While it is a mixed bag of proposals from a tax perspective, directionally, it seems to be a good Budget—one that is aimed at pump-priming the economy, ramping up government expenditure for stimulating growth, and bringing the economy back to pre-Covid levels
By Himanshu Parekh
On February 1, the finance minister unravelled a bold and ambitious Budget by giving a boost to a humungous spending plan to dig out the Indian economy from a pandemic-induced slump. The main thrust of the first paperless Budget was on the themes of health, human capital, innovation & R&D, physical infrastructure and giving impetus to the government’s disinvestment program. In her Budget speech, though the finance minister spoke only about a few procedural and administrative tax changes, the Finance Bill contains several far-reaching proposals on the tax front.
At the outset, the finance minister deserves to be complimented because despite a significant slippage on the fiscal deficit—pegged at 9.5% of GDP for FY21—she did not introduce any new taxes or enhance any tax rates. At the same time, there was no space to give relief to taxpayers by reducing taxes or giving them any incentives. Accordingly, the finance minister chose to focus on the themes of reducing tax compliances, promoting ease of doing business and enhancing taxpayer services. The Budget proposals include the facility of providing taxpayers with prefilled income tax returns with details of capital gains, dividend and interest income, scrapping of income tax return filings for senior citizens above the age of 75 years, having a pension and interest income only. Further, the time limit for reopening of assessments is proposed to be reduced from six to three years from the end of the relevant AY, except for certain cases which can be reopened up to 10 years. Apart from the above, acknowledging the reduced efforts required in a digital era, the timelines for filing belated returns, revised returns and completion of assessments have been reduced.
There are some welcome proposals on the dividend taxation front. These include waiving off withholding tax on dividend payments to REIT and InvIT, granting benefit of tax treaty rates for the dividend paid to FPIs and aligning advance tax liability on dividend income with its declaration or payment thereof.
Start-ups have been fueling India’s growth story. In order to incentivise them, the three-year tax holiday available to them is proposed to be extended to start-ups that are set up by March 31, 2022. Further, the tax holiday on affordable housing projects (including affordable rental housing projects) is proposed to be extended by another year, till March 31, 2022. This would assist in realisation of the government’s goal of “Housing for All”.
There is a slew of proposals vis-a-vis tax dispute resolution. Having made assessments, appeals and penalty proceedings faceless, the Budget now proposes to even make Tribunal appeals faceless. Further, in order to ensure faster disposal of cases, the Authority for Advance Rulings is proposed to be replaced by a Board for Advance Rulings (BAR). The BAR shall consist of two members, not below the rank of chief commissioner. Orders of the BAR shall not be binding and shall be directly appealable to the High Court. To enable taxpayers to get fair and impartial rulings, it would have been advisable to provide for the members of BAR to be independent tax experts or retired Tribunal members, without which the BAR may just turn out to be a forum for fast-tracking cases to the High Court.
It is said that the devil lies in the details. There are some proposals that did not find a mention in the Budget speech but are likely to have far-reaching ramifications for taxpayers. One of them pertains to depreciation on goodwill. Overturning a favourable Supreme Court decision, it has now been clarified that goodwill will no longer be treated as a tax depreciable asset, irrespective of whether it arises on an amalgamation or demerger or business acquisition. Further, to augment revenues and keep a check on tax evasion, it is proposed to introduce TDS on purchase of goods @ 0.1% in case payment by a resident buyer (whose turnover in the preceding FY exceeds Rs 10 crore) to resident seller exceeds Rs 50 lakh in a financial year.
The finance minister has also made some far-reaching modifications to the equalisation levy (EL) provisions. It is proposed to exclude payments in the nature of royalty or fees for technical service, from the scope of EL, thereby ensuring that they suffer tax @ 10% under the Income-Tax Act, as compared to the 2% tax under EL provisions. Further, the expression ‘online sale of goods’ and ‘online provision of services’ has been significantly widened. Apart from the above, it is clarified that the term ‘consideration’ will include the value of goods or services, regardless of their ownership or the fact that the e-commerce operator is merely a facilitator of the transaction. One beneficial change relates to the income-tax exemption for receipts liable to EL. This provision was originally made applicable from FY22, but it is now proposed to make it applicable from FY21 itself, thereby removing the anomaly in the law.
All in all, while it is a mixed bag of proposals from a tax perspective, directionally, it seems to be a good Budget aimed at pump-priming the economy, ramping up government expenditure for stimulating growth, and bringing the economy back to pre-Covid levels.
(With inputs from Ravish Kotadia, CA)
The author is Partner and head, Corporate and International Tax, KPMG, India