As the Indian economy is still struggling to recover from the economic aftermath of the pandemic, all eyes are on the expected big policy announcements in the upcoming Union Budget 2021, which will be tabled on 1 February 2021. Indeed, a lot of steps have already been taken by the government to minimise the financial damage in the economy, but a lot more is still required to be done.
Though few sectors, like e-commerce, have shown growth even in these tough times, there are many others like real estate, travel and tourism etc., which have been badly battered by the pandemic and may need special support from the government. With the Finance Minister promising a “Budget like never before”, it does raise the expectations of different stakeholders.
As the fiscal deficit mounts, one can expect that there may be some increase in tax rates. Considering that the optional tax regime for individual taxpayers was introduced last year, it is possible that the tax slabs for individuals are not tinkered with, but some form of additional tax may be on cards.
There has been news about a new cess or surcharge to fund the vaccination drive. It is likely that since the lower income strata has suffered the most during this period, an additional cess or surcharge may be imposed on those falling in the higher income brackets.
It is also expected that considering the recent buoyancy in the stock markets, capital gains tax on securities may be hiked to garner more funds. As far as corporate tax rates are concerned, considering that these were recently lowered to 15% for new investments into manufacturing and 22% for other businesses to make them globally competitive, further tweaking is not expected. However, increase in surcharge or imposition of additional cess may be on the anvil. Some carve outs may be possible for the MSMEs.
Considering the impact of the pandemic, on the financial health of households and businesses, it is desirable that government explores other options to bridge the fiscal deficit and maintain status quo on the effective tax rates.
This Budget may also see more measures to garner non-tax revenues for the government. Accordingly, further push on disinvestment agenda is expected. The upswing of the Indian stock markets may be a good omen. It may be just the right time for the government to divest stakes in public sector companies through various measures like direct sale, strategic sale, consolidation etc. Thus, it may be possible to generate much needed funds, without disturbing the common man and the ailing businesses.
Providing impetus to investment and spending
The pandemic has adversely hit the savings and consumption in the economy. To boost consumption the government may consider a one-time tax deduction for all individual taxpayers in respect of expenditure incurred by them on travel & stay in India, purchase of electronics, white goods, and vehicles, that are manufactured in India. This would help provide impetus to the ailing hospitality industry and give boost to make in India.
On the savings and investment front, support may come in the form of tax deduction for individuals for investments into long term infrastructure bonds and long-term infrastructure projects. This could be done by increasing the current deduction available under section 80C of the Income-tax Act, 1961 or by introducing a separate provision. This relief measure will enable sourcing of funds for long term infrastructure projects.
Increase in government spending
This Budget is also likely to see increase in government spending on infrastructure, both urban and rural. Increase in activity in infrastructure has a multiplier effect in the growth of feeder and allied sectors. Not only will this help generate employment for people who have lost their livelihoods due to the pandemic, particularly the unskilled and semi-skilled workers, but would help rekindle both rural and urban demand. This is extremely important for India where domestic demand has always been a big driver for growth.
It is also expected that funding in healthcare infrastructure sector is likely to get a priority based on the learnings from the pandemic. The pandemic has already exposed the existing gaps that need to be addressed in the short to mid- term future. Boost to this sector will ensure that the country can tackle any health eventuality in future and is able to mitigate its adverse economic impact.
Clarifications on digital tax
In last year’s Budget, digital tax provisions were expanded. Effective 1 April 2020, Equalisation levy at the rate of 2% became applicable on the amount of consideration received or receivable by an e-commerce operator from supply of goods or services to any person resident in India or to a non-resident (in specified circumstances)
Stakeholders have pointed out that the key terms used in these provisions need clarity. Limited guidance on these terms has led to interpretational challenges which may lead to unintentional non-compliance and fuel unnecessary litigation in the future. There are also concerns on simultaneous application of the digital tax and withholding tax provisions in the first year of the operation of this new levy. Compliance for the last quarter is also challenging due to the timelines involved.
