Union Budget 2020 and How it Affects You!
Updated: Feb 24, 2020
The Union Budget 2020 presented on 1st February has definitely evoked some passionate opinions and responses across the industry. And there were certainly some changes that would affect us as avid investors. We have compiled a list of the provisions from the Budget 2020 that are most directly relevant to most of us.
1. A new tax regime has been proposed under section 115BAC with new slab rates.This is a starting point to the much awaited direct tax code that is supposed to simplify the way we calculate and file our taxes. Under the new tax regime, following would be the tax rates:
Opting for this new regime would mean bidding farewell to the 70 out of 100 exemptions (Section 10) and deductions (Chapter VIA) that we are all used to. Examples of these include section 80C (PPF, ELSS, insurance premiums), house rent allowance, standard deduction for the salaried, and many more. Fortunately, the new tax regime is optional and assesses (only individuals and HUFs with no business income) can choose to alternate between the new and old regime depending on whatever is beneficial to them. HOWEVER, if you have business income and choose to opt for the new regime, you are indefinitely stuck with it i.e. you cannot move back to the old regime and vice versa. Of course, if your business income ceases, the option of maneuvering between the old and new regime is offered back to you.
BlueFort’s Opinion: We wish we had an answer to the million dollar question, “Which regime is more beneficial?” Unfortunately there is no single answer. It not just depends on your income and salary structure, but also your age, investment habits, life goals, expenses, etc. Fortunately, quite a few apps are being developed (one of them by the government itself) where you can conveniently put in your details to find out which one suits you more. For individuals with business income, we would recommend to stick to the old regime for now. Generally speaking, using the various deductions at your disposal would leave you better off than the new regime.
2. Dividend Distribution Tax has been abolished! India was the only country in the world where companies would have to pay a tax on declaring dividends. As per the recent budget, all kinds of dividend income, whether for shares of mutual funds will now be taxable in the hands of the investor as applicable slab rates. This is good news for companies declaring dividend as they will have more distributable income for their shareholders. This is how it was working thus far
BlueFort’s Opinion: For most of us who fall under the 30% tax bracket, this is a major blow! The tax outflow on dividend will be far larger than the increase in dividend distributed. Investors with large direct equity portfolio giving hefty dividends should consider whether moving to mutual funds for equity exposure makes more sense. For all mutual funds investors, we strongly recommend that any schemes lying in the dividend option should be shifted to growth as soon as possible. Any need for liquidity is much better fulfilled by the SWP option. Investors in the 10% and 20% tax bracket should rejoice due to greater distributable dividend as well as lower tax outflow. Also, FPIs are probably happy. Now that dividend is being taxed in their hands, the more lenient DTAA provisions will apply which will reduce the tax burden.
3. Change in the Definition of Resident in India (Section 6). The following three changes have been made:
a. Any individual who is a citizen of India shall be deemed to be a resident of India if he is not paying tax in any other country.
b. Any individual who is a citizen of India (or a person of Indian origin) who stays in India for 120 days AND has stayed in India for more than 365 days in the previous 4 years is now a resident. Previously this 120 days was 182 days.
c. The definition of not ordinarily resident has been changed to “an individual who has been a non-resident in India in seven out of ten previous years.
BlueFort’s Opinion: Following are our observations:
· The 120 days rule given in point b above would definitely have a lot of NRIs worried. Firstly, we’d like to clarify that despite being a resident, you must further be classified as an ordinarily resident or not ordinarily resident. An ordinarily resident has to offer his/her global income for taxation in India. This is not the case for a not ordinary resident. Even if an NRI is classified as a resident due to the above changes, they would have to be classified as an ordinarily resident to attract tax on their global assets. Simply put, even if in a particular year you happen to stay in India for more than 120 days for some reason, you are fine provided you are a legitimate NRI and have been residing in a different country indefinitely as you would most likely be qualified as a not ordinarily resident.
· However, individuals who in substance reside in India but travel from country to country to maintain a “stateless status” have reason to worry. But if you are a legitimate NRI staying in a country where there is no tax, the government has clarified that they won’t come under the ambit of point a.
Although there is still plenty of confusion and ambiguity with the new residency rules, we are of the opinion that legitimate NRIs with genuine businesses abroad don’t have a reason to worry.
4. Tax Audit threshold has been increased from Rs. 1 crore to Rs. 5 crores under section 44AB. Any businessmen reading are surely aware that they are required to get their account audited if their gross turnover exceeds one crore (50 lakhs in case of professional) in a year. Now, no audit will be required up till a turnover of 5 crores. HOWEVER, this is only applicable IF:
a. Receipts in cash do not exceed 5% of total receipts
b. Payments in cash do not exceed 5% of total payments
BlueFort’s Opinion: Tax audit is another inconvenience in the pile of compliances Indian businesses have to go through and therefore this move is welcome. However, the government has been very smart with the caveat they have attached to it. Less than 5% cash of total receipts especially for businesses in the B2C segment where they have limited control over how their client pays is very difficult to follow. In our opinion a lot of businesses will not qualify for this relief.
5.TDS will be applicable for dividend paid by Indian companies and mutual funds to residents in India at 10% under section 194 and 194K respectively.
BlueFort’s Opinion: The major worry was whether any redemption from mutual funds will attract TDS i.e. will there be any TDS on capital gains? The answer to that is no. TDS is only attracted from dividend declared whether its mutual funds or dividend declared by companies. This does not affect investors as they now have to pay tax on dividend at slab rates anyway. TDS always improves tax collection and this move is welcome. Of course, investors falling under the basic exemption limit will have to file for refund, a minor inconvenience.
For any questions or concerns, please do not hesitate to call us
Siddhanth Jain | Partner
Mobile: +91 97699 88804