- Creation of Deep Tech Fund: NASSCOM suggested creation of Deep Tech Investment Fund to invest in startups in the Deep Tech space, including Quantum Computing. The Government has proposed National Mission on Quantum computing with an outlay of INR 8000 crores.
- Taxation of Employees Stock Option Plans (ESOPs): NASSCOM recommended deferral of tax on ESOPs granted by eligible startups*, to the time of sale of such shares. As per the Budget proposal, employees can defer tax liability for five years or till they leave the company or when they sell their shares, whichever is earlier.
- Amendment of Startup Definition: NASSCOM recommended that definition of “eligible startups” under section 80-IAC should be amended to increase the turnover limit from INR 25 crores to INR 100 crores.i The budget has proposed the same.
- Deferral of Significant Economic Presence (SEP) provisions: NASSCOM recommended deferment of implementation of SEP proposal till a consensus is reached by OECD. The budget has deferred the applicability till Assessment year 2022-23.
- Creation of Design to Manufacturing Clusters: NASSCOM recommended creation of Design to Manufacturing clusters. The Budget has proposed setting up of clusters for designing, fabrication and proof of concept and further scaling up technology clusters harboring such test beds.
Global economic slowdown and challenges in the domestic financial sector moderated the growth of Indian economy to 5.0 % in 2019-20 compared to 6.8 % in 2018-19. This moderation has had its impact on the Government finances. Against a budget estimate of 3.5% of the GDP for 2019-20, the fiscal deficit has been revised to 3.8% of GDP.
For year 2020-21, the GDP growth is estimated at 6-6.5%. The government has chosen to go for an expansionary budget and has budgeted a fiscal deficit of 3.5% for 2020-21. A good part of the borrowings would go towards capital expenditure. Around ₹22,000 crore have been allocated for equity to fund certain specified infrastructure finance companies.
- Funding: Proposal to provide early life funding including seed funding to support ideation and development of early stage start-ups is welcomed.
- Intellectual Property (IP): The budget emphasized on the need to promote and encourage Startups to make use of IP ecosystem to protect their innovations. Proposal to create a digital platform was announced to offer seamless application process for protection of IP. In addition, a center would be setup to work on the complexity and innovation in the field of Intellectual Property.
- ESOPs: For ESOPs granted by eligible startups, employees can defer tax liability for five years or till they leave the company or when they sell their shares, whichever is earlier. This will ease tax burden on the employees and make ESOPs an attractive instrument.
- Relaxation in availing tax holiday: The turnover limit for eligible startups to claim 100% deduction from profits under section 80-IAC has been increased from existing INR 25 crore to INR 100 crores and the period for claiming deduction has also been extended from 7 years to 10 years. These announcements are in line with NASSCOM suggestion to Ministry of Finance (MoF).
- Dividend Distribution Tax (DDT): The budget proposed to tax dividend at the hands of the shareholder at applicable rates instead of the current requirement of levying tax on companies.
- Removal of cascading effect of dividend: Cascading tax effect for dividends received from subsidiaries removed for computation of taxable income at each level of the shareholding structure; withholding tax may apply at each level though at@ 10%.
- TDS on e-commerce operator: Introduction of a new levy of TDS @ 1% to be paid by e-commerce operator for sale of goods or provision of service facilitated by it through its digital or electronic facility or platform. This is applicable only for sale made by Indian residents through the e-commerce operator. Exemption provided for sale made by individuals and HUFs through E-commerce operator up to INR 5 lacs.
Taxation of Digital Economy
- Deferral of implementation of Significant Economic Presence (SEP) provisions: Finance Act 2018 introduced the concept of ‘Significant Economic Presence (SEP)’ to tax companies that conduct business in India without any physical presence in the country. However, since discussion on this issue is still ongoing in G20-OECD, SEP provisions have not been notified yet. Further, India have signed Double Tax Avoidance Agreements (tax treaties) with various countries which currently do not have SEP clause. Implementing the SEP provisions would require amendment to the tax treaties to incorporate the SEP provisions. Considering these challenges, NASSCOM recommended to the Ministry of Finance to defer implementation of these proposals till a global consensus is arrived. In line with our recommendation, the Budget has deferred the applicability till Assessment year 2022-23. A detailed view of NASSCOM on the subject is attached.
