Over past five years, the Indian government has significantly rationalised the corporate tax regime. This has included corporate tax rate cuts coupled with phasing out of tax incentives and MAT. Moreover, the government now has to grapple with an economic slowdown and growing fiscal deficit. Against this backdrop, it will be too optimistic for India Inc. to expect any big-bang tax breaks this Budget. Having said so, many sectors have been strained because of the pandemic. Some tax proposals discussed below will provide a much-needed fillip to such sectors, build investor confidence, and ease of doing business.
To revive those sectors that have been severely hit by the pandemic, the government should consider sector-specific reliefs. For instance, raising the maximum exemption limit for health insurance will boost the purchase of insurance plans and help the insurance and medical sectors. Permitting hotel expenses under Leave Travel Allowance will propel spending in the hospitality sector. Tax reliefs for the aviation and hospitality sectors are the need of the hour. Additionally, increasing the maximum deduction permitted against interest on home loans (which currently is ₹2 lakh) will help stimulate demand in the real estate sector.
Currently, corporate social responsibility (CSR) expenditure is not tax deductible in the hands of the company incurring such expenditure. Allowing CSR to be tax deductible will provide a cushion to corporates and reduce their overall tax burden. The government can also consider covering the provision of Covid-19 vaccines for employees under CSR expenses.
E-commerce has proved itself as the mainstay of our economy during Covid-19 and needs to be encouraged to secure the livelihoods of local traders and artisans. During the last Budget, e-commerce operators were saddled with the responsibility of withholding tax on sale of goods and services facilitated by their platforms (even where payment is routed outside the platform). Several interpretational issues exist around such withholding tax provisions that need to be addressed to ensure smooth functioning of this sector.
Similarly, the newly introduced 2% equalisation levy on foreign e-commerce operators also has its own set of interpretational issues. For instance, the tax base in transactions where sale is made on an online marketplace, applicability to business-to-business sales, financing transactions, interplay with withholding tax provisions, etc. all need some more clarity for tax certainty. The government may also consider further deferring the significant economic presence test and attribution rules until the OECD makes more headway on the inclusive framework for digital taxation.
Startups have contributed greatly to employment generation, innovation, and entrepreneurship in India. They are key to India’s vision of being a technology exporter instead of importer. At present, a tax holiday for three years is available to startups that are incorporated on or before April 1, 2021. It is desirable that this is extended for startups incorporated after April 1, 2021, at least for a few years.
Shifting back to the classical system of dividend taxation was a step in the right direction. This enabled non-resident investors to claim treaty benefits for lower tax withholding on dividends and claim foreign tax credit against such withholding. However, a few more amendments are required in the current dividend taxation landscape to make it more efficient. For example, tax on non-residents is capped at 20% under the domestic tax laws, whereas dividends can be taxed at rates north of 35% in the hands of residents. For a level playing field, income in the hands of residents should also be capped at 20%. Further, only interest expenditure up to 20% of dividend income of a shareholder can be claimed as expenditure. This poses as a problem for highly leveraged investors and investment companies that spend a substantial chunk of their resources in researching, managing, and tracking their investments.
Finally, the withholding tax rate for foreign portfolio investors on dividends and interest income should be in line with rates in force under the tax treaties. Small changes like this will ensure more access to foreign capital and debt for Indian companies.
Views are personal. Puri is a partner at Shardul Amarchand Mangaldas & Co; Malpani is an associate at Shardul Amarchand Mangaldas & Co.