Analysis of Direct Tax changes introduced by the FM -CCI Talk

The Finance Minister recently announced various changes to Direct Tax while giving the details of the Economic Package. Various relaxations were given to the taxpayers in the form of extension of the statutory due dates, and reduction in the TDS and TCS rates. After the relaxations were announced by the FM people had several questions about the implications of such changes.

We at CAclubindia attempted to help the taxpayers understand the implications of the same. We asked CA(CS) Ujjwal Jindal the answers to various queries that we had received from the taxpayers. Mr. Ujjwal is a first class commerce graduate (B.Com) from Delhi University, an associate Company Secretary (ICSI) and a practicing Chartered Accountant (U J & CO.). He has relevant experience in the field of direct and indirect tax laws, corporate, secretarial and allied laws, capital markets, etc. and is also the Co-founder at UJ LEGAL LLP.

Here is what Mr. Ujjwal had to say about the changes introduced by FM in Direct Tax.

Ques 1. The TDS/TCS rates have been reduced by 25% for the period 14/05/2020 to 31/03/2021. Please tell us if this relaxation covers all the provisions of TDS. Also, what will be the possible implications of the reduction in TDS rate?

The Economic Package was focused on creating liquidity. Due to COVID-19 lockdown, the money supply in the entire economy has squeezed. The rotation of money has stopped as the businesses are shut and people are locked at their homes. Thus, there was a pressing need to bring back money into the economy to boost back the entire system.

The Finance Minister announced a TDS and TCS rate reduction by 25% of the existing rates, to infuse liquidity to the tune of Rs. 50,000 crore.

The press release to give effect to this reduction came out on 13th May, 2020 (https://pib.gov.in/PressReleseDetailm.aspx?PRID=1623745) which highlighted the reduced rates of TDS and TCS that shall be applicable with effect from 14th May 2020 to 31st March, 2021.

Let's first analyze the reduction in the TDS rates i.e. Tax Deducted at Source.

The TDS rates, on majorly all types of payments have been reduced viz. interest on securities, dividends, payment to contractors, insurance commission, brokerage, rent for immovable property/plant and machinery, transfer of immovable property, fee for technical or professional services, etc.

This implies that if the existing rate of TDS, say, on payment of interest by a bank to a deposit holder was 10%; it would now be 25% less i.e. 7.50%.

This would lead to more money in the hands of the deposit holder (as less TDS has been deducted by the bank on the interest so paid) and consequently more liquidity in the economy.

However, it's pertinent to note, that all the payments have not been extended the benefit of reduced TDS deduction. The TDS under the following categories of payments shall continue to be deducted at the existing rate, as provided under the Income Tax Act, 1961:

Now, coming to TCS i.e. Tax Collected at Source, all the major specified receipts have been extended the benefit of reduced rate of tax collection. Tax would therefore be collected at a 25% lesser rate than the exiting rate on receipts from sale of tendu leaves, alcoholic liquor, timber, scrap, minerals, motor vehicles, etc.

The benefit of reduced rate of TCS is also applicable on receipts from sale of goods in excess of Rs. 50 lakh from a buyer, as provided under section 206C(1H), introduced by the Finance Act, 2020 w.e.f. from 1st October, 2020. The applicable rate shall now be 25% less than the existing rate of 0.10% i.e. 0.075%

However, the benefit of reduced rate of TCS has not been extended to any amount received for overseas remittance and for receipts from sale of tour packages as provided under section 206C(1G), introduced by the Finance Act, 2020 w.e.f. 1st October, 2020. Therefore, wherever applicable, TCS on the above receipts shall be collected at the existing rate of 5%.

Further, the reduced rates of TDS and TCS shall be applicable on payments/receipts made/collected to/from RESIDENTS only. Any payments/receipts made/collected to/from non residents/foreign entities, etc. shall attract TDS/TCS at full rates as provided under the Income Tax Act, 1961.

Also, there shall be no reduction in rates of TDS or TCS, where the tax is required to be deducted or collected at higher rate due to non-furnishing of PAN/Aadhaar. For example, if the tax is required to be deducted at 20% under section 206AA of the Income-tax Act due to non-furnishing of PAN/Aadhaar, it shall be deducted at the rate of 20% and not at the rate of 15%.

IMPORTANT NOTE - The Economic Package has provided a reduction in the rates of TDS and TCS only. Tax incidence on the total income of a person continues to remain the same. The reduction in TDS and TCS rates is a onetime temporary relief, in order to provide more funds at the disposal of the taxpayers due to liquidity crisis.

IMPLICATION OF REDUCTION -

A person is required to pay advance tax if his self assessed tax liability is Rs. 10,000 or more.

As mentioned above, the incidence of tax on the total income of a person continues to remain the same. The tax deposited by way of TDS and TCS on a person's behalf has been reduced by 25% by the economic package. Therefore, a higher self assessment tax shall now be payable, which implies, that the advance tax provisions may apply in such a case and a person shall be liable to deposit advance tax in quarterly installments.

