Amidst the COVID-19 outbreak and lockdown in various states, the Finance Bill 2020 introduced vide Union Budget 2020-21 was passed by both Houses of Parliament, with certain amendments including relaxation of ‘deemed residency’ rule for Indian citizens not liable to tax in any other country, enlargement in the scope of Equalization levy to include e-commerce supply or services, etc. The Bill is yet to receive assent from President of India for it to become Law.
Basis our review of the proposals introduced vide Finance Bill 2020 and feedback received from our members, NASSCOM submitted a detailed post budget memorandum to Ministry of Finance (MoF) highlighting concerns and recommendations to strengthen the Budget proposals. The document can be accessed from the link: https://community.nasscom.in/communities/policy-advocacy/post-budget-memorandum-2020-21.html. While, some of the recommendations have been accepted, we will continue to work with MoF to get clarity on the other aspects highlighted in our Post Budget Memorandum.
The key amendments made to the Finance Bill 2020 are summarized below:
Amendment to section 10(34) of Income Tax Act, 1961 (IT Act) where dividend is received after April 1, 2020
- As per Finance Bill, 2020 – Earlier, there was a possibility of double taxation of dividend declared before March 31, 2020 and paid after March 31, 2020. This is because Dividend Distribution Tax (DDT) regime prescribed under S.115-O will be applicable to dividend declared/ paid before March 31, 2020, while S.10(34) exempting dividends in the hands of shareholders will not apply to dividend received after March 31, 2020.
- As per amendment to Finance Bill, 2020 – It has now been clarified that dividend received on or after March 31, 2020 shall not be taxable in the hands of the recipient, if dividend distribution tax has already been paid by the company declaring dividend.
- Implication – This is in line with NASSCOM’s recommendation and would ensure that dividend declared by a company before March 31, 2020 but received by a shareholder after March 31, 2020 is not taxed doubly.
Withholding tax rate for payment of dividend to non-residents
- As per Finance Bill, 2020 – Finance Bill, 2020 had abolished dividend distribution tax and dividends would be taxed in the hands of recipient at applicable rates. For a non-resident recipient, the applicable tax rate is 20% or rates specified in the treaty, whichever is beneficial. However, there was an ambiguity on the applicable withholding tax rate for payment of dividends to a non-resident in absence of 20% rate being mentioned in First schedule of Finance Bill, 2020.
- As per amendment to Finance Bill, 2020 – It has been proposed to introduce 20% rate in the First schedule of Finance Bill, 2020 and therefore, the payer will now deduct tax at 20% or rates specified in the treaty, whichever is beneficial, on payment of dividend to non-residents.
- Implication – This is in line with NASSCOM’s recommendation and would result in clarity on applicability of withholding tax rate.
Deduction for receipt of dividend by domestic companies from any other company under section 80M of IT Act
- As per Finance Bill, 2020 – Earlier, there was a possibility of double taxation of dividends when an Indian company (which received dividend from a foreign company) further pays dividend to its shareholders. Such dividends would have been subjected to double taxation – once in the hands of Indian company receiving dividend from foreign company and again in the hands of shareholders of the Indian company.
- As per amendment to Finance Bill, 2020 – It has now been proposed to amend section 80M of IT Act to provide deduction of dividends received by a domestic company from any other domestic or foreign companies.
- Implication – This is in line with NASSCOM’s recommendation and would ensure removal of double taxation of such dividends.
Enlarged scope of Equalization Levy (EL) to e-commerce supply or services
- Equalization levy @ 6% was introduced vide Finance Act 2016 on amount paid to a non-resident not having any Permanent Establishment (PE) in India, for specified services (i.e., online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government).
- As per amendment to Finance Bill, 2020 –
#It is now proposed to levy EL @ 2% from April 1, 2020 on the amount of consideration received or receivable by an E-commerce operator from E-commerce supply or services made or provided or facilitated by it:
=to a person resident in India; or
=to a non-resident in specified circumstances – sale of advertisement targeted to Indian market or sale of data collected from India market;
=to a person who buys such goods or services or both using internet protocol address located in India.
#‘E-commerce operator’ means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or provision of services or both.
