Direct Tax Changes
Direct tax changes can be categorised into the following:
• Rates of income-tax;
• Tax incentives;
• Removing difficulties faced by taxpayers;
• Rationalisation of various provisions
Let us see what are the key changes:
• Rates of Income-tax
There has been no change in the rates of income-tax, as specified under the Income Tax Act, 1961. The rates of deduction of tax at source and advance tax also remain the same.
This lack of change in the rates of income-tax has been touted by critics as a negative aspect of this year’s budget.
• Tax Incentives
• Exemption for LTC Cash Scheme
Currently, exemption is provided to the value of Leave Travel Concession (LTC) received by an employee. Due to COVID-19, it was proposed that this exemption should also be extended to the cash allowance paid in lieu of the LTC. Certain conditions have been imposed in order to allow the employees to avail of the same. This measure would enable consumer spending and would put more cash in the hands of the people.
• Incentives to Affordable Housing
Currently, the Income Tax Act provides a 100% exemption on the profits earned in developing and building an affordable housing project. This exemption is subject to certain conditions. One of the conditions is that the project should be approved by a competent authority after June 1, 2016 but before March 31, 2021. In the present budget this outer limit of March 2021 has been extended by an year. Moreover, in order to ensure that migrant labourers get access to affordable houses now this exemption would be extended to such housing projects as notified by the Central government as well. This amendment will take effect from April 1, 2022.
• Tax Incentives to IFSC
IFSC is a non-resident zone, though it is treated as a resident entity for the purposes of the Income Tax Act. Budget 2021 contained a slew of measures for the IFSC: announcement of tax holiday for capital gains for aircraft leasing companies, tax exemption on the aircraft lease rentals paid to foreign lessor entities; tax incentives on the relocation of foreign funds to the IFSC and to tax exemption to investment branches of foreign banks which are situated in IFSC. These set of liberal changes are designed to attract Indian funds which had set up shop in foreign tax-friendly jurisdictions such as Singapore. This move would help in attracting more foreign investment to India.
• Issuance of Zero-Coupon Bond by Infrastructure Debt Fund
In zero-coupon bonds, investors do not have to pay any tax on interest since the bonds are issued at a discounted price and can be redeemed at face value. These are ideal for people who would require funds at a specific period of time in the future like children’s education or retirement or a planned tour.
With an aim to enhance infrastructural growth, Budget 2021 allowed infrastructural debt funds to issue tax-efficient zero-coupon bonds. This would enable infrastructural debt funds to raise money and at the same time would lead to higher foreign investment in the infrastructure sector. This Amendment would take effect from April 1, 2022.
• Facilitating strategic disinvestment of the Public Sector Companies
Statutory provisions such as definition of demerger, provisions related to set-on and set-off and definition of public sector undertakings are sought to be amended in order to facilitate strategic disinvestment of Public Sector Companies. Such strategic disinvestment is aimed at reviving the fortunes of public sector companies and at bringing more efficiency in the same.
• Extension of date of sanction of loan for affordable residential house property
Currently, there is a provision which allows deduction up to INR 1,50,000 on interest on loans taken to purchase a residential property between April 1, 2019 and March 31, 2021. In order to enable first-time buyers to purchase houses, this period has now been extended by one year to March 31, 2022. This would lead to more people owning houses and would make housing more affordable.
• Extension of date of incorporation for eligible start up for exemption and for investment in eligible start-up
Start-ups were eligible to get a tax holiday of three years if they were incorporated after April 1, 2016 but before March 31, 2021. This eligibility period has now been extended up to March 31, 2022. This has been done with a view to encourage the setting up and creation of new start-ups and to ease the compliance burden on nascent start-ups.
• Removing Difficulties faced by Taxpayers
• Relief to Senior Citizens
In order to give relief to senior citizens and to reduce their compliance burden, senior citizens above the age of 75 years, who have only pension income and an interest income, would be given relief under section 139 of Income Tax Act to file income tax returns.
However, if any dividend income or any other income also exists, then the senior citizens above the age of 75 years are required to file their income tax returns as usual.
• Relief from Double Taxation for Non-Resident Indians
Retirement funds of Non-Resident Indians were taxed twice, once at the time of accrual in India, and then at the time of receipt, in the foreign country in which they reside. There were issues of mismatch in the years of taxability of withdrawal of amounts from such retirement funds. In order to remedy this mismatch, the Finance Minister proposed the insertion of Section 89A which would enable the Central Government to lay down the year and the manner in which income of NRIs from retirement funds would be taxed.
This measure is going to provide a relief to NRIs from double taxation and would also encourage them to open retirement funds in India.
• Rationalisation of Provisions of Minimum Alternate Tax
MAT was levied in accordance with the book profits, however, due to dividend being taxable in the hands of the shareholders, issues were creeping up with regards to the calculation of book profits. In order to rationalise MAT provisions, the Budget 2021 proposed that the calculation of book profits be aligned. Such alignment would be done for the purposes of MAT with the year of taxability of income as mentioned in the Advance Pricing Agreement or on account of secondary adjustment.
• Sovereign Wealth Fund
In order to attract the Sovereign Wealth Funds of foreign governments to invest in India, the Finance Minister proposed to grant 100% tax exemption to their interest, dividend and capital gains arising out of certain priority sectors. These sectors inter alia include infrastructure and other notified sectors. Such exemption would be available before March 31, 2024 and availing of such exemption would lead to the investment being locked-in for a period of three years. This is an investment promoting measure and hopefully would help in attracting foreign investment.
