News By/Courtesy: Gunjan Dayal | 28 Jun 2020 22:21pm IST

HIGHLIGHTS

  • Finance Bill 2020 has introduced some sweeping reforms to the overall direct tax system.
  • Need to review the shareholding structure and re-evaluate whether the more appropriate vehicle is a corporate holding structure.
  • Fascinating to see what happens when taxes and interest have already been paid, depending on the conflict.

There was some debate about the adjustments that will be brought in before the budget as often happens. Many of the goals were unworkable and failed to materialize. That said, the Finance Bill 2020 has introduced some sweeping reforms to the overall direct tax system, which will have an effect on individual and corporate taxes, and will change the tax environment of non-residents. Perhaps the most significant change regarding corporate taxation is the abolition of the dividend distribution tax (DDT). The existing DDT of about 20 percent charged by dividend-paying companies is replaced by a tax in the recipients' pockets. The dividends distributed by companies will presumably be higher now. The higher dividend thus received would be paid in the recipient's pockets — an individual shareholder whose effective tax rate (ETR) is 20% or less will be better off while an individual recipient whose ETR is as high as 43% will end up paying higher tax. In the recent past, several promoters have engaged in succession planning exercise and have moved their shareholding into a trust. The overall discount rate for these dividends will be the taxes. There will be a need to review the shareholding structure and re-evaluate whether the more appropriate vehicle is a corporate holding structure, LLP, or trust. Dividends earned from international shareholders should be subject to applicable treaty rates and could thus be much better off. The applicability of the tax treaty would, however, depend on the new provisions that do not allow advantages in the case of contract shopping. The one clause that affects individuals which is the taxation of non-residents at its heart extension of the taxation ambit. First, the period from 182 to 246 days that a person needs to be out of India to qualify as a non-resident has been extended. More importantly, if a person is a citizen of India and is not liable to tax on account of residency in a foreign country, etc., the person would be treated as a resident of India and would be liable to tax on global income here. Although the provisions may have been meant to tax "stateless" individuals, where they are not expected to pay tax, the way the laws are worded may extend to Indians who are citizens of, say the UAE. I am sure that the words "tax-friendly" will come up for interpretation in court, but the Task Force 's intention to propose this move appears to be to tax even such citizens. It could potentially generate demand from non-residents for international passports. The final issue I want to tackle is the proposed dispute resolution scheme. While we are awaiting the contours of the scheme, the broad outline seems to be that where a person is litigating with the tax office, the person can choose to settle the dispute by agreeing to pay the principal amount and not be subject to interest or penalty levies. The scheme would be open until March 31, 2020, demonstrating the government's desire to gather immediate revenue to bridge the budget deficit. Post-March 31, on payment of taxes plus "some" interest, one can opt to be governed by the scheme until June 30th, 2020. It'll be fascinating to see what happens when taxes and interest have already been paid, depending on the conflict. The plan may be appealing where a matter has long been pending in litigation and one has a future interest obligation that is far outside the tax liability. The scheme may encounter fair success, depending on the structure. The Finance Bill extends the scope of tax collected at source to overseas travel and TDS to e-commerce transactions, changes pricing provisions, and has plenty of other changes, the delight of a tax practitioner.

THIS ARTICLE DOES NOT INTEND TO HURT THE SENTIMENTS OF ANY INDIVIDUAL, COMMUNITY, SECT, OR RELIGION ETCETERA. THIS ARTICLE IS BASED PURELY ON THE AUTHOR'S PERSONAL VIEWS AND OPINIONS IN THE EXERCISE OF THE FUNDAMENTAL RIGHT GUARANTEED UNDER ARTICLE 19(1)(A) AND OTHER RELATED LAWS BEING FORCE IN INDIA, FOR THE TIME BEING.

Section Editor: Pushpit Singh | 28 Jun 2020 22:30pm IST


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