The Hon’ble Finance Minister announced the Budget 2021 with prime focus on six pillars – health and wellbeing, physical and financial capital and infrastructure, inclusive development for aspirational India, reinvigorating human capital, innovation and R&D, and minimum government – maximum governance. Despite limited fiscal headroom due to the pandemic, the Finance Minister maintained status quo on taxes and made allocations in all core areas to spur economic growth. The resultant Budget was growth-oriented, reassuring one that shall induce positivity and foster growth.
The Finance Minister proposed to enhance spending on healthcare and infrastructure, which will have the desired impact of generation of employment. Moreover, increased FDI limit from 49% to 74% for insurance sector, introduction of IPO for LIC and privatization of a few national banks would help bring liquidity in the market.
Direct Tax Measures
On the direct tax front, the Finance Minister began by offering her pranaam to the senior citizens and acknowledged their contribution in nation building. In order to provide relief to the elderly in terms of compliance, it was announced that such resident seniors above the age of 75, would not be required to file an income tax return, if they derive income in the nature of pension or interest (from the same bank in which they receive their pension income). Based on a declaration furnished by such taxpayers, the paying bank will deduct tax at source on income computed after giving effect to applicable deductions and rebate.
The Prime Minister Narendra Modi led government has always promoted digital transactions to enable greater ease of doing business. Accordingly, a slew of measures were introduced that suggest the government’s intent of transforming India into a digital India. For instance, the government has offered incentive in the form of relaxation of threshold for applicability of tax audit. It has been proposed to increase the threshold limit for a person carrying on business from INR 5 crores to INR 10 crores, where 95% of business transactions are done in digital mode.
CHANGING WAY OF DISPUTE RESOLUTION
Indian Tax Administration is also changing its ways. Driven by the principle of ‘minimum government and maximum governance’, the tax department went for a ‘faceless e-volution’ only last year. Resultantly, the entire chain of events- right from the filing of tax return to the dispute resolution has gone digital. The Budget 2021 extended the faceless procedures for disposal of appeals before the ITAT as well, on the same lines as the faceless appeals scheme. While the nitty-gritties in respect of the new scheme are yet to be notified, it is felt that the government ought to have waited for the successful implementation of faceless assessment and faceless appeal before hastily introducing faceless ITAT. Notably, ITAT is the final fact finding authority, for the taxpayer to argue and counter argue their tax position in light of differentiating facts. Digitising will change the litigation process.
Additionally, to provide early tax certainty for preventing new disputes and settling issues at initial stage for small and medium taxpayers, constitution of DRC has been proposed. Established with the power to reduce or waive any penalty or grant immunity from prosecution for any offence under the Income Tax Act, the DRC shall only handle disputes where returned income is up to INR 50 lakhs (where return has been filed) and aggregate amount of variation is up to INR 10 lakh. Further, orders on account of cases of search, requisition, survey or information received under DTAAs, case of detention, prosecution or conviction under various laws shall not be eligible to be taken up by the DRC.
Even the Authority of Advance Rulings has been proposed to be restructured. Under the existing provisions of the Act, the AAR consists of a Bench, including a Chairman who should be a retired judge of Supreme Court or Chief Justice of a High Court. The Bench cannot function in the absence of Chairman or Vice Chairman, which causes significant delays. To expedite the disposal of applications, it is proposed to constitute a Board of Advance Ruling, which shall substitute the existing structure. The Board would now consist of two members, not below the rank of Chief Commissioner. The rulings given by the Board will not be binding on either applicant or department and can be appealed before the High Court. Foreign investors might be reluctant to apply to a board for advance rulings that is manned by commissioners, because they would fear that the decision is going to be against them from the very beginning. Further, that fact that the ruling would not be binding may act as a deterrent for foreign investors, considering the looming uncertainty of tax cost of doing business in India.
INCENTIVISING STARTUPS
Startups contribute to economic dynamism by inciting innovation and injecting competition. Recently, start-ups have borne a huge burnt of economic devastation cause by the pandemic; therefore, the Finance Minister extended the benefit of tax holiday and capital gain exemption upon investment in a start-up. Entire profits and gains derived from an eligible business by an eligible start up is allowed as deduction under section 80-IAC of the Income Tax Act, for three consecutive years out of ten years at the option of Assessee. The deduction is subject to the condition that the eligible start up is incorporated on or after April 1, 2016 but before April 1, 2021. It has now been proposed to extend the outer date of incorporation by one year, to March 31, 2022. Additionally, to incentivise investment in start-ups, it has been proposed to extend the benefit under section 54GB of the Act by one year. The said section provides for exemption of long-term capital gain arising from transfer of residential property, owned by eligible assessee, if the assessee utilizes the net consideration for subscription of equity shares of eligible start up. It has now been stipulated that the residential property can be sold until March 31, 2022.
