Budget 2021: Vaccine for the Covid-19 hit economy?

The year gone by has been nothing less than a roller coaster for the global economy given the pandemic situation. The economic impact of the 2020 Coronavirus pandemic in India has been largely disruptive. According to the Ministry of Statistics, India's growth in the fourth quarter of the fiscal year 2020 went down to 3.1%.

Major companies in India, across industries, have temporarily suspended or significantly reduced operations. While we are seeing green shoots of economic recovery, arguably, the macro economic situation will still demand a careful and planned hand-holding from the government. Against this backdrop, Budget 2021 is a very important event, one that the entire country is looking forward to. We take a look at the key expectations from direct taxes.

The government had in the past two years reduced corporate tax rates as well as individual taxes, making it competitive with comparable countries. Understandably, this, therefore, leaves very little head room for the government for any further reduction in tax rates. While no tax reductions may be reasonable, surprises in the form of new taxes should be avoided. What should be on top of the Finance Minister’s agenda, is how to revive growth and at the same time safeguard government’s tax revenues without introduction of new taxes.

Individual taxpayers: The common man too is facing a financial crunch; increasing his disposal income is important for rejuvenating the economy. An increase in the basic exemption limit and/or lowering of the highest tax slab rate of 30% for the lower/ mid-income groups, seems to be the key expectation in the list of individual tax reforms.

The pandemic has also forced NRIs who were working abroad but had to come to India to visit family or for any other personal purpose, to remain in India for some part of FYE 2021, thereby preventing them from going back to the country where they are employed. The NRI community expects tax residency related relaxations to be extended to them, which is a valid ask.

CSR tax concessions for corporates: During the Covid-19 pandemic, as good corporate citizens, many companies spent monies in helping the society at large. If not a full tax shield, companies expect some tax concession for their Corporate Social Responsibility (CSR) initiatives.

Digital economy taxation: To address tax collection challenges in a digitised economy, the government had expanded the scope of Equalisation Levy (EQL) with effect from 1 April 2020, to rope in e-commerce revenues of foreign vendors into the Indian tax net. However, the ambiguous nature of this new levy has left taxpayers unclear of various aspects. Without giving too much importance to the positions adopted on this by the USA, it is but fair that the government issues appropriate guidance notes on this new tax, to iron out the creases.

Boost to ‘Ease of Doing Business’ (EODB) initiative: Clarifications on the taxability of use of various emerging technologies (such a cloud computing, AI etc) that are reshaping the way businesses are run in the current pandemic-hit landscape, would go a long way in facilitating the EODB initiative of the government. Given the widespread use of digital services across businesses, some of which are sourced from foreign vendors, the government should clarify critical aspects on withholding tax, so that Indian users are not burdened with any future withholding tax demands.

Tax litigations: The Direct Tax Vivad se Vishwas (VsV) scheme has seen reasonable success. Companies want to be done with their outstanding tax litigations and focus on their core businesses. Rather than making these schemes as one-time opportunities for the businesses, the option of settling tax disputes must be permanently coded in the tax law. This will go a long way in reducing future tax litigations.

Loss carry forward rules: Currently, the benefit of carry forward of losses and unabsorbed depreciation is inter alia allowed in cases of mergers of a company that owns an “industrial undertaking”. However, similar loss carry-forward rules don’t exist for other sectors such as the real estate / service / media sectors. To maintain parity, loss carry-forward rules have to be extended to these sectors as well which will help in rapid growth and consolidation of businesses, in a pandemic-hit economy.

Conclusion

For the Indian economy, private consumption and investment are the two biggest engines for growth. The government had recently introduced a scheme whereby unused Leave Travel Concessions (LTCs) exemption was allowed to be used against purchases made by taxpayers, that came with a GST invoice. This scheme is a good scheme as it boosted consumption as well as added to the government’s GST kitty at the same time. Something similar should be thought of by the government to balance economic growth and increase tax revenues. With the pandemic adversely affecting engines of growth, the government has a very important role to play in the revival of the slump-hit Indian economy. With all these expectations and hopes, it would be really interesting to see how Budget 2021 turns out.

Views are personal. The author is Partner with Deloitte Haskins and Sells LLP.