Common Startup Compliance Mistakes & How to Avoid Them
Finance Minister Smt. Nirmala Sitharaman presented the longest-ever Union Budget in the parliament on 1st Feb 2020. FM said that budget 2020 is woven around three prominent themes - Aspirational India, Economic Development and Caring Society. The Finance Minister introduced several tax proposals in the budget. Here, we have discussed key direct tax proposals introduced in the budget.
Tax Proposals impacting Personal Taxpayers
1. New Tax Regime
New optional scheme is introduced for individuals and HUF. They have been provided option to pay tax at lower rates without availing any deduction and exemptions. The concessional tax rates under new scheme are as under:
| Total Income (Rs) | Rate |
|---|---|
| Up to 2,50,000 | Nil |
| From 2,50,001 to 5,00,000 | 5% |
| From 5,00,001 to 7,50,000 | 10% |
| From 7,50,001 to 10,00,000 | 15% |
| From 10,00,001 to 12,50,000 | 20% |
| From 12,50,001 to 15,00,000 | 25% |
| Above 15,00,000 | 30% |
This scheme is optional for taxpayers to choose. It won’t be easy for taxpayers to make a decision that whether to opt for this scheme or not. Social media flooded with memes as soon as this scheme was announced by FM.
You should consult your tax advisor whether you should opt for new tax regime or not.
2. Incentive for Affordable Housing
Deduction under section 80EEA is allowed is up to Rs. 1,50,000 is allowed for acquisition of an affordable residential house property subject to certain conditions. In order to continue promoting purchase of affordable housing, the period of sanctioning of loan by the financial institution is proposed to be extended to 31st March, 2021.
3. Taxability of Employer’s Contribution
Finance bill proposes a combined upper limit of Rs. 7,50,000 in respect of employer's contribution in a year to NPS, superannuation fund and recognised provident fund and any excess contribution is to be taxable. Any annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme may be treated as perquisite to the extent it relates to the employer’s contribution which is included in total income.
4. Citizenship based taxation
An Indian citizen who is not liable to tax in any other country by reason of his domicile, residence or other similar criteria, he shall be deemed to be an Indian tax resident irrespective of his duration of presence in India.
5. Residential Status
To qualify as Not Ordinarily Resident (NOR), an individual should either be a NR in 9 out of last 10 years, or should have been present in India for 729 days or less, in last 7 years. Now, a person will qualify as a NOR if he has been Non Resident in just 7 out of 10 preceding tax years.
6. Taxability of Dividend
Now the dividend shall be taxable directly in the hands of shareholders at normal tax rate applicable to them. Only deduction available to taxpayers against such income, shall be interest expenditure, subject to a ceiling of 20% of dividend income.
7. Deduction under section 80GGA
The Finance Bill 2020 proposes to restrict the deduction of cash donation under section 80GGA to Rs. 2,000 only as compared to existing limit of Rs. 10,000.
8. Rate of TDS on FTS
Fees for Professional Services will continue to be subjected to TDS @ 10%, other FTS shall be subjected to TDS @ 2%. Hence, persons providing technical services will get TDS deducted @2% on their income.
9. TDS on E-commerce
To ensure collection of tax from persons selling goods through e-commerce platforms, it is proposed to levy a TDS @ 1% (or 5% in case of non-furnishing of PAN) on payments or credits made by an e-commerce operator for sale of goods or provision of service of an e-commerce participant facilitated by such e-commerce operator through its digital or electronic facility / platform. Now, persons selling goods or providing services through these platforms will need to get their ITR filed to claim refund of such taxes.
10. Sale of immovable property
Presently, in computing capital gains on sale of any capital asset acquired prior to 1 April 2001, taxpayers have an option to substitute the actual purchase price, with FMV of the asset as on 1 April 2001. It has been proposed that in case of sale of an immovable property, such Fair Market Value shall not exceed Stamp Duty Value of the property on 1 April 2001.
Tax Proposals Impacting Start-ups
Start-ups may avail the various benefits under Income Tax Law. Budget has proposed the various tax incentives for the start-ups.