Furthermore, NRIs are now allowed to incorporate One Person Company (OPC) and grow without any restriction on the paid up capital and turnover, and are allowed to convert into any type of company at any time. Further, the residency timeline has also been reduced from 182 to 120 days, hence even NRI’s shall be allowed to form an OPC in India. The measure was intended to incite founders with ideas, to incorporate a limited liability structure at an early stage and should help India climb up the EODB ranking.
RESPONDING TO THE NEEDS OF THE REAL ESTATE SECTOR
The Finance Minister was also responsive to the needs of the homebuyers and the ailing real-estate sector as well. In the Budget 2019, the government had provided an additional deduction of interest, amounting to Rs 1.5 lakh, for loan taken to purchase an affordable house. It has now been proposed to extend the eligibility of this deduction by one more year. The additional deduction of Rs 1.5 lakh shall therefore be available for loans taken up until March 31, 2022, for the purchase of an affordable house. Further, the safe harbour threshold limit in case of transfer of land and building has been increased from 10 to 20 percent. Therefore, where the stamp duty value of a property exceeds 120 percent of the consideration received or accruing because of the transfer, such consideration shall be deemed to be the transfer value of the property. However, the relief has only been accorded in case the transfer of residential unit takes place during the period from November 12, 2020 to June 30, 2021 and is by way of first time allotment to any person. Further, the consideration received should not exceed INR 2 crores.
Additionally, amendments to SEBI regulations have been proposed to enable InVITs and REITs to raise funds through debt from FPIs. This will further ease access of finance to InvITs and REITs thus augment funds for infrastructure and real estate sectors.
AUTOMOBILE SECTOR
The Indian automobile sector, which was already facing an unparalleled slowdown, was further emaciated due to the pandemic and subsequent localized lockdowns. The sector will benefit immensely from the ‘voluntary vehicle scrapping policy’, which is being devised to phase out old and unfit vehicles. Under the policy, vehicles would undergo fitness tests in automated fitness centres after 20 years and 15 years for personal and commercial vehicles, respectively. Given that BS VI has rolled out, the Policy is likely to have further positive impact on automobile sector and the environment by fuelling demand for cleaner vehicles.
Rationalising Provisions of Equalisation Levy
The Government’s efforts, so far, to build a favourable tax regime for genuine taxpayers cannot be disregarded. The government has worked incessantly to clarify ambiguous provisions of the law and issue detailed guidelines on new regulations. This time, the Budget rectified the anomaly of mismatch of effective date of income tax exemption with the applicability of equalisation levy. It has been stipulated that there will be a parallel exemption from income tax if equalisation levy is payable. Further, considerations taxable as FTS or royalty as per the provisions of the IT Act read with DTAA, shall be excluded from the purview of the new levy. Clarifications as regards what constitutes online sale of goods and online provision of services have also now been provided.
LIMITED LIABILITY PARTNERSHIPS
LLP is a legal entity form commonly used by small and medium enterprises for doing business in India. In addition to companies, decriminalizing of the procedural and technical compoundable offences now extends to LLPs. Decriminalising offences, which do not involve substantial violations, shall incentivise compliance, de-clog the criminal justice system and promote congenial business climate for LLPs.
Though LLPs are regulated the same way as companies in respect to conduction of audit, maintaining books of accounts, etc. they do not enjoy the benefit of lower tax rate as accorded to companies. In addition, it has now been clarified that LLPs cannot even opt for presumptive taxation (which is available to partnerships). While expectations were rife that some benefit in the form of rationalisation of provisions would be accorded to LLPs as well, they continue to hang in between with extensive regulatory requirements with no favourable tax structure.
REVAMPING ASSESSMENT/ REASSESSMENT PROCEDURE
Owing to the digitization drive in the tax department, it is now collecting information from law enforcement agencies and third parties in the form of Statement of Financial Transactions (SFT) and is disseminating the same to the taxpayers. Consequently, the assessment and re-assessment is largely information driven. In view of the same, the government has come out with a new way of conducting such proceedings. It has been proposed that before the issuance of notices for reassessment (other than search and requisition cases) the tax officer will conduct enquiries and give an opportunity of being heard to a taxpayer before determining whether such case is fit to be for further action. The time limit to issue a notice of reassessment in normal cases is proposed to be reduced from six years to three years from the end of the relevant assessment year. In specific cases, where there is evidence available that income escaping assessment amounts to INR 5 million or more, the time limit to issue notice is 10 years, subject to approval of PCIT.
