February 3 2020

Union Budget 2020 presented to Parliament – corporate tax

Source: IBFD Tax Research Platform News

On 1 February 2020, the Finance Minister presented the Union Budget 2020 before Parliament. The key amendments introduced in the Finance Bill 2020 regarding corporate tax are summarized below.

Removal of dividend distribution tax (DDT)

  • To increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, the classical system of dividend taxation has been adopted under which companies are not required to pay DDT.
  • Dividends will be taxed only in the hands of the recipients at the applicable rate.
  • To remove the cascading effect, the dividends received by a holding company from its subsidiary will be allowed as a deduction, subject to certain conditions.

Concessional rate of income tax for power generation companies

To attract investment in the power sector, the concessional corporate tax rate of 15% has been extended to include companies engaged in the generation of power/electricity.

Tax concession for other foreign investments

  • The concessional withholding tax rate under section 194LC of the Income Tax Act 1961 (the Act) for interest payments made to non-residents in respect of funds borrowed and bonds issued has been extended up to 30 June 2023.
  • The period of concessional withholding under section 194LD of the Act for interest payments made to foreign portfolio investors (FPIs) and qualified foreign investors (QFIs) in respect of bonds issued by Indian companies and government securities has been extended up to 30 June 2023 and also applies for municipal bonds.
  • To incentivize listing of bonds at the International Financial Services Centre (IFSC) exchange, the withholding rate has been reduced to 4% on interest payments made on bonds listed on this exchange.

Tax benefits for start-ups

  • To boost the start-up ecosystem, the tax burden for employees of such start-ups is eased through deferral of tax payments on employee stock option plans (ESOPs) by 5 years, or until employees leave the company or sell their shares, whichever is earlier.
  • 100% deduction of profits for 3 consecutive years out of 10 years is allowed if the total turnover does not exceed INR 1 billion.

Concessional tax rate for co-operative societies

To bring parity between co-operative societies and companies, co-operatives will have the option to pay income tax at a lower tax rate of 22% plus applicable surcharge and cess, subject to certain conditions.