#‘E-commerce supply or services’ means:
= Online sale of goods owned by the E-commerce operator; or
= Online provision of services provided by the E-commerce operator;
= Online sale of goods or provision of services or both, facilitated by the E-commerce operator; or
#The responsibility to deposit EL with the Indian government is on the E-commerce operator. The due date for deposit is as under:
| Quarter ending | Due Date |
| 30th June | 7th July |
| 30th September | 7th October |
| 31st December | 7th January |
| 31st March | 31st March |
#These provisions are not applicable if
= E-commerce operator has a PE in India and such supply is effectively connected with the PE
= such services are already covered under existing EL provisions as introduced in Finance Act 2016 (ie online advertisements); and
= sales, turnover or gross receipts of such E-commerce operator is less than INR 20 million during the previous year.
- Implications:
- These provisions were not a part of Finance Bill 2020 as presented on February 1, 2020.
- The levy, which hitherto was applicable only to digital advertising players, has now been expanded to cover all sorts of digital e-commerce transactions into India, as well as those transactions which use Indian data. As a result, businesses having subscription-led model will also come under the ambit of EL.
- Hence, any digital services or sale of goods or digital content through online platform by non-resident entity to customers in India could possibly now get covered under new EL provisions (for which, earlier “no tax” position in India under income-tax law could have been possible).
- Further, the obligation for payment and compliance is on the e-commerce operator, which could increase compliance burden on non-resident entities in India.
Tax Collection at Source (TCS) on overseas tour package and sale of goods under section 206 of IT Act
- As per Finance Bill, 2020 – It was proposed to insert sub-section (1G) to section 206C to provide for collection of tax from a person purchasing overseas tour package or making foreign remittance exceeding 7 lakh rupees during a financial year. Further, sub-section (1H) was proposed to be inserted to provide for TCS on sale of goods exceeding INR 50 lakh to a buyer in a financial year by seller having turnover exceeding INR 10 crores.
- As per amendment to Finance Bill, 2020 –
- The applicability of newly introduced TCS provision on sale of overseas tour package program and consideration received by seller of goods on sale of goods to buyer has been deferred from April 1, 2020 to October 1, 2020.
- Board have been authorized to issue guidelines for removing difficulty arising in interpretation or implantation of these provisions and such guidelines will be laid before Parliament and shall be binding on IT authorities and person liable to collect sum.
- Import of goods and export of goods have been specifically excluded from levy of TCS under said provisions.
- Implication – Exclusion of import and export transactions from TCS is in line with NASSCOM’s recommendation and would avoid compliance burden for sellers making exports and particularly, for non-resident sellers for imports into India. This would also resolve cash flow issues and compliance burden (with regard to tax return filing and claiming refund of TCS amount) for non-resident buyers. Deferment of TCS provisions would provide adequate time to the industry to integrate withholding tax facility in their ERPs.
Introduction of tax withholding @ 1% by e-commerce operator under S.194-O of the IT Act
- As per Finance Bill, 2020 – It was proposed to introduce tax withholding by e-commerce operator under S.194-O of the IT Act.
- As per amendment to Finance Bill, 2020 –
- The applicability of withholding tax provisions (Section 194-O) on E-commerce transaction is proposed to be deferred from April 1, 2020 to October 1, 2020. This is in line with NASSCOM’s recommendations.
- A deeming provision is proposed to be included to state that the E-commerce operator shall be deemed to be the person responsible for paying to the E-commerce participant.
- The Board has been empowered to issue guidelines with approval of Central Government to remove difficulties. Such guidelines will be binding on IT Authorities and e-commerce operator.
- Definition of e-commerce operator is proposed to be amended as under:
| As per Finance Bill, 2020 | As per amendment to Finance Bill, 2020 |
| E-commerce operator means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce and is responsible for paying to e-commerce participant | E-commerce operator means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce |
- Implication: The definition of e-commerce operator has become very wide and in a scenario, where multiple digital facility or platform operators are part of transaction, this amendment could probably entail withholding tax obligations on multiple parties involved in the transaction. Deferment of effective date to October 1, 2020 would enable e-commerce operators to upgrade their system and undertake the withholding tax compliances.
We hope you will find the update useful.
In case you have any feedback, please write to Tejasvi Gupta at tejasvi@nasscom.in
