EY summarized below key proposals of the budget impacting the PE/ VC sector presented by the Finance Minister of India (Mrs. Nirmala Sitharaman) at the Union Budget 2020 before the Indian Parliament.
- Reduced corporate tax rate of 15% which is applicable to new domestic manufacturing company set-up on or after 1 October 2019 and commencing manufacture by 31 March 2023, shall also be applicable to companies that are engaged in the business of generation of electricity.
- An optional regime has been introduced for individuals and Hindu Undivided Families providing lower rates of income tax for income up to INR 15,00,000, provided the individual does not claim any exemptions or deductions (with some exceptions).
Dividend Distribution Tax (DDT) removed and dividend taxable in the hands of the shareholder
- Currently, the company distributing dividend pays DDT at an effective rate of 20.56%. It is now proposed to remove DDT and re-introduce the classical system of taxing dividends in the hands of the shareholders.
- The company paying a dividend is required to withhold tax at 10% (in case of resident shareholders entitled to a dividend of INR 5,000 or more), at 20% [in the case of Foreign Portfolio Investors (FPI)] and at applicable tax rates (in case of other non-resident shareholders). The deduction for expenses (other than interest) incurred to earn dividend income has been restricted to 20% of the dividend income.
- The new section introduced to remove the cascading effect on the taxation of the inter-corporate dividend by allowing set-off for dividends distributed by a domestic company against the dividend income, provided the dividend is distributed one month prior to the due date of filing return of income.
- With the introduction of the above, taxation of dividends in excess of INR 1 million at 10% in the hands of the resident non-corporate taxpayer to be removed.
Relaxation on conditions prescribed for availing safe harbor for onshore management of offshore funds
- The safe harbor provisions for onshore management of offshore funds currently restrict investment by resident Indians in an eligible offshore fund to 5% of the fund’s corpus – it is proposed that an eligible fund manager’s investment up to INR 250 million in the offshore fund shall not be considered in determining the aforesaid 5% limit during the initial three years of operation of the fund.
- For newly incorporated offshore funds, the requirement to maintain a minimum corpus of INR 1 billion can now be fulfilled within 12 months (currently, 6 months) from the last day of the month of establishment/incorporation.
Extension of 5% withholding tax rate on specified interest income of non-residents
- Concessional tax withholding rate of 5% on interest payable by an Indian company on monies borrowed (in foreign currency), from a source outside India, has been extended to loan agreement / long-term bond issuances on or before 30 June 2023 (this benefit was slated to expire on 30 June 2020.
- A concessional withholding rate of 4% has been introduced for long-term bond or rupee-denominated bond issued on or after 1 April 2020 upto 30 June 2023 which is listed on a recognized stock exchange located in any International Financial Services Centre.
- Concessional tax withholding rate of 5% on interest payable to FPIs in respect of investment in rupee-denominated bonds of an Indian company or government securities shall now be available up to 30 June 2023. This benefit has now also been extended to investment by FPIs in municipal debt securities (subject to the interest on such securities being within a notified rate).
Exemption from tax on investment income of Sovereign Wealth Fund
- Income-tax exemption to be granted to specified Sovereign Wealth Funds (wholly owned and controlled, directly or indirectly, by Government of foreign country, subject to meeting certain conditions), in respect of income in the nature of dividends, interest or long term capital gains from investments made on or before 31 March 2024 and held for at least 3 years in an Indian entity carrying on specified infrastructure facility business.
Proposals relating to Start-up
- The total turnover threshold to qualify as an ‘eligible start-up’ proposed to be increased from INR 250 million to INR 1 billion.
- Eligible start-ups allowed to avail 100% deduction of profits and gains derived from an eligible business for a period of 3 consecutive years out of 10 years (earlier 7 years) beginning from the year in which it is incorporated.
- Perquisite tax on ESOPs granted to employees of an eligible start-up proposed to be deferred to within 14 days after (a) expiry of 5 years from end of the year in which ESOP is exercised (b) date of the sale of such share/ security (c) date on which the employee ceases employment with the start-up, whichever is earliest.
Change in residency provisions
- An Indian citizen is proposed to be considered a resident in India in any year if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. Resultantly, such Indian citizens would be taxable in India on their global income under the domestic tax law provisions.
- Residency threshold for an Indian citizen or a person of Indian origin who comes on a visit to India in any year has been reduced from 182 days to 120 days.
- Exemption from the application of indirect transfer tax provisions to investors (direct or indirect) in a FPI is proposed to be restricted to investors (direct or indirect) in erstwhile Category I & II FPI under the SEBI (FPI) Regulations, 2014 and Category I FPI under the SEBI (FPI) Regulations, 2019.
- Non-residents earning royalty income and fees for technical services not required to file a return of income provided applicable tax has been deducted at source.
- Exemption from personal income tax on the amount contributed by the employer in National Pension Scheme, Superannuation Fund and Recognised Provident Fund, now proposed to be capped to INR 750,000.
- Tax withholding at 1% is proposed to be levied on the sale of goods or provisions of services above INR 500,000 by an e-commerce participant through digital or electronic facility or platform.
- Remittance of money exceeding INR 700,000 in a financial year under the Liberalised Remittance Scheme is proposed to be liable for tax collection at source (TCS) at 5% (10% if PAN/Aadhar is not available). Payments subject to withholding tax excluded from TCS levy.
Key Policy announcements
- Limit for Non-Banking Financial Companies (NBFCs) eligible for debt recovery under Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as SARFAESI) to be reduced from INR 5 billion to INR 1 billion; or loan size from INR 10 million to INR 5 million.
- Certain specified categories of G-Secs to be opened fully for non-resident investors.
- The limit for FPI in corporate bonds increased from 9% to 15% of the outstanding stock.
- GIFT City to house an International Bullion exchange for gold trading by global market participants
- A Dispute Resolution Scheme is proposed to be notified to clear litigation and provide an option to taxpayers to pay taxes under dispute prior to 31 March 2020 (with a complete waiver of interest and penalty) or 30 June 2020 (with an additional amount, as would be notified).
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