EYEING THE HNI’S INCOME FROM PROVIDENT FUND WITH INTEREST
The prevailing provisions of the Income Tax Act grant an exemption in respect of any payment from specified provident funds. Additionally, accumulated balances due and payable to an employee by specified provident funds are also exempt subject to certain conditions. It has now been proposed to tax the interest income accrued on account of employee’s contribution in excess of INR 2.5 lakhs in any previous year. This amendment will be effective from Financial Year 2021-22 onwards.
The amendment is targeted towards high-income salaried class, who stash away a huge chunk of their salary in these funds. Apart from earning high-rate assured returns, they also get tax exemption on the same. The proposed amendment shall not have a bearing on the middle-income group earning income up to INR 20.83 Lakh (assuming that 12% of the same is contributed to the Provident Fund). However, high-salaried individuals may be dragged into the tax net since their contribution may exceed INR 2.5 Lakhs.
IMPOSING AGRICULTURE INFRASTRUCTURE DEVELOPMENT CESS (AIDC)
To finance the improvement of agriculture infrastructure and other development expenditure, it has been proposed to impose AIDC on the import of specified goods. It has been declared that rate of AIDC would not exceed the rate of customs duty and would be calculated as a percentage of value of goods, determined in the same manner as the value of goods is calculated for the purpose of customs duty under Customs Act. Further, AIDC is in addition to any other duties of customs chargeable on such goods, under the Customs Act or any other law for the time being in force. The corresponding reduction of basic customs duty shall ensure that AIDC does not lead to additional burden on the consumer.
INDIRECT TAX MEASURES
Budget 2021 served as a means to address the perplexities revolving around the taxation laws, thereby making taxpayers happy without impinging government’s funds too much. India is in the fourth year of the GST regime. While numerous measures such as filing of nil return through SMS, quarterly return and monthly payment for small taxpayers, electronic invoice system, pre-filled editable GST return, etc. have already been introduced, Budget 2021 focussed on removing further irregularities in the new Act. For instance, the provision requiring payment of GST on net basis has been introduced with retrospective effect from 1 July 2017 providing much needed relief to taxpayers. Changes have been made in the GST Legislation to restrict the zero-rated supply on payment of integrated tax only to a notified class of taxpayers or notified supplies of goods or services only. Further, it has been proposed to allow taxpayers to file a self-certified annual return (GSTR-9) along with a reconciliation statement (GSTR-9C), instead of certification by a Chartered Accountant /Cost Accountant.
With the twin objective of promoting domestic manufacturing and helping India get onto a global value chain and export better, major review of more than 400 old Customs exemptions are proposed to be conducted through extensive consultation. From 1st October 2021, a revised customs duty structure, free of distortions is proposed to be introduced. Any new customs duty exemption henceforth would have validity up to the 31st March following two years from the date of its issue.
ACCORDING BENEFITS TO INTERNATIONAL FINANCIAL SERVICES SECTOR
IFSC’s ranking among global fund jurisdictions in the last two years has significantly improved owing to several ingenious and swift changes to IFSC framework in the last two years. In furtherance thereof, the finance minister has come up with extensive new changes.
Though widely anticipated, exempting funds and fund managers from safe harbour rules for managing offshore funds from India, is an extremely intrepid and encouraging move. Extending tax holiday to investment division of banking units in IFSC on the lines of Cat III AIFs investing in India will enable such banks to invest in the rupee market without taxation.
Exemption to foreign aircraft lessors from aircraft lease rentals paid by a lease in IFSC will add a new dimension to the way aircraft leasing is structured. Currently, such leasing companies are housed in countries like Ireland. If a foreign lessor as well as a lease in IFSC are exempted from Indian tax (under existing tax holiday scheme), new structures will emerge for global aircraft leasing such as Ireland and Hong Kong.
Providing for tax neutral relocation of foreign funds to IFSC with continuity of original treaty benefits on the lines of merger/demerger provisions will encourage funds from countries to move to IFSC.
CONCLUSION
The government, with its unconventional and admirable methods has helped India emerge as a strong yet liberal nation with clear signs of progress. The Budget 2021 was surely an enthralling one as India’s expectations were running high. The well-structured Budget portrayed an honest effort of the government to address the fiscal and economic issues and render procedural simplification.
(With inputs from Vasudha Arora)