1. Deduction under section 80-IAC
The deduction under the said section 80-IAC shall be available to an eligible start-up for a period of 3 consecutive assessment years out of 10 years beginning from the year in which it is incorporated. Further, this deduction can now be claimed if the total turnover of its business does not exceed Rs. 100 Crore in the previous year relevant to the assessment year for which deduction under this section is claimed.
2. Relaxation on Payment of taxes on ESOPs
ESOP is a tool used by start-ups to retain highly talented employees at a relatively low salary. In order to give a boost to the start-up ecosystem, the burden of tax payment on the employees deferred by 5 years or till they leave the company or when they sell their shares, whichever is earlier.
Tax Proposals impacting Corporates
1. Generation of electricity to be considered as manufacturing
Taxation Law Amendment Act introduced section 115BAB in the Act to provide concessional tax regime for new manufacturing domestic companies set up on or after 1st October, 2019 (Refer: https://www.startup-movers.com/2020/01/31/recent-tax-exemptions-for-corporates-2019-20/). Now, for the purposes of this section, manufacturing or production of an article or thing shall include generation of electricity. Hence companies engaged in generation of electricity can avail the benefit of concessional tax rates.
2. Increase in Tax Audit Limit
To reduce compliance burden on MSMEs, tax audit limit for person carrying on business is proposed to be increased from Rs. 1 Crore to Rs. 5 Crore, in cases where:
3. Due date of Filing of ITR
ITR filing due date by persons liable for tax audit has been extended from 30 September to 31 October. However, the Tax Audit Report (TAR) is required to be furnished at least 1 month prior to ITR due date i.e. by 30 September.
Pehle tax audit report ayegi, fir ITR form ayega.
This move is introduced to enable pre-filling of returns in case of persons having income from business or profession. Hence, it is required that the tax audit report may be furnished by the assessee at least one month prior to the due date of filing of return of income.
4. Due date of TP Audit
Presently, a taxpayer is required to file the Transfer Pricing certificate in Form 3CEB, by 30 November of the assessment year. It is proposed to prepone the same to 31 October.
5. DDT is abolished
Dividend Distribution Tax is currently levied at an effective rate of 20.56% on the dividend declared and distributed by an Indian company. This is in addition to the income-tax paid by a company on its net profits. Finance Minister has proposed the abolition of DDT in union budget 2020.
6. TDS on Dividend
Since the dividend shall be directly taxable in the hands of shareholders. Companies shall be required to deduct TDS @ 10% on such dividend distributed or paid to shareholder in excess of Rs. 5,000.
Tax Proposals for Litigation
1. Faceless Appeal before CIT(A)
E-filing of appeals before CIT(Appeals) has already been enabled through e-Filing portal. However, the process that follows after filing of appeal is neither electronic nor faceless. Hence, the FM proposed that e-appeal scheme be launched on the lines of e-assessment scheme.
2. Best judgment assessments
The Finance Bill 2020 proposes to expand the scope of e-assessment to cover the best judgment assessments under Section 144.
3. E-penalty scheme
Assessee is still required to visit the tax office in response to a show cause notice issued by the Assessing Officer for the purpose of levying penalty. Hence, an e-penalty scheme is proposed be launched on the lines of e-assessment scheme.
4. Vivad se Vishwas Scheme
Finance Minister stated in her Budget speech that similar to 'Sabka Vishwas' Scheme introduced in respect of litigation in indirect taxes, a ‘Vivad Se Vishwas’ scheme shall be introduced for taxpayers whose direct taxes appeals are pending at any level
Tax Proposals impacting Charitable Institutes
1. Filing of Statement
Charitable institutes registered under section 80G Section 80G receiving donation shall be required to file a statement of the donation received with the Income Tax Department and shall issue a certificate to donor.
2. Registration to be valid for 5 years
Registration granted to entities under section 10(23C), section 12AA or section 35, section 80G of the Act shall be valid for a period not exceeding 5 previous years at one time.
3. Grant of Provisional Registration
The Finance Bill 2020 proposes the concept of provisional registration. This provisional registration shall be valid for 3 years and shall be granted to new charity institution which is yet to start its charitable activities.
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