Budget 2020: Experts dive into IT reforms, startup ESOP tax payment plan, others
When the Finance Minister Nirmala Sitharaman announced the new income tax slabs on Saturday, little did anyone realise that it is going to be part of a social experiment. It could be a future that differentiates the young and the old.
"I see an India where, in a couple of years, you won't find any deductions like HRA or any of those sections which gave you exemptions for investing in financial products for tax savings. It will be a simplified tax structure that the younger people will like. I believe there will be those who will continue with the deductions-based tax systems too. Overall it is a good Budget because it promotes a digital economy," says Archit Gupta, Founder of ClearTax.
While the multi-tier tax structure is real now, only those who opt out of claiming deductions can avail of these new income tax rates. Others, on the other hand, will continue on the same structure, that is, anyone earning more than Rs 10 lakh will pay 30 percent tax.
Under the new income tax slab, when you claim no deductions, the rates are:
Up to Rs 5 lakh – 5 percent
5.7 lakh to 7.5 lakh – 10 percent
7.5 lakh to 10 lakh – 15 percent
10 lakh to 12.5 lakh – 20 percent
12.5 lakh to 15 lakh – 25 percent
Above Rs 15 lakh – 30 percent
"We have to see how it works before we feel this is going to add more money in the hands of the taxpayer. But the government intends to put more money in the hands of the people and boost consumption," says Pavan Sharma, Founder of BCL India, a corporate tax consulting firm.
The good news is that startups can pay taxes in any of the three years that they turn profitable in ten years, and their turnover threshold has been increased from Rs 25 crore to Rs 100 crore.
The government also removed the burden of paying the dividend distribution tax by companies. This 15 percent, which was charged on companies will now be forgone.
The tax, instead, will become a part of the income slab of the person who receives the dividend. It can go as high as 43 percent if you are part of the super-rich category.
The government has also deferred tax payments for ESOPs to five years or whenever the employee quits his company or sells the ESOPs, whichever is earlier. Startups keen to qualify for this will have to register under Section 80IAC of the Income Tax Act, which means more paperwork.
Since most companies may not choose to register under section 80IAC, employees may have to pay taxes under the old regime. The government is yet to clarify the same.
"While the government claims that it is being startup-friendly. The tax authorities have targets to increase tax collections and they will do anything to meet those targets. The authorities play on the fact that in most cases the startup cannot provide documents of tax compliance. If these documents are not presented on time they will ask companies to pay higher taxes, based on the notional valuation of their companies," says Pavan.
Further, companies who forgo accelerated depreciation and other deductions will be taxed at 25 percent, including surcharge, or if they claim deductions they will continue to pay 30 percent.
There is a provision for newly set up manufacturing companies, who will be charged a tax of 15 percent. There is also a push for electronic invoicing under GST.
"The government wants electronic invoicing to speed up under GST for companies in the Rs 500 crore revenue category. This will eventually trickle down to companies in the Rs 100 crore category, which means the entire manufacturing and vendor ecosystem can become part of an electronic system," says Archit.
Budget 2020 is certainly aimed to please, but the startups have to read the fine print before celebrating.
(Edited by Suman Singh)