If the provisions of advance tax are ignored, interest and penalty under section 234B and 234C can apply to a person at the time of filing of income tax return for late deposit of taxes.

Therefore, all the provisions should be carefully analyzed in order to avail the maximum benefit and avoid any liabilities by way of interest, penalty or alike.

Ques 2. Any reasons why salaried individuals have not been give any relaxation in TDS deduction?

The basic objective of the economic package was to infuse liquidity. The rates of TDS and TCS were reduced to release liquidity to the tune of Rs. 50,000 crores.

However, such benefit is not extended to the salaried individuals.

Annoying or dis satisfactory, it may sound, but the ministry had certain logic behind it.

To understand this in a better way, let's dissect our discussion into 2 parts where:

Now, the 1st part remain completely unaffected, with regard to liquidity, as they continue to receive the same amount of salaries as they were receiving before the COVID-19 breakdown. The TDS rate cut for them was thus undesirable.

For the people falling under 2nd part, the salaries have been slashed by 15-20%. However, this reduction is made only for the people who were earning higher salaries, say, 20 lakh p.a. or above. Thus, they end up paying proportionate (less) tax, on their reduced salaries, in the form of TDS and the liquidity remains unaffected and thus there was no need for any rate reduction.

Secondly, TDS on salaries is deducted on slab rates as applicable to an individual. There is no defined rate of TDS for salary payments. A reduction in the TDS rate would have made the computation of tax deduction complex as each individual receive different salary in an organization and their tax computation differs. A reduction in TDS by 25% would have made the computations very difficult.

Thirdly, lesser TDS reduction would have an implication of higher payment of self assessment tax by the individual. This would have resulted in a higher payment of tax at the end of the year by the individual. Also, as mentioned in the answer to question 1, the provisions of advance tax could have also applied on such individual, ignorance of which would attract interest and penalty under section 234 of the Act.

Lastly, we all understand that the government is in a big trouble. The GDP has crashed, the economy is in a bad shape, businesses are shut, there is a widespread liquidity crunch, no GST/tax collections, etc. There are no big resources available with the government to finance the show at this juncture. Giving away all the finances by way of reliefs is not a good idea.

Thus, keeping in view the above, the TDS rates on salaries have not been reduced.

IMPORTANT NOTE - For other payments and receipts, except salaries, only the TDS/TCS rates have been reduced. The tax incidence on the total income continues at the same rates as were applicable before. There has been just a deferment in collection of taxes; however the total liability for tax payment is the same. This is a just a temporary move to infuse liquidity in the hands of taxpayers.

Ques 3. How has the definition of MSMEs changed?

The Micro, Small and Medium Enterprises are also known as the MSMEs which came into existence by the MSME Act passed on 2nd October, 2006.

Setting up a new industry or business is a big challenge. The government in 2006 came up with the concept of SMALL IS BEAUTIFUL by passing the MSME Act which gave an opportunity to the budding entrepreneurs who had ideas but lacked resources. By MSME government wanted to turn job seekers into job providers. These enterprises are given various benefits by way of easy collateral free loans at concessional rates, tax rebates, subsidies, a 45 days credit recovery guarantee, etc.

The MSMEs form the backbone of Indian economy today.

To illustrate them in a better way, let's take an example of Hero Motocorp (erstwhile Hero Honda) which assembles/manufactures motor bikes. Now, Hero procures all the parts and spares which are required to finally manufacture a motor bike from different enterprises that are MSMEs, each producing a specific component.

These enterprises are of utmost importance and without their working the economy could not grow.

These enterprises are badly hit by the COVID-19 breakdown.

The Finance Minster came out with various reliefs for MSMEs in the economic package. There was a specific section in the package for them because of their vital importance in the economic growth.

Among various other benefits that were extended to the MSMEs, a new definition for them was also provided.

Presently MSMEs are classified on the basis of investment in plant and machinery (Manufacturing Enterprises) or investment in equipment (Service Enterprises).

The announcement -

• revised this investment limit upwards
• added an additional criteria of turnover for their classification
• removed the distinction between manufacturing and service enterprises

This was done on the ground that lower thresholds in MSME definition have created a fear among MSMEs of graduating out of the benefits and hence killing their urge to grow. Also, there has been long pending demand for revisions in the definition of MSMEs.

The table below demonstrates the pre and post amendment investment/turnover criteria for classification of MSMEs:

This amendment increased the investment limit in a big way! This was really beneficial for the existing MSMEs. But why was additional turnover criteria added? What would be the implication of this addition?

Let's analyze this now.

The MSME Act came out in 2006 and gave the MSME classification based on investment in plant and machinery or in equipment. From 2006 to 2020 i.e. 14 long years, these limits have never been revised.

