On September 22, 2020 India’s parliament passed the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill, 2020. This bill aims to reduce the tax and compliance stress amid the ongoing COVID-19 pandemic. In addition, certain provisions of the Finance Act 2020 have also come into force that impact the Indian tax laws. This blog post will highlight all of these developments.
New Tax Collected at Source regime
The Finance Act 2020 has amended India’s legal provisions that relate to Tax Collected at Source (TCS). TCS formerly applied to selected transactions involving prescribed goods and services. The Finance Act 2020 expands the applicability of TCS to three new cases starting October 1, 2020.
1. Sellers of goods
Under amended provisions of the Income Tax Act, certain suppliers are liable to collect TCS at 0.075% on the amount exceeding INR 5 million (about US$68,000) billed to a buyer for the sale of goods during the financial year. In other words, if the amount received from a buyer during the financial year exceeds the stipulated sum, the excess amount will be the value used for computing and collecting the tax. The current rate of 0.075% applies from October 1, 2020, until March 31, 2021. After this period, the Government will declare a new TCS rate.
The amount of Goods and Services Tax (GST) should be included in the value for calculating the TCS amount. While not a requirement, it is good practice to make the applicable TCS amount visible on the invoice, so the total amount due is clear to the customer.
Which sellers are subject to the new requirement?
If the company’s turnover (i.e. total sales) was INR 100 million (about US$1.3 million) or higher in the prior financial year, the company is required to collect TCS.
To which goods does the requirement apply?
The requirement applies to all goods sold, except:
- If goods are exported from India to a foreign country;
- If the buyer is liable to deduct Tax Deducted at Source (TDS) under the Income Tax Act;
- Certain categories of goods such as alcoholic liquor, tendu leaves, timber, scrap, and others covered by the subsections (1), (1C), (1F), and (1G) of section 206C of the Income Tax Act.
2. Foreign remittances
The TCS changes affect individuals as well as businesses. From now on, any foreign remittance exceeding INR 700,000 (about US$9,500) will attract a tax collected at source at the rate of 5% at the time of remitting the money, or at the rate of 10% if PAN or Aadhaar identity documents are not available. However, TCS will not be applicable if the remitter is subject to the TDS under the Income Tax Act, 1961.
For education-related foreign remittances funded by loans, a TCS of 0.5% will be levied for an amount above INR 700,000.
3. Overseas tour packages
5% TCS will be applicable on purchase of overseas tour packages, irrespective of the value.
The TCS, however, will not be applicable if a person makes all arrangements for a foreign tour on his or her own (for example if an air travel agent sells only the air ticket and not the complete package).
Tax Deducted at Source on e-commerce transactions
After long discussions on bringing the e-commerce ecosystem into the tax framework, the Government has decided to tax online retail companies. From now on, marketplace-based e-commerce businesses will be required to pay TDS at the rate of 1% of the gross amount on sales or services facilitated by the digital platform.
Indian law differentiates among three types of e-commerce platforms:
- Inventory-based model (where goods are directly sold by the e-commerce platform);
- Marketplace-based model (where the e-commerce platform acts as an operator between buyers and sellers); and
- Hybrid of inventory- and marketplace-based model.
The new provisions of the Income Tax Act are applicable only to marketplace-based models.
E-invoicing for large companies
From now on, businesses with an aggregate turnover exceeding INR 5 billion (about US$68 million) in a financial year will have to generate e-invoices from October 2020 onwards. The digitization of invoices will enable the government to monitor tax compliance more efficiently. E-invoicing involves uploading details about GST invoices, credit notes, debit notes for all business-to-business supplies and exports on a portal designated by the Goods and Services Tax Network (GSTN), the company that processes tax returns. This function should be integrated with the process for the regular invoices created by the companies’ own accounting or billing systems.
It is expected that larger companies will be most affected by the changes, as many of them generate around 5,000 invoices per day.
Experts say that although the change is expected to reduce errors and mismatches and may prove helpful in the long run, it will create additional workload for firms in the beginning. Some large companies are prepared for this change, but some businesses are still struggling because they lack the IT and other resources to implement e-invoicing.
