Direct and Indirect Tax Reforms in Budget 2020

CA Vivek chaudhary | Last updated: 01 August 2020

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Quick Summary

Budget 2020 introduced significant direct and indirect tax reforms aimed at simplifying the tax system and boosting domestic industries. For direct taxes, new optional tax slabs were introduced for individuals, with a significant reduction in rates for higher income brackets, alongside the removal of numerous deductions and exemptions. Indirect tax changes included increased customs duties on items like footwear and electric vehicles to encourage local manufacturing, and higher excise duties on tobacco products. The budget also featured initiatives like the 'Vivaad se Vishwas' scheme for settling tax disputes and increased turnover limits for startups.

Union Budget 2020-2021 key Highlights:

Budget 2020 Tax Reforms: Direct and Indirect Changes

Direct Tax:

1. New Tax slabs for Individuals, HUF, AOP, BOI, AJP are optional. Assessee can also opt for old regime with exemptions and deductions. New slabs are: -

Those earning up to Rs 5 lakhs are exempt from paying taxes.
10% tax for everyone earning Rs 5-7.5 lakhs against the current 20%.
15% tax for everyone earning Rs 7.5- 10 lakhs against current 20%.
20% tax for everyone earning Rs 10-12.5 lakhs against current 30%.
25% tax for everyone earning Rs 12.5-15 lakhs against the current 30%.
30% tax on earning more than Rs 15 lakhs get no exemptions.

2. To simplify the tax system and lower rates approx 70 deductions and exemptions have been removed.

3. Dividend Distribution tax (Section 115O) Completely abolished. Now the person who is receiving the dividend will be liable to pay tax on it as per their respective rates.

4. Limit of tax audit under section 44AB has been increased to 5 Crore for those whose cash receipt does not exceeds 5% of turnover.

5. rate on co-operative societies has be reduced to 22% plus 10% surcharge plus 4% cess against 30% plus surcharge and cess.

6. Vivaad se vishwas scheme. Tax payers are now only need to pay disputed tax without any interest and penalty, if they availed for the scheme up to 31st March 2020.

7. Faceless appeals will be allowed.

8. 15% new concessional rate for power generation companies.

9. 100% tax exemptions to foreign funds on investments in infrastructure with a minimum block in of 3 years.

10. Increase in turnover limits for startups from current 25 Crores to 100 Crores. Startups can now also claim deduction for 3 consecutive years up to 10years.

11. To reduce the tax burden on ESOP’s to be deferred by 5 years or till they leave the company or when they sell w.e.e.

12. Instant online allotment of PAN on the basis of aadhar.

13. Aadhaar based verification introduced to weed out dummy units.

14. Registration of Charitable institutions to be made completely online. With this donation made is prefilled in the returns.

Indirect Tax:

Customs duty raised on footwear to 35% against 25% and on furniture to 25% against 20%. (“To promote the domestic industry of these products”).
Excise duty raised on cigarettes and tobacco. ( “To reduce the consumption of these harmful products”).
Customs duty on electric vehicle raised to 40% against current 25%. (“To promote local manufacturing in EV sector”).
Lower customs duty on certain inputs, chemicals, plastics, paper etc.
Higher customs duty on certain goods to boost domestic industries.

Investments:

Foreign Portfolio Investment(FPI) limits in corporate bonds is increased to 15% against previous limit of 9%.
Government to sell part of its holding in LIC through IPO.
Governments double the disinvestment targets for next fiscal at Rs.2.1 Lakh crore.

General Points:

India now world’s 5th largest economy.
Govt loans has been reduced to 48.7% of GDP in March 2019 from 52.2% in March 2014.
India to host G-20 presidency in 2022.
Govt. proposes to setup recruitment agencies.
6000 Crore will be provided Bharat Net (Fiber to Home).
National security is the topmost priority.
India Step up efforts to tackle climate change.
Gross annual ratio (GAR) of girls is higher than boys (Tremendous impact of Beti Bachao Beti Padhao).
Govt incentivize farmers to go solar.

FAQ :

For individuals, the new optional tax slabs are: up to Rs 5 lakhs exempt, 10% for Rs 5-7.5 lakhs, 15% for Rs 7.5-10 lakhs, 20% for Rs 10-12.5 lakhs, 25% for Rs 12.5-15 lakhs, and 30% for earnings over Rs 15 lakhs, with no exemptions in the highest bracket.

The Dividend Distribution Tax (Section 115O) was completely abolished. Now, the individual receiving the dividend is liable to pay tax on it at their respective income tax rates.

Customs duty was raised on footwear to 35% (from 25%) and on furniture to 25% (from 20%). Additionally, the customs duty on electric vehicles increased to 40% (from 25%) to promote local manufacturing in the EV sector.

The 'Vivaad se Vishwas' scheme allows taxpayers to pay only the disputed tax amount without any interest or penalty, provided they availed the scheme by 31st March 2020.

Yes, the turnover limit for startups eligible for tax benefits was increased from Rs 25 Crores to Rs 100 Crores. Startups can also now claim deductions for three consecutive years within a 10-year period.

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