During the very first term of BJP's government headed by PM Shri Narendra Modi, the government came up with an MSME Amendment Bill, 2015 which had revised criteria of MSME classification based on Turnover. This Bill was reintroduced in 2018 but was not passed due to various objections and protests. This bill provided for the following classification criteria:

Due to lower turnover limits the bill was not passed in 2018.

However, the economic package added the criteria for turnover. The limits so prescribed are lesser than those provided by the Bill, which was not passed earlier. This is very unreasonable!

Let's understand this with an example. People working under the jewellery/diamond sector have investment say of Rs. 10 crores and turnover running into multiple crores. These businesses were earlier operating as Medium Enterprises. However, the economic package has added an additional criterion of turnover. Now, this enterprise, in order to stay in the classification of MSME, has to satisfy, simultaneously, both the conditions of investment and turnover. If its investment is within limit but turnover goes beyond the limit i.e. 100 crores, it would not be classified as an MSME and no benefits or advantages as provided under the MSME Act shall accrue to it anymore. This is the biggest disadvantage of the composite criteria so added in classifying MSMEs.

Moreover, this could even lead to tax evasion and window dressing as the enterprises would now re-evaluate or re-design their financials in such a way that their turnover is within the revised limit as provided by the economic package, to continue, enjoy the benefits provided to MSMEs.

This is a kind of irregularity that needs action by the government.

Ques 4. What are the various extensions announced by the FM under Direct Tax in the Economic Package?

This lockdown has made everything non operational. The businesses are shut, people are locked at their homes, there is no commercial activity and the entire world economy is at its all time low!

Considering the above, the economic package, in order to ease the burden of compliances on various stakeholders has extended the time frame for:

1. Filing Return of Income and Tax Audit Report for F/Y 2019-2020 i.e. A/Y 2020-2021

2. Assessments

As the dates of filing return of income have been extended the assessment period is extended as well.

3. Vivad se Vishwas Scheme

The scheme was introduced by the Budget 2020 and came in form of an Act in March, 2020. Since its introduction this scheme has remained in Vivads with regard to its due date.

Earlier the last date for dispute settlement between the taxpayer and the department, without any interest and penalty, was 31st March, 2020 but as the scheme was notified late, it was extended to 30th June, 2020.

Again, the economic package has extended this date to 31st December, 2020. Therefore, now taxpayers can settle their existing disputes without payment of any additional amount by 31st December, 2020.

Ques 5. Taxpayers have a lot of confusion about how can the tax audit date fall before the due date to file the Income Tax Return. What do you have to say on that?

The Income Tax Return and Tax Audit Report, before Budget, 2020 were to be filed by 30th September, in cases where Tax Audit was applicable.

However, Budget 2020 suggested an amendment in this regard.

To ensure ease of return filing, the government has enabled pre-filling of information in the income tax returns. Now individuals have to just login to the income tax e-filing portal, click on respective ITR and all the details are pre-filled based on TDS deducted, etc. In this way, the individual could easily check the pre-filled information and file the return. This takes not much time!

However, in case of people who had income from business or profession, where tax audit was applicable, the due date for filing tax audit report and income tax return was both same i.e. 30th September. The information could therefore not be pre-filled into the income tax returns of the assessees and they could not file their income tax returns with much ease.

Thus, to enable pre-filling of returns in case of persons having income from business or profession, it was required that the tax audit report may be furnished by the said assessees at least one month prior to the due date of filing of the return of income.

The Finance Act, 2020 therefore amended various sections of the Act to give effect to the above.

However, the doubt which came in the minds of all the professionals was that whether these provisions were made effective from F/Y 2020-21 as they came by Budget 2020 or from F/Y 2019-20 as the economic package mentioned different filing dates for income tax return and tax audit report.

Let's analyze this in some detail.

The memorandum to the Finance Bill, 2020 clearly mentioned that "these amendments will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 (i.e. F/Y 2019-20) and subsequent assessment years".

Further, the Finance Act, 2020 states that "sections 2 to 104 shall come into force on the 1st day of April, 2020" which covers section 44AB (that provides for furnishing/filing tax audit report).

Also, the economic package that came by a press release states that "Due date of all income-tax return for F/Y 2019-20 will be extended from 31st July, 2020 & 31st October, 2020 to 30th November, 2020 and Tax Audit from 30th September, 2020 to 31st October,2020".

By reading the above collectively, one after the other, we can infer that these provisions are effective from 1st April, 2020 and would apply to F/Y 2019-2020 as the return filing date for 2019-20 lies in the year 2020-21 i.e. the A/Y.

The Tax Audit report was required to be filed for F/Y 2019-20 on 30th September, 2020 i.e. one month before the date of income tax return filing which was made 31st October, 2020.

The economic package has now extended these dates by 1 month to 31st October, 2020 and 30th November, 2020 respectively.

The author can also be reached at connect@ujlegal.com

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