- Safe harbor scheme scope extended: To apply to attribution of profits to business connection/ permanent establishment, including significant economic presence. Advance pricing agreement to also specifically address attribution of profits, basis applicable methods and rules.
IT – BPM & Electronics manufacturing sector
- National Mission on Quantum Technologies and Applications: An outlay of 8000 crores over a 5-year period has been proposed for the National Mission on Quantum Technologies and Applications. This is in line with NASSCOM suggestion of setting up a Deep Tech Fund to fund startups in the Emerging Technology space.
- Data Center parks: The Finance Minister proposed formulating a policy to establish Data Center Parks throughout the country to enable firms to incorporate data at every stage of their value chains.
- Design to Manufacturing clusters: The Finance Minister proposed setting up of clusters for designing, fabrication and proof of concept and further scaling up technology clusters harboring such test beds.
- Electronics Manufacturing: A scheme to encourage manufacture of mobile phones, semi-conductor packaging, electronic equipment and possibly medical devices has been proposed. The details of this scheme would be released subsequently.
- National Logistics Policy: A national logistic policy will be unveiled soon. It will offer a single window e-logistics market and will focus on employment generation, skill and making MSMEs more competitive.
- Digital connectivity: The budget laid emphasis on establishing connectivity between various public institutions at gram panchayat level. A budget of 6000 crore has been allocated to connect 1 lakh gram panchayats through Bharatnet Fiber to the Home (FTH).
- Investment Facilitation: An Investment Clearance Cell is proposed to provide “end to end” facilitation and support, including pre-investment advisory, information related to land banks and facilitate clearances at Centre and State level.
- E Appeals: Currently, a new faceless assessment scheme is in place. The same is proposed to be extended to appeals. This will impart greater transparency and accountability to the appeal process.
- Tax Disputes: In the last budget, Sabka Vishwas Scheme was brought in to reduce litigation under indirect taxes. A similar scheme has been proposed to address disputes related to direct tax. The taxpayers will get complete waiver of interest and penalty if disputed tax amount is paid before March 31, 2020.
- Tax Charter: CBDT will enshrine a taxpayer’s charter in statues. Government has reaffirmed its commitment to take measures to ensure that taxpayers are free from tax harassment.
- Eased compliance burden for non-residents: Non-residents will not be required to file income tax return if total income consists of only dividend or interest income or royalty or Fee for Technical Service (FTS) and tax has been deducted on such income. This is in line with NASSCOM’s recommendations to MoF.
- Eased compliance for MSMEs: No tax audit for MSMEs with turnover up to INR 5 crore, if they do business less than 5% in cash.
Summary of key measures that were not addressed
Some of the NASSCOM suggestion that were not addressed in the Union budget 2020-21 are listed below:
- Extension of reduced corporate tax rate of 15% to newly incorporated companies in the Special Economic Zones (SEZs).
- Extension of sunset clause under section 10AA of Income Tax Act for another 5 years.
- Extension of weighted deduction of 150% beyond financial year 2020-21 u/s 35(2AB) and include “IT/ ITeS” as eligible business for the purpose.
- Allow deduction under section 80JJAA to taxpayers having income from profession. Further, threshold of total emoluments should be increased from INR 25,000 per month to at least INR 50,000 per month.
- Long Term Capital Gains (LTCG) for all assesses (i.e., residents as well as non-residents) arising from sale of shares of unlisted companies should be taxed at uniform rate.
* As per section 80-IAC of Income Tax Act, “eligible start-up” means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely:—
- it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April 2021;
- the total turnover of its business does not exceed INR 25 crores in the previous year relevant to the assessment year for which deduction under sub-section (1) is claimed; and
- it holds a certificate of eligible business from the Inter-Ministerial Board (IMB) of Certification as notified in the Official Gazette by the Central Government.