The Indian Central Board of Indirect Taxes and Customs (CBIT) has waived penalties on non-compliance with e-invoicing requirements for the month of October 2020, provided that the issue is resolved within 30 days. CBIT officials say no such relaxation will be available for invoices issued going forward from November 1, 2020.
Reduced compliance stress under the Taxation and Other Laws Bill 2020
On September 22, 2020, India’s parliament passed the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Bill 2020. The main goal of the new act is to reduce tax compliance burden during the ongoing COVID-19 pandemic.
The new law replaced the Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020, that came into effect in March. It implemented changes to certain Finance Acts — the Central Excise Act, 1944; Customs Act, 1962; Direct Tax Vivad se Vishwas Act, 2020; the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015; and the Prohibition of Benami Property Transactions Act, 1988.
Key provisions are detailed below.
Compliance relief
The new law has extended the deadline for filing GST annual returns and audit reports for the 2018-19 fiscal year by a month — to October 31, 2020. The deadline to file belated income tax returns for FY 2018-19 has been extended to November 30, 2020, from the earlier deadline of September 30, 2020.
Surcharge capped at 15 percent on dividend income for FPI investors
As the term suggests, a surcharge is an additional charge or tax in India. The new law amends the Finance Act, 2020, to clarify that the surcharge on dividend income of Foreign Portfolio Investors (FPIs) is capped at 15 percent.
Previously, the dividend income earned by FPIs was subject to a 37 percent surcharge that took effective dividend tax rates to nearly 29 percent (this includes 20 per cent tax on dividends received, 37 percent surcharge and 4 percent educational cess). The new effective tax rate will consequently be about 24 percent. The new surcharge is effective from April 1, 2020.
Foreign Investment facilitation
The Bill establishes a new regime for taxing foreign funds registered in the International Financial Services Centre (IFSC) at Gujarat International Finance Tec-City (GIFT City).
The changes are implemented through amendments to the Income Tax Act. The incentive covers Category-III Alternative Investment Funds located in the IFSC. Under proposed amendments to the Act, profits and business income earned by such funds from GIFT City are tax-exempt. This would have the effect of convincing foreign funds to relocate their base to IFSC. The proposed changes are comparable to the tax treatment of foreign funds domiciled in offshore fund jurisdictions.
Previously, foreign funds investing in India had to state where they wanted to pay taxes, which would be accepted only if they had a business registered in the chosen jurisdiction, and not on the basis of which jurisdiction had a lower tax rate.
Tax re-registration for charitable trusts and NGOs
Under the Finance Act 2020, certain organizations such as charitable trusts and tax-exempt institutions have been asked to reapply for income tax registration.
The original deadline was June 1, 2020, and later it was extended to October 10, 2020. The deadline for this re-registration has now been extended to April 1, 2021.
Upon fresh registration, the income tax department will issue an electronically generated Unique Registration Number (URN) to all charitable and religious institutions.
The re-registration is aimed at simplifying tax compliance for new and existing charity institutions. It will also enable the government to create a national register of all charitable and religious institutions, which will in turn help eliminate tax fraud and malpractice.
Conclusions
The Indian government is trying to improve the investment and business climate in the country by introducing tax incentives, such as facilitating a shift of foreign investment funds to the country through a lower surcharge on dividends for FPI investors, and tax compliance relief. At the same time, certain changes — such as the new Tax Collected at Source regime, implementation of the Tax Deducted at Source on e-commerce transactions, and e-invoicing for large companies — impose additional tax burden and will hamper India’s transformation into a pro-business jurisdiction. India remains a country with a complicated tax system, with tax rates that are uncompetitive globally and that encourage entrepreneurs to consider setting up their companies in more tax-efficient and pro-business countries. Singapore is one such jurisdiction, which provides numerous business assistance programs and tax incentives. In particular, Singapore provides full tax exemption for resident holding companies that receive foreign-sourced dividends from subsidiaries that have been taxed abroad at a corporate income tax rate of at least 15% (which is satisfied in the case of India). So from a tax perspective, it is a very rational choice for Indian entrepreneurs to create India-Singapore subsidiary-holding structures. Contact our firm if you are doing business in India and would like to know how incorporating a Singapore holding company may benefit the bottom line of your business.
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