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February 3, 2021
Budget 2021 – What’s in it for small businesses?

While the country is embarking on a mass vaccination drive, The Union Budget 2021 – announced on 1 February, promises to be the economic vaccine that would drive recovery across sectors. The implementation of the same will have a huge role in determining the true outcome of the budget.

Here are five key budget proposals on direct tax that I think would have an impact on small and medium businesses

1. Timely deposit of Employees’ contribution to labour welfare funds

Budget Proposal: Late deposit of employees’ contribution to labour welfare funds (eg. Provident Fund (PF), Employees State Insurance) by the employers will not be allowed as a deductible business expenditure to the employer.

Implication: Here is an example to understand the implication. Let’s say the due date for PF contribution for the month of January is 15th of February. If the employer delayed in depositing the employees’ contribution to PF beyond the 15th, there were judicial precedents that were being relied upon to claim such delayed deposits as deductible expenditure for tax purposes. The budget proposal aims to discourage delays in depositing the employees’ share by disallowing such expenditure if the same is not remitted within the due date prescribed under the PF Law (i.e.15th of the subsequent month).

This move would also have the effect of protecting the interests of employees.

2. TDS/TCS related

a. Non-filing of Income Tax Returns may adversely impact cash flows

Budget Proposal: In order to discourage the practice of non-filing of returns by persons in whose case substantial tax (Rs. 50,000 or more) has been deducted/collected for each of the past two years, a proposal has been made to increase the rate of TDS/TCS to twice the specified rate or 5%, whichever is higher.

Implication:

The deductee who has defaulted in filing returns for the past two years would receive payment after TDS/TCS at a higher rate, thereby impacting the timing of cash flows. Example: Mr X, a service provider has not filed his Income Tax Returns for FY 19-20 and FY 20-21 and the TDS in his name for each of those years is Rs. 60,000 and Rs. 75,000 respectively. In such a case, a businessman availing of professional services from Mr. X in FY 21-22 would be required to deduct tax at 20% (i.e. twice the specified rate of 10% for professional services). *

*The provisions of the Finance Bill in this regard appear to be anomalous and it would be pertinent to revisit the provisions once the Bill is assented to by the President of India.

This may result in practical difficulties as the business owner would now also be required to know if his vendor has filed returns for the past two years in order to determine the rate of TDS.

b. TDS on Purchase of Goods

Budget Proposal: Introduction of a TDS provision requiring tax to be deducted at 0.1% on the purchase of goods from a resident. This is applicable only if the value of purchases from a single person exceeds 50 lakh rupees in a financial year. In order to reduce the compliance burden, it is also proposed to provide that the responsibility of deduction shall lie only on the persons whose turnover exceeds Rs 10 crores in the preceding financial year.

There may be a situation in which a single transaction is covered by both, the new TDS provision and the TCS provision on the sale of goods. In such a scenario, it is proposed that the TDS provision would override the TCS provision.

Implication: This cast an additional responsibility of TDS on business owners who now have to constantly track supplier accounts to monitor whether the thresholds are being breached or not.

3. Increased turnover threshold for Tax Audit

Budget Proposal: Increase the turnover limit for tax audit for persons who are undertaking 95% of their transactions digitally from Rs. 5 crores to 10 crores.

Implication: Apart from reducing the compliance burden on Small and Medium Enterprises (SMEs), this move incentivizes non-cash transactions to promote the digital economy.

Despite the turnover threshold for tax audit being enhanced, the requirement for audit would also have to be evaluated from a presumptive taxation stand-point. Example: A business with a turnover of Rs. 7 crores and undertaking atleast 95% of its transactions digitally may still need to evaluate the applicability of audit under the Income Tax Law (though its turnover is below Rs. 10 crores) if its profits are less than a prescribed percentage* of its revenues.

*The percentages refer to those contained in the presumptive taxation provisions.

4. Impetus to Dispute Resolution for Small Tax Payers

Budget Proposal: Setting up of a Dispute Resolution Committee (DRC) for taxpayers in whose case:

  1.  Returned income is <= 50 Lakh rupees; and
  2. Variation proposed in the specified order is <= 10 lakh rupees

Implication: This gives small tax payers an alternative route to take when served with an adverse order* with the object of settling disputes in a more timely manner.

* There are multiple other conditions that need to be satisfied to be eligible to approach the DRC

5. Tax Benefit for Start-ups

Budget Proposal:

  1. Extension of the eligibility period by one year for eligible start-ups to claim tax holiday
  2. Extension of the eligibility period for claiming capital gains exemption for investment made in start-ups by one more year to 31st Match, 2022.

Implication:  The aforementioned proposals incentivize the setting-up of start-ups in the country and also encourage investments being made in them. However, it is important to note that not every start-up is an eligible start-up for tax holiday and capital gains exemption. Thus, care should be taken to evaluate eligibility before planning transactions.

