With the lockdown extended, the cash-flow and liquidity problems for taxpayers will increase. CBDT would do well to examine the need for additional measures
By Akhilesh Ranjan
The government has announced several measures to provide relief to taxpayers and alleviate cash-flow problems faced by them as a result of the disruptions caused by COVID-19. An ordinance promulgated on March 31, has extended time limits specified in the law for various compliances, for making payments under the ‘Vivad se Vishwas Scheme, 2020’ and making tax-saving investments, etc, falling within the period March 20 to June 29 to June 30. Reduced rates of interest have been provided in respect of tax payments falling due between March 20 and June 30, if the payments are made by June 30. Separately, a special dispensation for expedited issue of certificates for lower or nil deduction of tax at source has been introduced. The validity of all such certificates, which was expiring on March 31, has been extended to June 30. In addition, orders have been issued for immediate issue of all tax refunds up to an amount of Rs 5 lakh.
However, with the period of lockdown now having been extended to May 3, the cash-flow and liquidity problems for taxpayers are bound to increase, and the Central Board of Direct Taxes (CBDT) would do well to examine the need for additional measures. Drawing upon the compilation of country responses to COVID-19 published recently by the OECD—Forum on Tax Administration as well as requests being voiced by different stakeholders, the following further steps could be considered.
Deferral of tax payments: The reduction in interest rates on deferred tax payments brought in through the ordinance may not provide adequate relief to a large number of taxpayers who are facing, or will be facing, acute cash flow problems due to the lockdown. Several countries have allowed taxpayers who can demonstrate cash flow problems due to COVID-19 to seek deferment of advance income taxes payable by them for periods up to a year and, in some cases, without payment of any interest.
CBDT could consider authorising Commissioners of Income Tax to grant further reduction or even complete waiver of interest chargeable for delays in payments of, (i) advance tax due on June 15 and September 15, and (ii) self-assessment tax in respect of income of FY20, and due to be deposited by September 30, subject to the amount of tax-deferred being paid in full during the current financial year, and the taxpayer demonstrating financial difficulty and cash flow problems (some specific and objective parameters may be laid down in this regard) arising due to COVID-19.
Suspension of tax-debt recovery measures: No relaxation has been specified by the ordinance in respect of payment of outstanding tax demands by taxpayers. Several countries around the world have applied a pause on coercive or active enforcement measures for collection of tax. Recovery measures like attachment of bank accounts or garnishee orders can have a crushing impact on businesses in the current scenario.
India may also consider allowing suspension of all coercive recovery measures on a case-to-case basis for the period up to September 30, subject to the taxpayer demonstrating on an objective basis (specific parameters in this regard may be specified), the financial difficulties caused by the corona outbreak, and also committing to a suitable plan of payment by instalments, which may extend to the end of the current financial year or even beyond.
Faster refunds: Government has already directed immediate issue of all pending tax refunds of amounts up to Rs 5 lakh. While the measure is timely and very welcome, the monetary limit set appears to be conservative, even if we factor in the systemic risks involved in processing high-value refunds. The primary and urgent requirement at present is to provide direly needed cash flow and liquidity to small and medium businesses, and to individuals and senior citizens who are dependent on fixed income sources such as interest and rent. It is also to be noted that these pending refunds represent the taxpayers’ own money paid in the form of excess taxes. CBDT should, therefore, consider substantially enhancing the monetary limit of Rs 5 lakh for expedited processing of refunds in all cases.
Tax residence: Apprehensions have been expressed by tax professionals that there could be several cases where individuals or managers and employees of non-resident enterprises are stranded, or otherwise find it safer to stay on in India, and the extended periods of stay may give rise to issues of tax residence or of place of effective management, thereby, impacting the taxability in India of the income of such persons or of the enterprises they work for.
A very recent report brought out by the OECD on April 3 has analysed the possible impact of the COVID-19 disruptions on the interpretation and implementation of tax treaties, and has generally found that the mere fact of temporary or exceptional stay in a jurisdiction is highly unlikely to affect taxation outcomes under tax treaties. For instance, the domestic law might hold non-resident individuals to be residents after considering their extended stay in India. But, this will only lead to invoking the tie-breaker tests specified in the respective tax treaty, and these tests, which stress upon factors like ‘permanent home’ and ‘habitual abode’, should ensure a correct and reasonable assignment of residential status to the person.
However, these considerations are essentially based on tax treaties. In order to provide tax certainty even under the domestic law, CBDT may consider issuing a circular to assure taxpayers that, (i) the place of effective management of a foreign company shall not be taken to be in India merely because certain persons responsible for taking key management and commercial decisions are stranded and unable to leave India for any period of time owing to the impact of COVID-19; and (ii) any period of time reckoned for the purpose of deciding whether a non-resident individual (including a non-resident Indian) has acquired the status of a resident, or resident, but-not-ordinarily-resident in India, shall not include the period for which the taxpayer establishes that he was forced to remain in India due to COVID-19 considerations.
The above measures can be carried out through administrative instructions and circulars issued by the CBDT and do not need any amendments to the Income-Tax Act.
The author is Former member, CBDT. Views are personal