Budget 2021 will be presented on February 1 in the backdrop of a pandemic that has profoundly changed the economic landscape not only in India, but globally. Having tackled the downturn head on, the government issued a slew of fiscal incentives, with the year seeing highest quarterly GST collections. However, direct tax collections have understandably slowed.
With India Inc. looking upwards towards recovery from an overall economic slump, ensuring stability and impetus for growth should be key in this Budget. While the government is likely to incentivise each sector, as the global epicentre for information technology, performance of the Indian IT industry is likely to be crucial.
The recent reductions in tax rates for domestic companies have been greatly appreciated, and they should be extended to non-corporate domestic taxpayers as well. Not permitting the claim of unutilised Minimum Alternate Tax (MAT) paid in earlier years has been a dampener in opting for the 22 percent regime by those who have significant MAT credit accumulated and it is suggested that the restriction should be removed. The concessional corporate tax rate of 15 percent introduced for new domestic manufacturing companies should be extended to new service sector ones too, to place them on an equal footing.
Further, it has been long expected that the provisions for carry forward of loss and unabsorbed depreciation on amalgamation would be extended to all players in the service sector to boost their competitiveness. Another expectation carried over from the past is relief on the applicability of buyback tax to listed companies.
To provide employment hiring incentive during these difficult times, the government should further liberalise the additional tax deduction available for salary paid to new workforce. Considering the nature of work in this sector, the threshold for monthly emoluments should be raised to Rs 50,000 or more.
The recently introduced tax withholding on sale of goods or provision of services facilitated by an e-commerce operator has various practical difficulties and should be rolled back. If not done away with, it is suggested that cancelled sales, incidental charges and GST are clearly excluded. The exemption threshold of Rs 5 lakh should be substantially raised and it should be clarified that the withholding requirement applies only on the incremental amount exceeding the threshold during the financial year.
Moving to international tax expectations, it is hoped that the ‘significant economic presence’ provisions are once again deferred. In any case, considering the intent of the provisions, the applicability should be clearly restricted to digital economy transactions. This is even more so considering the expansion of equalisation levy last year, in respect of which taxpayers lacked the opportunity of public consultation and the benefit of explanatory documents. This has sparked debate on the exact intention and on the applicability of the widely worded provisions to various types of businesses and operating models.
Though the US Trade Representative has objected to the levy, the government has issued a reply in support of the fairness of the levy. Several representations have been made to the government, and the industry keenly hopes that the government will provide much-needed clarity in areas such as coverage of physical goods ordered online, quantification in commission models, mismatch in date of corresponding exemption from income-tax, applicability to correspondence over e-mail, and many others. It is also expected that all interest and penalties are waived until substantial clarity is brought in.
In light of the effects of the pandemic, the government should clarify that extended stay of employees in India due to travel restrictions will not enhance permanent establishment and place of effective management risks for non-resident taxpayers.
For transfer pricing safe harbour margins, it is suggested that these are continued for future years, the turnover threshold is increased and the rates are rationalised. Further, in cases where tax return filing has been dispensed with for interest, dividends, royalties and fees for technical services earned by non-residents on which taxes have been withheld at rates prescribed under domestic law, transfer pricing filings too should be dispensed with.
Lastly, short term relaxations called for due to the pandemic include recognising costs incurred due to the pandemic as extraordinary for computing operating margins, making concessions for critical assumptions / margins as per advance pricing agreements not being met, permitting single year comparable data, etc.
(Khushroo Patel, Senior Tax Professional, EY, contributed to the article).Ravi Mahajan is Tax Partner, EY India. Views are personal.