One of the most prominent aspects of the Narendra Modi government’s Budget 2020 is that it caters to the demand side of the Indian economy by reducing tax incidents on taxpayers, thereby incentivising consumption. Some of the key reforms include giving incentives to undivided families, resident cooperative societies, startups; and widening the scope of TDS on e-commerce transactions.
A bonanza for income earners
With the aim to stimulate growth, simplify tax structure and bring ease of compliance, the Modi government’s Budget 2020 seems to be a bonanza for income earners of up to Rs 15 lakh. It addresses those sections of taxpayers that are maximum in number and most vulnerable in terms of tax incidence. Finance Minister Nirmala Sitharaman has proposed a simplified personal tax regime by reducing tax rates at which an individual is taxed whilst forgoing certain exemptions and deductions. However, the option of whether to be governed with the old tax regime or the latest tax regime remains with the taxpayer. It is important to note that this is not a presumptive tax regime.
With the announcement of a simplified personal tax regime, one can envision this trend leading to a mandatory policy in near future where no-exemption regime will be the order of the day.
Exemptions to resident cooperative societies
While delivering Budget 2020, Finance Minister Sitharaman noted that it is undeniable that the co-operatives play an extremely important role in facilitating access to credit, procurement of inputs and marketing of products to their members. Thus, in order to bring parity between co-operative societies and corporates, the simplified tax regime offers exemption and a lower tax rate of 22 per cent with 10 per cent surcharge and a cess of 4 per cent (without exemptions and deductions). In other words, the choice of corporate form will not influence tax incidence.
What the startups got
By emphasising that startups are engines of economic growth for India, the Modi government’s Budget 2020 is focussed to further rationalise the provisions pertaining to startups. In 2019, the finance minister had provided a much-needed breather to the startup sector by proposing changes oriented towards clearing up long-pending angel-tax controversy over valuations.
In order to further boost the startup ecosystem, the Modi government has in Budget 2020 proposed to ease the burden of taxation on the employees by deferring the tax payment on Employee Stock Option plan (ESOPs) of startups. ESOPs, which are provided to employees as compensation, are taxed as perks. The government noted that this tax on perks that is required to be paid at the time of exercising such option was leading to a cash flow problem for the employees. To resolve this issue, the Modi government has deferred the payment of such tax on employees by five years or from the date they cease to be employees or from the date such shares are sold, whichever is the earliest.
These measures will, undoubtedly, further the Modi government’s flagship programme Startup India, provided it takes a larger view by coupling these changes with those introduced in the customs law as regards regulatory rate structure. This will ensure that cheaper inputs do not erode the completeness of domestic industry.
TDS on e-commerce transactions
In order to keep a check on tax evasion and deepen the tax net for e-commerce giants, the Modi government has introduced a TDS of one percent effective 1 April 2020. The e-commerce operator will have to deduct this tax at the time of sale of goods or provision of services on the gross amount of such sales facilitated by it on the digital platform. The ambit of such supply of goods and services will include digital products, supply of goods or services over digital network and a fee that will be charged for technical and professional services. This will lead to expansion of tax base, particularly addressing the global concern and move towards taxing digital service companies that apparently do not pay tax in any jurisdiction from where they derive the bulk of their revenue.
Various changes in dispute resolution-related provisions to weed out harassment from tax proceedings, including by way of taxpayer charter, is a welcome step. This reaffirms trust in the tax system and incentivises compliance with tax laws.
Overall, the Modi government’s Budget 2020 is promising and instills a hope for holistic economic order.
The author is managing partner at BMR Legal and was assisted by Shreyash Shah, managing associate and Riya Gupta, associate at the firm. Views are personal.