Changes introduced by Budget 2020 which require clarity in Budget 2021

Photo for representational purpose

Budget 2020 introduced several changes in the Income-tax provisions. Some of most discussed and debated ones being scrapping of dividend distribution tax (DDT) regime, expansion of tax collection at source (TCS) provisions on sale of goods and expanding the scope of digital tax provisions.

Over the past one year stakeholders have highlighted few concerns on the interpretational aspects and practical challenges in complying with these new provisions and changes. It is expected that in the upcoming Budget 2021, the government will address these concerns. Some of the key issues that require clarity include:

Treaty benefits for dividends

Budget 2020 discarded DDT and adopted the classical system of dividend taxation. Accordingly, dividend which was earlier exempt in the hands of the shareholders, now becomes taxable. This is a welcome move as, non-resident shareholders can now take benefit of the tax withheld on the dividend income, in their home country.

Non-residents can also claim benefit of lower tax withholding rates given in the applicable tax treaty, on meeting specified conditions. One such condition in case of dividends is meeting the beneficial ownership test. It is pertinent to note that neither the Income-tax Act, 1961 (the Act) nor the tax treaties define or clarify as to what constitutes beneficial ownership.

Though, few judicial precedents and the OECD literature provides some guidance on this matter, however, at times it becomes difficult to apply these with certainty in some cases, based on the particular facts and circumstances. Particularly, in case of fiscally transparent entities, multi-tier structures and ultimate shareholders residing in different jurisdictions, taxpayers have experienced some interpretation challenges.

Also, at the tax withholding stage, at times payers are in dilemma as to whether a declaration from the recipient that he is beneficial owner should suffice or do they need to go beyond the declaration i.e. to obtain further documentary evidence.

Therefore, it is desirable that suitable clarifications are issued on this subject to remove ambiguity and avoid any unnecessary potential litigation.

Credit for inter-corporate dividend

Post abolition of DDT, provisions for credit of inter-company dividend were introduced, to avoid double taxation of the same income. These provisions permit deduction for inter-corporate dividends received by a domestic company in case such company further declares dividends to its shareholders. However, clarity is required as regards:

' Amount eligible for deduction i.e. whether the gross dividend received or the net dividend after considering permissible deductions under the Income-tax Act should be considered.

' In certain cases, dividend received by an Indian company from a foreign company is subject to tax at special rates. In such cases there may be a difference in the corporate tax rates and special rates. This may lead to some challenge with the tax authorities on computation of this deduction.

' Whether any deduction for dividend received in any earlier year can be claimed in any subsequent year when the company actually distributes dividend.

TCS on sale of goods

As per the changes introduced by Budget 2020, TCS is required to be collected by the seller on consideration received on sale of any 'goods' under specified conditions.

To address stakeholders' concerns relating to these provisions CBDT issued some clarifications last year. It inter-alia clarified that transactions in securities which are traded through recognized stock exchanges will be outside the purview of these provisions. Rationale cited was that in these transactions there is no one to one contract between the buyers and the sellers.

However, the issue remains whether unlisted shares /off-market sale of shares particularly which form part of the seller's investment portfolio would get covered. As the term "goods" is not defined under the said provisions, reliance is placed on other laws and judicial precedents. It would be good to review these provisions and issue necessary clarifications.

Equalization levy

Budget 2020 also expanded the scope of equalization levy ('EL 2.0') w.e.f. April 1, 2020, by covering the non-resident e-commerce operators. Many of the key terms used in these provisions which define the scope of this levy are broadly worded and need clarification. It was also clarified that in case of a transactions which are covered by this levy, there would be no requirement of withholding tax. However, this exemption was made effective from 1 April 2021. The issue of simultaneous applicability of the EL 2.0 and the withholding tax provisions in financial year 2020-21, needs to be addressed.

Professional services v. Technical services

In a welcome move, the Budget 2020 reduced the Tax Deduction at Source (TDS) rate for Fees for Technical Services (FTS) to 2 per cent. However, TDS rate on Fee for Professional Services (FPS), continues to be 10 per cent. The definition of FTS and FPS under the Act is overlapping in many cases. This poses challenges in correct application of these provisions and could result in disputes and litigation.

Therefore, clarity is required on this issue. It may be a good idea to reduce the TDS rate on all such cases to 2 per cent to avoid any issues at a later date. Further, it may also be clarified whether professional services can be carried out by a company, as there are conflicting judicial views on this issue.

Taxability of excess contribution to retiral funds

Budget 2020 amended provisions relating to taxation of salary to provide that employer's contribution to recognised Provident Fund, National Pension Scheme or approved Superannuation Fund, which is more than Rs 7.5 lakhs in aggregate, will be taxable in the hands of employees as 'perquisite'. Further, any annual accretions by way of dividend /interest on such taxable contributions will also be taxed.

However, the manner /mechanism for working out these details has not been prescribed. Suitable clarifications provided at this juncture will eliminate subjectivity and reduce ligation in future.

To conclude, clarity on the above issues would help both taxpayers and tax administration. Most of these being revenue neutral measures should be considered on priority to avoid any avoidable disputes and litigation. Further, with the Finance Minister promising a "Budget like never before" one hopes that these issues which have troubled the taxpayers for past one year will get addressed in the upcoming Budget.

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