Considering the role of digital economy in this pandemic era and stakeholders’ representations the government may carry out amendments and issue FAQs addressing various concerns. It is also desirable that the interest and penal provisions for the first year are deferred as in many cases timely compliances involved changes in IT Infrastructure by the companies to capture this additional information, which was difficult due to the lockdowns and other challenges during the ongoing pandemic.
Recently the US Trade representative has issued a report on India’s digital tax and concluded that it discriminates against US companies and hence actionable under Section 301 of the US Trade Act, 1974. One of the key findings of the report was that the provisions of equalisation levy are unclear and very expansive. The government has responded by stating that digital tax is not discriminator. It will also examine this Report and would take appropriate action keeping in view the interests of the nation.
Deduction for Medical Insurance
Concerns about increasing cost of healthcare, lack of social security cover and limitations in the universal availability and quality of the public healthcare system needs to be addressed. It is pertinent to note that in India, the private healthcare plays an important role and complements the government support system. Therefore, there is a need to further strengthen both the systems. The income tax deduction on account of premium paid for medical insurance for an individuals and family, which is currently Rs 25,000 and for senior citizens, being Rs 50,000, may be revised upwards to make it more meaningful in line with the current economic reality.
The pandemic has dramatically changed the way we work and most of the Indian corporates have adopted the “Work from home” or “Work from anywhere” policy. Given this new normal, it became suddenly important for employees to arrange the necessary infrastructure to set up their home offices. This entailed incurring cost on tables, chairs and computer peripherals etc. Hence, the employee tax provisions drafted to deal with “what was considered normal” in the pre- pandemic era now need a relook.
Currently, reimbursement of such expenses/ providing allowances for this purpose may get taxed as perquisites/ salary. Typically, perquisite implies a benefit, or an amenity provided by an employer to an employee. Under the changed scenario, it is evident that such support from the employer is not an amenity but an essential pre-requisite to run the business. Accordingly, it is expected that the government would provide clarity that such reimbursements/ allowances do not carry tax implications for employees.
Also, Special Economic Zones (SEZs) which are area / rule bound, could also see more flexibility to enable employers to decide on their workforce operating from offices or homes.
Relaxation in residency norms
Considering the lockdown and travel restrictions in India and elsewhere in the globe, many individuals visiting India were stuck and could leave the country only when travel restrictions were lifted. In March 2020, the government issued relaxation for excluding certain India stay days (between 22 March 2020 and 31 March 2020) to determine tax residential status for FY 2019-20.
However, a similar relaxation has not yet been notified for FY 2020-21. An extended stay necessitated by reasons beyond the control of the individual, impacts his residential status and consequentially his taxability of in India. It can also have significant impact on the taxability of the employer organisation depending upon the employment / secondment arrangements. It is expected that the government may announce the required relaxations in the upcoming Budget for the FY 2020-21.
Incentivizing the employment creators (start-ups)
Indian Start-up eco-system, though still developing, has been instrumental in creating 21 unicorns valued at USD 73.2 billion and it is expected that more than 50 start-ups might join the unicorn club as early as 2022. They are going to be an important part of the vision of “local to global”.
At present the tax holiday for 3 years (out of initial 7 year period) is provided to “eligible start-ups” that are incorporated on or before 1 April 2021. It is likely that this benefit is extended tor start-ups incorporated after 1 April 2021, at least for a few years.
Another key area of concern for the start-ups is their valuations and tax rules surrounding the same that require unnecessary paperwork to be created to justify the valuations. There is an urgent need to relook at these provisions and align them with the practical reality as to how start-ups are valued.
While the FDI flows have continued to be resilient during the pandemic, it is likely that relaxation in FDI norms in several key sectors such as insurance etc. may also be on the anvil. There may be further thrust to boost domestic investment as well. In addition, is expected that clarity on various aspects of the New Labour Codes may also be forthcoming.
There is no denying that the economy is facing trying times and it may not be easy for the government to provide “please all solutions”. However, with the receptiveness shown in hearing out all stakeholders concerns, we can expect that Budget 2021 to be a reformist one that will place the economy firmly on a high growth trajectory.
(By Vikas Vasal, National Managing Partner Tax – Grant Thornton Bharat LLP. Richa Sawhney and Ankita Chowdhry contributed to this article. Views are personal)