Changes introduced by Budget 2020 which require clarity in Budget 2021

Budget 2020 introduced several changes in the Incometax provisions Some of most discussed and debated ones being scrapping of dividend distribution tax DDT regime expansion of tax collection at source TCS provisions on sale of goods and expanding the scope of digital tax provisionsOver the past one year stakeholders have highlighted few concerns on the interpretational aspects and practical challenges in complying with these new provisions and changes It is expected that in the upcoming Budget 2021 the government will address these concerns Some of the key issues that require clarity includeTreaty benefits for dividendsBudget 2020 discarded DDT and adopted the classical system of dividend taxation Accordingly dividend which was earlier exempt in the hands of the shareholders now becomes taxable This is a welcome move as nonresident shareholders can now take benefit of the tax withheld on the dividend income in their home countryNonresidents can also claim benefit of lower tax withholding rates given in the applicable tax treaty on meeting specified conditions One such condition in case of dividends is meeting the beneficial ownership test It is pertinent to note that neither the Incometax Act 1961 the Act nor the tax treaties define or clarify as to what constitutes beneficial ownershipThough few judicial precedents and the OECD literature provides some guidance on this matter however at times it becomes difficult to apply these with certainty in some cases based on the particular facts and circumstances Particularly in case of fiscally transparent entities multitier structures and ultimate shareholders residing in different jurisdictions taxpayers have experienced some interpretation challengesAlso at the tax withholding stage at times payers are in dilemma as to whether a declaration from the recipient that he is beneficial owner should suffice or do they need to go beyond the declaration ie to obtain further documentary evidenceTherefore it is desirable that suitable clarifications are issued on this subject to remove ambiguity and avoid any unnecessary potential litigationCredit for intercorporate dividendPost abolition of DDT provisions for credit of intercompany dividend were introduced to avoid double taxation of the same income These provisions permit deduction for intercorporate dividends received by a domestic company in case such company further declares dividends to its shareholders However clarity is required as regards Amount eligible for deduction ie whether the gross dividend received or the net dividend after considering permissible deductions under the Incometax Act should be considered In certain cases dividend received by an Indian company from a foreign company is subject to tax at special rates In such cases there may be a difference in the corporate tax rates and special rates This may lead to some challenge with the tax authorities on computation of this deduction Whether any deduction for dividend received in any earlier year can be claimed in any subsequent year when the company actually distributes dividendTCS on sale of goodsAs per the changes introduced by Budget 2020 TCS is required to be collected by the seller on consideration received on sale of any goods under specified conditionsTo address stakeholders concerns relating to these provisions CBDT issued some clarifications last year It interalia clarified that transactions in securities which are traded through recognized stock exchanges will be outside the purview of these provisions Rationale cited was that in these transactions there is no one to one contract between the buyers and the sellersHowever the issue remains whether unlisted shares offmarket sale of shares particularly which form part of the sellers investment portfolio would get covered As the term goods is not defined under the said provisions reliance is placed on other laws and judicial precedents It would be good to review these provisions and issue necessary clarificationsEqualization levyBudget 2020 also expanded the scope of equalization levy EL 20 wef April 1 2020 by covering the nonresident ecommerce operators Many of the key terms used in these provisions which define the scope of this levy are broadly worded and need clarification It was also clarified that in case of a transactions which are covered by this levy there would be no requirement of withholding tax However this exemption was made effective from 1 April 2021 The issue of simultaneous applicability of the EL 20 and the withholding tax provisions in financial year 202021 needs to be addressedProfessional services v Technical servicesIn a welcome move the Budget 2020 reduced the Tax Deduction at Source TDS rate for Fees for Technical Services FTS to 2 per cent However TDS rate on Fee for Professional Services FPS continues to be 10 per cent The definition of FTS and FPS under the Act is overlapping in many cases This poses challenges in correct application of these provisions and could result in disputes and litigationTherefore clarity is required on this issue It may be a good idea to reduce the TDS rate on all such cases to 2 per cent to avoid any issues at a later date Further it may also be clarified whether professional services can be carried out by a company as there are conflicting judicial views on this issueTaxability of excess contribution to retiral fundsBudget 2020 amended provisions relating to taxation of salary to provide that employers contribution to recognised Provident Fund National Pension Scheme or approved Superannuation Fund which is more than Rs 75 lakhs in aggregate will be taxable in the hands of employees as perquisite Further any annual accretions by way of dividend interest on such taxable contributions will also be taxedHowever the manner mechanism for working out these details has not been prescribed Suitable clarifications provided at this juncture will eliminate subjectivity and reduce ligation in futureTo conclude clarity on the above issues would help both taxpayers and tax administration Most of these being revenue neutral measures should be considered on priority to avoid any avoidable disputes and litigation Further with the Finance Minister promising a Budget like never before one hopes that these issues which have troubled the taxpayers for past one year will get addressed in the upcoming BudgetThis story has been sourced from a third party syndicated feed agencies Midday accepts no responsibility or liability for its dependability trustworthiness reliability and data of the text Midday managementmiddaycom reserves the sole right to alter delete or remove without notice the content in its absolute discretion for any reason whatsoever