Key tax changes announced in budget

The 2019-20 budget has ushered in several changes on the tax front with an intention to increase foreign investment into India and to provide for the rationalization of existing taxes.

Some of the key changes introduced by budget are:

Higher surcharge

In place of the existing flat 15% surcharge on income tax payable by specified taxpayers (including foreign portfolio investors set up as trusts) earning more than ₹10 million (US$ 139,765), the budget proposes to introduce progressive surcharge rates calculated at: 1) 15% for taxpayers earning more than ₹10 million but less than ₹20 million, 2) 25% for taxpayers earning between ₹20 million and ₹50 million, and 3) 37% for taxpayers in earning more than ₹50 million. This would increase the tax rates up to 42.7% for the highest slab of taxpayers.

Gifts to non-residents to be taxable

By virtue of section 56(2)(x) of the Income Tax Act, 1961 (ITA), the recipient of undervalued property is taxed on the difference between the fair market value (FMV) and the amount paid for the property as “income from other sources”. Noting that there have been instances where gifts made by residents to non-residents have been claimed to be non-taxable in India on the basis that income does not accrue or arise in India, the budget has proposed to introduce a deeming fiction in the nexus rules under section 9 of the ITA to ensure that such gifts (subject to exceptions for gifts to close relatives) are subject to tax under section 56(2)(x).

Relief from deemed capital gains tax

Section 50CA of the ITA provides that in case of the transfer of unlisted shares of a company at less than the FMV, it would be deemed to be the full value of consideration for computing capital gains. The budget seeks to provide relief from the applicability of section 50CA in cases where consideration for the transfer of shares is approved by certain authorities and the transferor has no control over such determination. This budget proposes to empower the Central Board of Direct Taxes to notify transactions to which the provision would not apply, although no indicative list of transactions has yet been notified.