Whatever has been discussed above is only the tip of the ice-berg. The budget proposals are a lot more extensive in nature and should you wish to discuss more on the same, feel free to write to ndjandassociates@gmail.com

The author Rishi Dabrai can be reached at ndjandassociates@gmail.com or at +919945236982

Rishi Dabrai
Chartered Accountant
Partner, NDJ & Associates

“DISCLAIMER: The views expressed are solely based on the opinion of the author and Capital Float (CapFloat Financial Services Pvt Ltd) does not necessarily endorse or subscribe to it. Capital Float (CapFloat Financial Services Pvt Ltd) shall not be liable for any loss/damage caused to any person/organization directly or indirectly. Capital Float does not guarantee the contents of the views expressed and the same are not binding on Capital Float.”

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January 28, 2021
Budget 2021 – Let’s Ideate

“Send me your inputs so that we can see a Budget which is a Budget like never before, in a way. 100 years of India wouldn't have seen a Budget being made post-pandemic like this. And that is not going to be possible unless I get your inputs and wish list, clear observation of what has put you through the challenge... Without that, it is impossible for me to draft something which is going to be that Budget like never before” – Hon’ble Finance Minister of India.

In the spirit of the aforementioned words of the Hon’ble Finance Minister, this article attempts to deliberate on certain aspects of the tax law, and how certain changes may help the respective classes of taxpayers and businesses concerned.

1. Liberalization of the scheme for voluntary declaration of unaccounted income
At present, the effective tax rate for declaring unaccounted income voluntarily in your income tax return is 78%. The very thought of losing 78% of the fortune deters such declarations. Can this regime be replaced with an effective tax rate of about 35% on declared unaccounted income coupled with a compulsory deposit of 40% of the declared amount in 15-year bonds? In such a case, the declarant gets to keep 65% of their declared amount though they get 40% back in their hands after 15 years. The government can allow banks to issue these 15-year bonds and use the money for credit expansion at low rates of interest to boost the economy.

2. Cashback to the final consumer a portion of GST paid if the purchase is through cashless means
An incentive like this from the government for a limited duration will encourage people to increase their purchases, thereby boosting the consumption demand and subsequently, the economy. Cashback to the final consumer will be more effective than cutting the GST rates as oftentimes rate cuts are not passed on by businesses. The Government may consider adding an additional condition that only “Made In India” products be eligible for cashbacks.

3. Discussion points arising out of Covid-19
Many individuals have got stuck in India due to travel restrictions, necessitating stay with family in India while working for foreign employers. The government released a clarification in May 2020 excluding the period between 22 March 2020 and 31 March 2020, while determining the residential status for FY 2019-20. Similar clarification is expected for FY 2020-21 as well since a change in residential status may result in increased tax liability for some individuals who have been forced to stay in India.

Furthermore, the Government may also consider providing additional tax deductions for expenses incurred on Covid-19 tests and treatment in private hospitals, which is a need of the hour.

4. Measures for easing the cash flow burden
Relaxation of advance tax norms with respect to Dividend income
India has moved to the traditional system of taxation of dividend, whereby the shareholder pays tax on the dividend income as compared to the company paying tax on such dividend declared, which was previously the case. Thus, it may be beneficial for the advance tax provisions to be amended suitably to provide relaxation from levy of interest if the shortfall in payment of advance tax is attributable to under-estimation of the dividend income.

Enhance the scope to apply for lower tax collection certificate
The scope of Tax Collected at Source (TCS) has been widened to cover the sale of motor vehicles, remittance of foreign currency under LRS or sale of an overseas tour package and sale of goods. This has resulted in persons covered by the said TCS provisions paying something more (in the form of TCS) at the time of purchasing goods or vehicles or making foreign remittances, as the case may be. A budget proposal enabling such persons (if their estimated tax liability justifies collection of tax at a lower rate) to apply for a lower tax collection certificate would go a long way in easing the crunch in cash flow resulting from an increase in cash outflow on account of TCS at the time of purchase.

With the promise of a Budget like never before, the nation waits in anticipation for the clock to strike 11 on the morning of 1st February 2021 - the date and time when the Budget speech will be delivered!

The author Rishi Dabrai can be reached at ndjandassociates@gmail.com or at +919945236982

Rishi Dabrai
Chartered Accountant
Partner, NDJ & Associates

“DISCLAIMER: The views expressed are solely based on the opinion of the author and Capital Float (CapFloat Financial Services Pvt Ltd) does not necessarily endorse or subscribe to it. Capital Float (CapFloat Financial Services Pvt Ltd) shall not be liable for any loss/damage caused to any person/organization directly or indirectly. Capital Float does not guarantee the contents of the views expressed and the same are not binding on Capital Float.”

