How the Budget of 2020 Affects the Current Tax Structure?

by Shatakshi Gupta

 The much-awaited budget was tabled on 1st February in parliament by our finance minister Ms. Nirmala Sitharaman. Budget derived from the word ‘bougette’ which means leather bag as till last year budget was put before parliament in a leather bag. Last year our finance minister change its name from budget to BAHIKHATA ,a more Indian name and gave a new red color traditional Bahi-Kahata design to it. The word budget does not find any mention in our constitution; In our constitution, it is called an ANNUAL FINANCIAL STATEMENT, which is mentioned in article 112. The budget is the account book which consists of the total revenue receipts as well as expenditure receipts for the upcoming financial year which starts from 1st April.

This year budget is based on theme ease of living which is further divided into three subheadings, viz. aspirational India, economic development for all, caring society. The market was expecting much more from the budget but it did not meet the expectations of the market, though budget laid emphasis on the agriculture sector and long term job creation but lack in fulfilling the expectation of short term demand creation which is very much essential for the boost of a current economic slowdown. Today in this article our focus will be on how this budget affects the tax structure?

Changes in Income Tax

The new budget proposed new optional Income tax structure. Earlier there were 4 tax slabs which now increased to 6 slabs, under which taxpayers will have pay no tax for annual income up to INR 2.5 lakh( just like before), those earning between INR 2.5 lakh to INR 5 lakh will pay 5 percent tax. While income between INR 5 lakh to 7.5 lakh will be taxed at 10 per cent, earning of INR 7.5 lakh to 10 lakh will attract 15 per cent tax. Taxpayers will have to pay 20 per cent and 25 per cent tax for incomes between INR 10 lakh to 12.5 lakh and INR 12.5-15 lakh, respectively. Income above INR 15 lakh will be taxed at 30 percent, just like earlier. Also an additional 4 percent cess is still there just like before.

Prima facie it looks like that government reduced tax, as there was a demand for so to boost demand, but here is a catch; if you opt the new tax regime then you will not be entitled to various Income tax deductions, like HRA, home loan interests, saving schemes, and other deductions mentioned in section 80c and 80d of I-T Act. The government made 2 options for taxpayers either they can choose a lesser percentage tax slab and forgo 70 such deductions or they can go for the existing tax regime. According to Finance Minister, this new tax structure will give more money in hands of people and increase more net disposable income, also officials of the Finance Ministry told that deductions are not claimed by the majority of taxpayers.

Some Qualitative improvements

Government announced the creation of Tax charter which consist the rights of taxpayers just like in USA Canada and Australia, this will further strengthen the trust between the government and taxpayers. With the objective of further improving the effectiveness of tax administration and eliminating human interface, a faceless appeal scheme is proposed to be launched.

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Dividend Distribution Tax

Another major announcement in the budget was the removal of the Dividend Distribution Tax. DDT is a tax levied on dividends that a company pays to its shareholders out of its profits. DDT is taxable at source and is deducted at the time of the company distributing dividends. However, an additional tax is imposed on the shareholder, who receives over INR. 10 lakh in dividend income in a financial year. The government abolished this DDT, which was imposed on companies and it will cost around INR. 25000 crore to  Government . But to build market trust and promote companies’ government took such a step.

Employee stock option plans (ESOP) Tax

 Employee Stock Ownership Plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company, employees of the company get shares at a discounted price. To enhance start-up ecosystem the budget proposes to postpone by 5 years the tax collection on income earned from ESOPs or till employees leave the company or when they sell the shares, whichever is earliest. This will be only applicable to Starts-ups which are established after April 2016. This is also seen as a welcome move by the Finance Minister.


Extension of tax holiday for affordable housing

In order to promote ambitious ‘housing for all‘ program,last year government, the government had allowed additional tax deduction up to 1.5 lakh for interest paid on housing loans taken between April 1, 2019, and March 31, 2020. This is applicable for houses priced below INR 45 lakh in tier II, III and peripheral parts of metro cities. This time period is now extended until March 2021. This will help in reviving the realty sector which is currently facing a gruesome slowdown.

Withholding tax

Withholding tax is an amount that an employer deduct from employees’ wages and pays directly to the government. This tax levied on income (interest and dividends) from securities owned by a non- resident, as well as other income paid to non-residents of the Country. So, in wake of listing more bonds at IFSC(International financial service center) exchange, the government has proposed to reduce the withholding tax rate to 4% from 5% on interest payment on bonds listed in the stock market. This step will attract more foreign capital.

Some other tax-related highlights

  • To boost the Indian MSME sector government increased custom duties on many imports.
  • For the above motive government also proposed that e-commerce operators shall deduct TDS on all payments and credits to E-Commerce participants at 1% in Pan/ Aadhar cases and 5% in non-Pan / Aadhar cases.
  • Chief election commissioner and other election commissioner will pay income tax on their perks.
  • To boost the Power sector the government announced that new power generation companies will be taxed at 15% corporate tax.
  • To widen the GST base new simple format of GST return will be introduced from April 2020.

These were some key announcements by the government in the budget which will affect the tax receipts of the Government of India. Though the budget is not very populist and does not include some big announcement,it is seen as a sustainable budget, which will spur long term growth.