• TDS on Dividends
The exemption of paying TDS on dividends was earlier only provided to insurance companies or insurers. Now this exemption has been expanded to include income credited or paid to a business trust by a special purpose vehicle or payment of dividend to any other person as may be notified.
• Tax Audit
In order to incentivise non-cash transactions to promote digital economy and to further reduce compliance burden of small and medium enterprises budget 2021 proposed to increase the threshold from five crore rupees to ten crore rupees for exemption of audit. However, the companies wishing to avail of this exemption need to have at least 95% of their transactions as digital transactions.
• Rationalisation of Various Provisions
• Delayed ESI and PF contributions not to be treated as deductions in the hands of the employer
Employers often deduct ESI and PF contributions from employees but fail to deposit them on time. This leads to the employers getting unjustly enriched at the cost of the employees. In order to avert such practices, the 2021 budget proposed that now those employers which delay the deposit of ESI and PF contributions would not be able to claim such contributions as deductions. This would act as a deterrent mechanism and is a measure to promote employee welfare.
• Removal of Depreciation on Goodwill
Goodwill of a business has not been specifically defined as an asset under the Income Tax Act. However, the Supreme Court in the case of Smiff Securities Limited [(2012)348 ITR 302 (SC)] held that goodwill is a depreciable asset. Post this decision, depreciation on goodwill started being calculated. However, this calculation was dependent upon a number of other provisions and practical issues started surfacing. Moreover, it was seen that goodwill is not a depreciable asset and depending upon the way a business is run can also appreciate in value. In order to address the aforementioned concerns, it was announced that goodwill would no longer be considered a depreciable asset. Hence, depreciation cannot be claimed on the goodwill of a business or profession. This change has removed the ambiguity related to goodwill. It may translate into higher tax liability for buyers in acquisition transactions as now depreciation on goodwill cannot be claimed.
• New Dispute Resolution Scheme for small and medium taxpayers
With an aim to provide early tax certainty to small and medium taxpayers, the Finance Minister proposed the introduction of a new scheme for preventing new disputes and settling the issue at the initial stage. A new section 245MA would be inserted to give effect to this proposition. This would enable low value tax disputes to get settled in a speedy manner.
• Constitution of Board for Advance Ruling
The current Authority on Advance Rulings (AAR) has proved to be inefficient and hence an alternative way of giving advance rulings was required. In order to streamline the process of advance rulings, it is proposed that a Board for Advance Ruling would be set up. This would further strengthen the dispute resolution mechanism.
• Faceless ITAT
A faceless scheme for appeals has already been introduced. The government in order to ensure that the human interface is further reduced even at the ITAT level, has introduced a faceless scheme for ITAT as well. This will reduce cost of compliance, increase transparency in the disposal of appeals and would help in optimum utilisation of resources.
• Slump Sale
The definition of slump sale is proposed to be amended to include all kinds of transfers within its ambit. This change has been brought about to provide more certainty in slump sale transactions.
Indirect Tax Changes
Following key changes were brought about by the Budget 2021, in the indirect tax regime:
• Reconciliation Statement
In a bid to make the compliances under the GST regime simpler, the budget 2021 proposed the removal of the mandatory requirement of providing a reconciliation statement certified by a Chartered Accountant or a Cost Accountant at the time of audit of annual accounts. Now, annual return can be submitted by a tax payer with a self-certified reconciliation statement.
• Definition of “Supply” under GST changed
The ambit of the term `supply’ has been expanded to include within its scope supply of goods and services by an person, except an individual to its members or constituents or vice-versa in return for cash, deferred payments or such like consideration. This changed definition would be applicable retrospectively from July 1, 2017. Supply of goods were already covered under the scope of Supply, this changed definition would also bring services under its ambit.
• Input Tax Credit
Input Tax credit can only be claimed when the invoices are uploaded in the GST returns by the suppliers. This would enable better mapping of GST compliance.
• Interest on Delayed Payment of Liability
It is proposed that interest would be charged only on net tax liability in cash retrospectively from July 1, 2017. This amendment had already been introduced in Finance Act, 2019, however, it was prospective in nature. Now a retrospective effect to this amendment has been brought about. In the light of the same, all prior cases would be required to be analysed.
It has been proposed that searches and seizures during transit should be treated as separate matters from the recovery of tax. Clarifications have been issued with respect to the meaning of `self-assessment tax’. It includes transactions declared as tax payable on any outward supplies in Form GSTR-1 but not Form GSTR-3B. This implies that now no penalty would be payable in case of difference between the two Forms.
• Filing of Appeals
It is proposed that the taxpayer deposits 25% of the penalty as pre-deposit if the appeal is pertaining to detention or seizure of goods or conveyance. This ensures that the taxpayer does not unnecessarily protracts the proceedings just to escape liability.
• Zero Rated Supplies
The meaning of `Zero Rated Supplies’ has been amended to only include those goods and services which are supplied for authorised operations in a SEZ. Moreover, claiming of refund under the CGST Act, 2017 has been linked with the time limit prescribed under the FEMA Act. This implies that if an entity is supplying goods or services to a SEZ, it would not have to pay GST only if such goods and services are for authorised operations in such SEZ.
The 2021 budget is a forward-looking budget with stress on development and growth. It has something for everybody. From simplifying indirect tax regime to attempting to reduce the compliance burden of corporates, it is focused on enhancing the ease of doing business in India. If the proposals are implemented effectively, they would improve India’s global position and would further strengthen its economy.