Union Budget 2021 Analysis | Key tax proposals: Less is more, or is it?

As India Inc. adapts to the new normal, the Finance Bill, 2021 introduced in the Lok Sabha yesterday by the Finance Minister displayed colours of restraint, resilience and self-reliance, a formula that the Government has long been working on and one that might just be the vaccine India Inc. needs right now. The Finance Minister seems to have taken the opportunity to introduce this budget in the backdrop of an unprecedented global pandemic to re-inforce investor confidence through a slew of housekeeping and rationalization measures to remove difficulties of taxpayers. This included proposals for an overhaul of the tax assessment and dispute resolution process, mitigation of compliance burden for small taxpayers and clarifying the legislative intent on some widely litigated tax issues. We have attempted to discuss some of the key tax proposals in the Union Budget that was presented yesterday.

The Union Budget 2021 embodies the ‘less is more’ approach in an effort to purge the Indian economy afflicted by a year long slowdown caused by the coronavirus outbreak. Whilst there were no populist tax breaks offered by the Finance Minister this year, the Government did extend the sunset dates for some incentives such tax holidays for start-ups and affordable housing project by one year. Notably, however, there were a series of well intended measures proposed to cleanse the tax system in an attempt to bring more transparency, ease of doing business, and eliminate redundancies in the tax administration.

The key tax incentives included offering tax incentives to foreign funds to relocate to GIFT city and tax holiday for international aircraft leasing companies. In attempt to ensure long term stable capital participation from Sovereign Wealth Funds and Pension funds, the Government has also proposed to relaxed some of the conditions applicable to them for claiming tax exemption from investments in specified infrastructure enterprises.

Foreign Portfolio Investors (FPIs) are currently governed by a standalone TDS provision that sets a flat 20% TDS rate on all income other than capital gains. Therefore, despite a lower withholding tax rate under the relevant DTAA, TDS on FPI’s income would be deducted at 20% and it would have to claim a tax refund by filing a return of income. This was further aggravated in last year’s budget when India shifted to the classical dividend tax system. To provide a sigh of relief to FPIs, the Bill proposes to align the TDS rate applicable to FPIs on dividends and interest with DTAA rates.

The Finance Minister proposed to discard archaic institutions like the Income-tax Settlement Commission (ITSC) and Authority for Advance Rulings (AAR), both of which had become almost non-functional and were nearing extinction. Instead, the Finance Bill, 2021 has hit the refresh button with its proposal to establish a new Board of Advance Rulings (BAR) to replace the AAR wherefrom appeals shall lie directly to the jurisdictional High Court. In the same breath, the Government proposes to introduce a dispute resolution committee for small and medium taxpayers to efficiently resolve disputes of tax where the tax effect does not exceed INR 10 Lakhs. The Government also plans to make the Income Tax Appellate Tribunal proceedings faceless, following suit from faceless assessment brought in last year, and faceless first appeal, which is still in its teething phase.

On the tax administration front, in a bid to reduce unwarranted litigation, the Government proposes to completely revamp the procedure for re-opening of assessments. Currently, a tax assessment can be reopened upto 4 assessment years (and upto 6 assessment years in case income has escaped assessment because of non-disclosure of information by the taxpayer). In cases of indirect transfers, where foreign assets may be involved, assessments could be re-opened upto 16 years from the end of the relevant assessment year. The Bill now proposes to reduce the limitation period for re-opening of assessments to 3 years (and 10 years in cases where income exceeding INR 50 lakhs has escaped assessment). Further, tax officers will be bound to take permission from very senior tax officials. This measure is bound to be seen in positive light by foreign investors.

Among the housekeeping measures undertaken the by the Government in this fiscals Union Budget, the Government has also proposed amendments to clarify its legislative intent with respect to certain issues, to restrict taxpayers taking unintended advantage on the basis of judicial precedents. Among these, the first issue is with respect to the availability of depreciation on goodwill. The amendments proposed ensure that depreciation will no longer be available on goodwill going forward. The cost incurred to purchase any goodwill will only become the cost of acquisition to compute capital gains in case of any future sales. Secondly, the proposed amendments clarify that a slump sale structured as an exchange for shares or undertaken through a court approved scheme would be taxable, irrespective of whether the consideration is expressly specified in monetary terms, to qualify as a sale. While such changes clarify the legislative intent on these issues, they may not be welcomes with open arms as they limit restructuring possibilities without attracting adverse tax consequences.

The government has also introduced a new TDS provision casting obligation to deduct tax on buyers (with gross receipts exceeding INR 10 crores) to deduct tax on any purchase of goods exceeding INR 50 lakhs. Further, the new proposals on this front include higher TDS and TCS rates for non-filers and stop-filers. This will saddle deductors with an additional burden of seeking proof of return filing before deducting tax at source. However, an exception has been granted where the deductee is a non-resident without a permanent establishment in India.

In all, as is evident, the Finance Bill, 2021 attempts to bring changes that affect every sphere, without doing too much. Effective implementation of these measures, listening to stakeholders and rolling out further clarifications where due is going to be key for the success of this fiscal’s Union Budget.

Amit Singhania, Partner and Suyash Sinha is Senior Associate, Shardul Amarchand Mangaldas & Co.

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