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September 5, 2020
Tax Computation – 2 regimes

India’s Minister of Finance and Corporate Affairs Smt. Nirmala Sitharaman, on February 1, 2020 tabled the Union Budget for the FY 2020-21 in the Lok Sabha. She announced a new income tax regime in addition to the existing one, to provide relief to individual taxpayers. 

However, this new regime is optional and the taxpayers can choose between the old and the new, basis their suitability. The new regime has foregone certain deductions and exemptions. The tax rates have been reduced, but taxpayers will have to forego exemptions when choosing the new tax regime.

Let us take a look at the tax rates of individuals whose age is less than 60 years under both the regimes:

Income tax slabsTax rate (Old Regime)Tax rate (New Regime)
Up to 2.5 lakhsNilNil
2.5-5 lakhs5%5%
5-7.5 lakhs20%10%
7.5-10 lakhs20%15%
10-12.5 lakhs30%20%
12.5-15 lakhs30%25%
Above 15 lakhs30%30%

From the above table, it is evident that the tax rates are lower in the new regime than the old regime. But, there is a list of exemptions and deductions that has to be conceded by the taxpayers. This list includes but is not limited to the following:

i) Leave Travel Allowance (LTA)

ii) Conveyance

iii) House Rent Allowance (HRA)

iv) Uniform Allowance

v) Helper allowance

vi) Professional tax

vii) Standard deduction

viii) Other special allowances [Section 10(14)]

ix) Interest on housing loan (Section 24) on self occupied property

x) Chapter VI-A deduction (80C,80D, 80E and so on) (Except Section 80CCD(2) and 80JJA)

Savings calculation based on income

PARTICULARSOld Tax Regime(Rs.)
Gross Income15,00,000
Less: Deductions- 
      U/S 80C (Investment in PPF)1,50,000
      U/S 80D (Medical Insurance – Self, spouse, children)25,000
      U/S 80TTA (Interest Income from Savings account on a bank)10,000
Taxable Income13,15,000

TAX ON TAXABLE INCOME (OLD TAX SLAB)(Rs.)(Rs.)
At normal rate, on the income of Rs. 13,15,000:  
Up to 2.5 lakhsNil 
2.5-5 lakhs @5%12,500 
5-7.5 lakhs @20%50,000 
7.5-10 lakhs @20%50,000 
10-12.5 lakhs @30%75,000
12.5-13.15 lakhs @30%19,500 
Total 2,07,000
Add: Cess @4% on Rs. 2,07,000 8,280
Tax Liability 2,15,280

From the above illustration, it is evident that taxpayers can reduce their taxable income by investing in tax saving instruments such as Provident Fund, Medical Insurance, etc. that appear as deductions under section 80C to 80U of the Income Tax Act, 1961.

PARTICULARSNew Tax Regime (Rs.)
Gross Income15,00,000
Less: DeductionsNil
Taxable Income15,00,000

TAX ON TAXABLE INCOME (NEW TAX SLAB)(Rs.)(Rs.)
At normal rate, on the income of Rs. 15,00,000:  
Up to 2.5 lakhsNil 
2.5-5 lakhs @5%12,500 
5-7.5 lakhs @10%25,000 
7.5-10 lakhs @15%37,500 
10-12.5 lakhs @20%50,000 
12.5-15 lakhs @25%62,500 
Total 1,87,500
Add: Cess @4% on Rs. 1,87,500 7,500
Tax Liability 1,95,000

From the above illustration, having regard to the income level and the deductions being claimed by the taxpayer, it is possible that taxpayers can save money because of the low tax rates of the new regime, however the same needs to be evaluated on a case-to-case basis.

Tax rates under both the regimes for senior citizens

Tax rates for individuals whose age is 60 years or more but less than 80 years (Senior citizens):

Income tax slabsTax rate (Old Regime)Tax rate (New Regime)
Up to 2.5 lakhsNilNil
2.5-3 lakhsNil5%
3-5 lakhs5%5%
5-7.5 lakhs20%10%
7.5-10 lakhs20%15%
10-12.5 lakhs30%20%
12.5-15 lakhs30%25%
Above 15 lakhs30%30%

Tax rates for individuals whose age is 80 years or more (Super senior citizens):

Income tax slabsTax rate (Old Regime)Tax rate (New Regime)
Up to 2.5 lakhsNilNil
2.5-5 lakhsNil5%
5-7.5 lakhs20%10%
7.5-10 lakhs20%15%
10-12.5 lakhs30%20%
12.5-15 lakhs30%25%
Above 15 lakhs30%30%

The Government has offered two types of regimes for tax computations for individuals– the old and the new system. The taxpayers should scrutinize and study both systems before opting for one. They should take into consideration their salaries, expenditures, savings, etc to select the system that is suitable for them. 

Disclaimer: This blog post is based on the provisions of the Finance Act,2020 as passed by the Parliament. Any subsequent notifications have not been factored into this post.