Finance Act 2020 Changes to Tax Residency Rules for Non-Residents YouTube Lecture Handouts

Get unlimited access to the best preparation resource for IAS : Get detailed illustrated notes covering entire syllabus: point-by-point for high retention.

Finance Act 2020

Changes to Tax Residency Rules for Non-Residents

  • Earlier - Income-tax Act provided that Indian citizens or persons of Indian origin who were resident outside India would qualify as a tax resident of this country only if they spent 182 days or more in India in the relevant year.
  • Now - New law reduced the period from 182 days to 120 days. The 120-days rule will apply only in cases where the individual՚s total income arising outside India exceeds INR 1.5 million during the fiscal year
  • The provisions of the Finance Act 2020 will be incorporated into the national regulations — most of them in the Income tax Act — and will come into force on April 1,2020.
  • Nearly 104 amendments have been made, through either changes or omissions to existing sections or by insertion of new ones.
  • The new law introduces the provision that an Indian citizen will be considered resident of India if that person is not liable to taxation in any other country because of domicile or residence rules; or any other criteria of similar nature. This amendment will apply only if total income, other than the income from foreign sources, of such an Indian citizen exceeds INR 1.5 million during the tax year.

Startup Waivers

  • From 3 years out of 7 years to 3 years out of 10 years
  • Turnover threshold has been increased from INR 250 million to INR 1 billion.

Abolish DDT

  • Dividend Distribution Tax abolished
  • Now dividend income will be taxable in the hands of the recipients, at the rate of 10 % for dividends paid to shareholders resident in India and 20 % if paid to foreign investors
  • Deduction for Inter-Corporate Dividends
  • Abolition of the Dividend Distribution Tax will benefit Singapore-based holding company structures. Singapore՚s efficient tax system allows businesses to enjoy low tax rates and take advantage of numerous reliefs as well as double taxation agreements. One such provision is Singapore՚s full taxation relief for resident holding companies receiving foreign-sourced dividends from subsidiary companies that have been taxed abroad at a corporate income tax rate of at least 15 % (which is satisfied in the case of India) . Therefore, from now on, it becomes very attractive for an Indian venture to create a Singapore holding company structure.

HUF Concessions

HUF Concessions

Equalization Levy

  • At 2 % from funds received by an operator mainly provided for Indian residents

The equalization levy is a tax charged by India from June 1,2016, on some specified services provided by non-residents in the ‘hard to tax’ digital sector.

Finance Act 2020 has extended the scope of this levy to cover consideration received for the following e-commerce supplies or services provided after April 1,2020:

  • Online sale of goods owned by the e-commerce operator; or
  • Online provision of services provided by the e-commerce operator; or
  • Online sale of goods or provision of services or both, facilitated by the e-commerce operator.

E-commerce operator refers to a non-resident who owns, operates, or manages an electronic facility or platform for online sale of goods or online provision of services.

Corporate Tax for Domestic Companies

  • Once the company opts for the 22 % rate in a particular financial year, that choice cannot be withdrawn in any subsequent year.
  • 22 %+ applicable surcharge of 10 % and cess of 4 % making effective tax rate 25.168 %

The main condition is that such companies should not claim any exemptions or incentives under other income tax provisions. These include:

  • Deductions available for units established in special economic zones;
  • Additional depreciation and investment allowance towards new plant and machinery made in notified backward areas;
  • Deductions for tea, coffee, and rubber manufacturing companies;
  • Deductions for deposits made towards a site restoration fund by companies engaged in extraction or production of petroleum, natural gas, or both, in India;
  • Deductions for expenditures made for scientific research, etc.

Corporate Tax for New Manufacturing Companies

15 %+ applicable 10 % surcharge & 4 % cess = effective rate 17.16 %

A domestic Indian company will be entitled to the low corporate tax if it satisfies the following conditions:

  • It has been set up and registered on or after October 1,2019, and has started manufacturing on or before March 31,2023.
  • It should be engaged in the business of manufacture of any article or thing, and research in relation to such article or thing. The company can also be engaged in the distribution of such goods produced by it.
  • It should not be formed by the splitting up and reconstruction of an already existing business.
  • It does not exploit any previously used plant or machinery, unless used outside India or its value does not exceed 20 % of the total value of the company՚s plant or machinery; it does not use a building previously used as a hotel or a convention centre, etc.

Developed by: