deduction shall not exceed 20% of dividend income.
- Withholding tax implications will arise in the hands of companies paying dividends to its shareholders in excess of INR 5,000/-.
- In order to remove cascading effect, it has been proposed to provide deduction of an amount of income by way of dividends received from such other domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company. However, it is imperative to note that dividends received from foreign companies will still be taxed and no deduction shall be allowed.
- Income of individual taxpayers will go up, thereby impacting the individuals who are covered in the highest tax rates (as per slabs) applicable to an individual.
Companies under acquisitions will have to evaluate the methods to repatriate cash from their subsidiaries by comparing dividends with buyback or capital reduction as prescribed methods. The financial model on acquisition will have to bake in such tax.
Concessional rate extended to power business
The benefit of concessional rate of 15% has also been extended to the business of generation of electricity, as a response to representations received from various stakeholders.
Rationalization of provisions applicable to startups
To rationalize the provisions applicable to startups, it is proposed that an eligible startup be allowed a deduction of 100% of its profits for three consecutive assessment years out of 10 (from 7 years) at the option of taxpayer from the year of its incorporation.
Further, the turnover criteria has also been streamlined and increased to Rs 100 crore (from Rs 25 crore) in any previous year from the year of its incorporation.
Employee Stock Option Plan (ESOP) of startups
An integral part of the compensation structure of employees in start-ups are ESOPs. ESOPs help startups to employ talented employees at lower salaries, which are taxed as perquisite on exercise of option by employees and as capital gains at the time of sale.
As perquisite tax is required to be paid by employees on exercise of option, they face challenges in terms of cash available to discharge tax obligation.
To relax the burden of payment of taxes by employees of eligible start-ups or withholding tax by startups, it is proposed that withholding tax or payment of tax on such perquisites by employees, should be made within 14 days as under:
- after the expiry of 48 from the end of the relevant assessment year; or
- from the date of sale of such specified security or sweat equity share by the taxpayer; or
- from the date on which the taxpayer ceases to be the employee of the person;
This amendment will incentivize, attract and retain high potential talent at startups in order to enable these enterprises to accelerate on their growth path by leveraging the knowledge and experience of such rainmakers.
Withholding tax on e-commerce transactions
In order to widen and deepen the tax net by bringing participants of e-commerce within tax net, Finance Bill, 2020 has proposed to levy withholding tax at the rate of one per cent. Such tax will be deducted by e-commerce operator at the time of credit / payment of amount of sale of goods or provision of service or both to the account of e-commerce participant
Such tax at one per cent is required to be deducted on the gross amount of such sales or service or both. Such deduction shall be required only if the gross amount does not exceed INR 5 lakh.
This will certainly dampen the investment atmosphere for enterprises in this sector which were henceforth on a roll.
Abolition of DDT is a welcome amendment for the corporate sector, thereby leading to greater liquidity in the hands of corporates for expansion of business. However, impact on other shareholders (resident as well as non-residents) will need to be considered.
Further, rationalization of the provisions of startups will promote entrepreneurship, thereby aiding the startup ecosystem.
We will have to wait and watch whether the reforms introduced till date and proposed in the Finance Bill, 2020 would really be sufficient for the corporates to lift spirits and the sentiment in the economy.
Anil Talreja is partner, Jatan Shah and Vishal Yeole are senior managers, and Ankit Panchal is manager at Deloitte Haskins and Sells LLP.