All eyes are on India as the country is in the midst of the world’s biggest vaccine drive in its fight against COVID-19. All eyes are also on India as Finance Minister Nirmala Sitharaman who is scheduled to announce her third Budget on 1 February 2021, is faced with the herculean task of taming the burgeoning fiscal deficit on one hand and given the gross domestic product (GDP) contraction that has taken place in the current year.
In September 2019, the government took game-changing steps to reduce the corporate tax rate from 35.95 percent to 17.16 percent for new manufacturing entities and 25.17 percent for other corporates. A few months later, in Budget 2020, the dividend distribution tax (DDT) was abolished to make way for a traditional tax collection mechanism on dividend distributed by the Indian companies. Together, these steps remarkably reduced the cost of operating in India and also resulted in a level-playing field for foreign investors and resident promoters.
The pandemic has forced most multinational corporations (MNCs) to re-look at their supply-chain locations. In such a global outlook, the reduction in corporate tax rates along with other incentives provide a golden opportunity for India to become the next World’s Factory and one hopes that the corporate tax rates will remain unchanged to capitalise on this.
Of course, the possibility of a temporary COVID-19 surcharge being introduced cannot be ruled out. Also, one of the industry asks is to extend the 17.16 percent rate to all newly set up entities (especially in the service sector) given their contribution to employment generation.
The manufacturing segment has the proven ability to play the booster role for job creation and economic growth. Recognising this, the government is focusing on manufacturing with a renewed eloquence as a part of Aatmanirbhar Bharat and various production-related incentives. With a focus to generate employment, there is a need to revisit available tax benefit on hiring new employees.
At present, section 80JJAA provides a tax deduction to the extent of 100 percent spread across three years on cost of new employees who earn wages not more than Rs 25,000 monthly. To make this benefit more attractive and to turbocharge employment, the Budget should consider doubling this limit.
Given the stressed nature of companies, especially in the MSME sector, there is a lot of mergers and restructuring activities going on. It is hoped that the government permits carry forward of losses in cases of all mergers (removing the current requirement of the existence of an industrial undertaking) and in case of a change in shareholding beyond 51 percent. The government could specify conditions of continued employment/business activity to ensure only genuine cases are covered.
One area where the Budget can make a powerful change is to reduce tax litigations in the country. The successful response to the Vivad se Vishwas scheme stands as a witness to the painful, prolonged and tangled web that tax litigation proceedings have come to signify. Concept of tax mediation can be introduced by the government, an effective and successful tool to reduce tax litigation which is widely prevalent in other countries such as UK, Netherlands etc.
Another area that India Inc is struggling with is the surprise introduction of equalisation levy on digital transactions which can potentially levy tax even on brick-and-mortar set-ups. This unilateral measure by the government without any detailed memorandum has created significant anxiety among taxpayers. Clarifications on the intention of a levy in general and various ambiguities in the law in specific are long-awaited by corporates.
Finally, with work from home likely to become a long-term concept, companies enjoying tax holiday under section 10AA are eagerly looking forward to a positive clarification on availability of the tax holiday even where employees of the eligible SEZ units are working from home.
As the world gears up to rise again from the ill-effects of the pandemic, Budget 2021 can be an important turning point and launching pad for India’s growth story to take-off making the “Once in 100 Years” Budget to become a Budget to remember for decades to come.
The writer is Tax Partner and National Auto Sector Tax Leader, EY India.
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