Budget 2021 | Tax compliance framework to help stabilise economy

With the economy still in the early stages of recovery from the coronavirus pandemic, the release of cash to the taxpayers was never on the cards, particularly after recognisable efforts of the government in the recent budgets. After the Budget announcement on February 1, the effort to bring back the growth in the economy and work on the “India First” motto can be clearly seen and much appreciated.

The Finance Minister shared the vision of a sustainable economy, starting with efforts towards putting the economy back on track in the aftermath of the pandemic, by resting on six obvious and relevant pillars – Health & Wellbeing, Physical and Financial Capital & Infrastructure, Inclusive Development, Human Capital, Innovation and R&D, Minimum Government and Maximum Governance.

Even though the fiscal deficit reached as high as 9.5 percent of GDP and government expenditure increased manifold to Rs 34.50 lakh crore vis a vis planned expenditure of Rs 30.42 lakh crore for FY 2020-21, the government has been considerable enough to not come out with measures to compensate the fiscal treasury through any significant additional levies, continuing to garner the confidence of taxpayers.

In fact, one may be able to draw a parallel between the 2021 Budget and the last Budget, with the FM’s focus more on channelising the amendments of the recent past towards clarification and ease for the taxpayers.

With the dividend withholding tax provisions announced in the last Budget, the government has been proactive in clarifying that advance tax liability in respect of dividend income is to be computed after declaration or payment of dividend, whichever is earlier, avoiding undue hardship to the taxpayer. Clarification around benefits under a tax treaty to be considered for withholding payments to FPIs is certain to draw a positive reaction from investors.

The focus on innovation and investment has ever been the key with capital gains tax exemption on investment in startups and tax holiday for startups further extended by 1 year. With an objective to further garner foreign investments in infrastructure, relaxation in conditions (viz prohibition on loans or borrowings, restriction on commercial activities, direct investment in the entity owning infrastructure) for exemption to Sovereign Wealth Fund & Pension Fund is a step ahead from tax exemptions announced in the last budget.

Not to miss, simplification of the tax framework, ease of compliance and continuous investment towards digitisation has been the core of corporate tax proposals this Budget. On the digital side, the focus has been aggressive, with proceedings before the tribunal also proposed to be conducted through ‘faceless’ mechanism after the recently implemented ‘faceless’ tax assessment scheme.

It is further remarkable to see the efficiency which is being targeted towards compliance lifecycle of a particular tax year, with a period for conclusion of assessments and processing of returns further reduced by three months, effective FY 2020-21. Similar traces can also be seen towards initiation of reassessment proceedings, reduced to three years from six years, with 10-year window only reserved for defined serious tax evasion cases (Rs 50 lakh or more).

The direct tax Vivad se Vishwas Scheme has been instrumental in reducing long-standing litigation to the estimated tune of Rs 85,000 crore. To further leverage the experience, the announcement of a faceless dispute resolution committee for small taxpayers having taxable income of up to Rs 50 lakh and disputed income up to Rs 10 lakh is a welcome move.

All in all, even though taxes have not been reduced nor has there been any direct incentive in terms of cash release to the taxpayers, the government has continued its focus towards stabilising the economy, leading with an idea of ‘inclusivity for all’ and investing further into easing the compliances.

It is rightly said that gain is equivalent to not losing and such has been the story of this Budget. Even during distressing times as that of the pandemic, the clarificatory measures are expected to bring about more certainty as we progress towards a quicker-yet-easier compliance framework.

(Vaibhav Luthra and Devansh Jain, senior tax professionals, EY, also contributed to this article.)