One would have hoped that the corporate tax framework would revolutionise with the announcement of the Taxation Laws (Amendment) Act, 2019 and Budget 2020, until we were hit by COVID-19 which left a dampening impact on global economies. Especially for India, where the economy was still under recovery from an overall slowdown, the scars of pandemic to a certain extent negatively impacted production, development, sales/export, earnings, investments and the overall economic situation.
Thus, while fiscal budgets for developing economies are typically growth driven, this time, it would be experiential to see whether the government considers infusing stability alongside in the economy — a base which could catapult the economic activity and growth. To this, it is likely that the government would continue its focus of spending on infrastructure and retail activity which can potentially provide much-needed impetus to sustainable and near-promising economic development.
This government has been focused towards revolutionising the tax framework — from reduced tax rates and manufacturing incentives to digitisation in the compliance framework. Unfortunately, not many of these measures have come to full utilisation due to the pandemic.
Expectation to have a further tax reduction may thus not be correct, and the Budget is expected to be more focused on laying a roadmap towards actual implementation of the measures announced in the past year or two. Even though the 2021 tax budget may eventually turn out to be a revamped version of Budget 2020, it may still be expected to incentivise contributions towards post-COVID-19 recovery forums.
The government may consider extending the R&D incentives under Section 35 of the Income-tax Act, 1961 incentivising R&D in the medical sector towards indigenous vaccine development and mass expansion. A weighted deduction (say at 150-200 percent) may not only provide businesses with additional cash, but also help the economy build indigenous capabilities and self-reliance. Considering that the availability of a vaccine along with uplifting the economy is a focus, the government may consider a transitory model to permit companies opting for reduced tax rates also to benefit from such R&D incentives.
The tax administration has been releasing pending refunds to the taxpayers to improve working capital situation of the taxpayer, which draws accolades of relevance, especially during such times when consumer spending is slowed. However, as the fiscal deficit is at record high and with GDP also expected to dip significantly, we cannot rule out the possibility of a temporary COVID-19 cess compensating towards government loss in revenue.
While such a move is expected to draw flak, weighed R&D deduction as well as further extension of 25 percent rebate on withholding taxes may still ease the stress. Additionally, minimum thresholds below which the COVID-19 cess may not be applicable to protect small/MSME taxpayers, may be set.
As laying down of roadmap for implementation of recent reforms is considered, lowering tax rates for LLPs and partnership firms may also be surrounding the thoughts to bring them to par with companies. Given the number of entities registered as firms in India, this is expected to be addressed soon. Plus, with government’s rapid focus on privatisation, public private partnerships cannot be given a miss and measures such as the above, under the overall umbrella of reduced tax rates as last announced, is expected to attract attention of the corporates.
Further, government spending into infrastructure is certainly expected to add to employment, but in addition, additional credits to businesses for salaries of employees retained or new hires over and above existing could be considered.
On the compliance front, the government was proactive in announcing relief measures during the lockdown, but the compliances for FY2019-20 have since then been extended multiple times. It has caused uncertainty in the minds of businesses and with a new year of compliances kicking in, it would be important that the government limits further extensions and streamlines the compliance calendar towards certainty.
Implementation of the E-Assessment Scheme 2019 has been a welcome move. As a measure to further rationalise, the government may consider a mechanism to not pickup recurring issues which are eventually settled in favour of taxpayer, in order to avoid unreasonable hardships. Not only will it build a taxpayer friendly community, but also serve the motive of quicker liquidity of litigation.
Overall, Budget 2021 is expected to be rolled out towards economic recovery in a post-COVID-19 scenario by augmenting the consumption levels, with low expectation on incremental tax reductions/benefits. However, one may expect the government to be taking steps towards defining a road map for future rationalisation of the framework.