With the India’s economy already stalling before the COVID-19 crisis, the Union Budget 2021 has put
forward measures to return the economy to a high-growth track and tackle pressing issues in
relation to – health and wellbeing, capital productivity, infrastructure and governance. In spite of the
financial fallout from the pandemic, the Union Budget 2021 has proposed to maintain status quo on
tax rates. The Government intends to make allocations in all core areas of activity in order to
stabilise the Indian Economy. The Budget, therefore, proposes structural reforms that would
effectively address the issues of the Indian Economy thereby providing real growth impetus.
The Finance Minister proposed to enhance spending on healthcare and infrastructure to accelerate
growth. Moreover, increased FDI limit from 49% to 74% for insurance sector, introduction of IPO for
LIC and privatization of a few national banks would help address credit crunch in the post-pandemic
landscape.
Direct Tax Measures
On the direct tax front, the Finance Minister began by offering her pranaam to the senior citizens
and acknowledged their contribution in nation building. To ease compliance for resident senior
citizens of age 75 years or above, the Finance Minister proposed to provide relaxation from filing of
return of income, if such assessees derive income in the nature of pension or interest (from the
same bank in which they receive their pension income). Based on a declaration furnished by such
taxpayers, the paying bank will deduct tax at source on income computed after giving effect to
applicable deductions and rebate.
However, such relaxation is subject to a stipulated rider that relaxation shall only be available to the
persons having pension income or interest income on deposits from the same bank in which he/she
receives his/her pension income.
The government’s efforts so far have been a strong catalyst for India’s rapid digitization. As
technological advancements ramp up and connectivity becomes omnipresent, India’s economy is
essentially poised to transform. With the intent to enable greater ease of doing business, a slew of
measures were introduced to transform India into a digital India. For instance, the government has
offered incentive in the form of relaxation of threshold for applicability of tax audit. It has been
proposed to increase the threshold limit for a person carrying on business from INR 5 crores to INR
10 crores, where 95% of business transactions are done in digital mode.
Changing way of Dispute Resolution
Indian Tax Administration is also changing its ways. Driven by the principle of ‘minimum government
and maximum governance’, the tax department went for a ‘faceless e-volution’ only last year.
Resultantly, the entire chain of events- right from the filing of tax return to the dispute resolution has
gone digital. The Budget 2021 extended the faceless procedures for disposal of appeals before the
ITAT as well, on the same lines as the faceless appeals scheme. While the nitty-gritties in respect of
the new scheme are yet to be notified, it is felt that the government ought to have waited for the
successful implementation of faceless assessment and faceless appeal before hastily introducing
faceless ITAT. Notably, ITAT is the final fact finding authority, for the taxpayer to argue and counter
argue their tax position in light of differentiating facts. Digitising will change the litigation process.
Additionally, to provide early tax certainty for preventing new disputes and settling issues at initial
stage for small and medium taxpayers, constitution of DRC has been proposed. Established with the
power to reduce or waive any penalty or grant immunity from prosecution for any offence under the
Income Tax Act, the DRC shall only handle disputes where returned income is up to INR 50 lakhs
(where return has been filed) and aggregate amount of variation is up to INR 10 lakh. Further, orders
on account of cases of search, requisition, survey or information received under DTAAs, case of
detention, prosecution or conviction under various laws shall not be eligible to be taken up by the
DRC.
Even the Authority of Advance Rulings has been proposed to be restructured. Under the existing
provisions of the Act, the AAR consists of a Bench, including a Chairman who should be a retired
judge of Supreme Court or Chief Justice of a High Court. The Bench cannot function in the absence
of Chairman or Vice Chairman, which causes significant delays. To expedite the disposal of
applications, it is proposed to constitute a Board of Advance Ruling, which shall substitute the
existing structure. The Board would now consist of two members, not below the rank of Chief
Commissioner. The rulings given by the Board will not be binding on either applicant or department
and can be appealed before the High Court. Foreign investors might be reluctant to apply to a board
for advance rulings that is manned by commissioners, because they would fear that the decision is
going to be against them from the very beginning. Further, that fact that the ruling would not be
binding may act as a deterrent for foreign investors, considering the looming uncertainty of tax cost
of doing business in India.
Incentivising start-ups
Start-ups contribute to economic dynamism by inciting innovation and injecting competition.
Recently, start-ups have borne a huge burnt of economic devastation cause by the pandemic;
therefore, the Finance Minister extended the benefit of tax holiday and capital gain exemption upon
investment in a start-up. Entire profits and gains derived from an eligible business by an eligible start
up is allowed as deduction under section 80-IAC of the Income Tax Act, for three consecutive years
out of ten years at the option of Assessee. The deduction is subject to the condition that the eligible
start up is incorporated on or after April 1, 2016 but before April 1, 2021. It has now been proposed
to extend the outer date of incorporation by one year, to March 31, 2022. Additionally, to incentivise
investment in start-ups, it has been proposed to extend the benefit under section 54GB of the Act by
one year. The said section provides for exemption of long-term capital gain arising from transfer of
residential property, owned by eligible assessee, if the assessee utilizes the net consideration for
subscription of equity shares of eligible start up. It has now been stipulated that the residential
property can be sold until March 31, 2022.
Furthermore, NRIs are now allowed to incorporate One Person Company (OPC) and grow without
any restriction on the paid up capital and turnover, and are allowed to convert into any type of
company at any time. Further, the residency timeline has also been reduced from 182 to 120 days,
hence even NRI’s shall be allowed to form an OPC in India. The measure was intended to incite
founders with ideas, to incorporate a limited liability structure at an early stage and should help
India climb up the EODB ranking.
Responding to the needs of the Real Estate Sector
The Finance Minister was also responsive to the needs of the homebuyers and the ailing real-estate
sector as well. In the Budget 2019, the government had provided an additional deduction of interest,
amounting to Rs 1.5 lakh, for loan taken to purchase an affordable house. It has now been proposed
to extend the eligibility of this deduction by one more year. The additional deduction of Rs 1.5 lakh
shall therefore be available for loans taken up until March 31, 2022, for the purchase of an
affordable house. Further, the safe harbour threshold limit in case of transfer of land and building
has been increased from 10 to 20 percent. Therefore, where the stamp duty value of a property
exceeds 120 percent of the consideration received or accruing because of the transfer, such
consideration shall be deemed to be the transfer value of the property. However, the relief has only
been accorded in case the transfer of residential unit takes place during the period from November
12, 2020 to June 30, 2021 and is by way of first time allotment to any person. Further, the
consideration received should not exceed INR 2 crores.
Additionally, amendments to SEBI regulations have been proposed to enable InVITs and REITs to
raise funds through debt from FPIs. This will further ease access of finance to InvITs and REITs thus
augment funds for infrastructure and real estate sectors.
Automobile Sector
The Indian automobile sector, that was already sluggish, was further pinched by the pandemic and
subsequent localized lockdowns. The ‘voluntary vehicle scrapping policy’, which is being devised to
phase out old and unfit vehicles, will benefit the sector greatly. As per the policy, vehicles would
undergo fitness tests in automated fitness centres after 20 years and 15 years for personal and
commercial vehicles, respectively. Given that BS VI has rolled out, the Policy is likely to have further
positive impact on automobile sector and the environment by fuelling demand for cleaner vehicles.
Rationalising Provisions of Equalisation Levy
The Government’s has worked relentlessly to build a favourable tax regime for the taxpayers. It has
given topmost priority to clarification of ambiguous provisions of the law and issuance of detailed
guidelines on new regulations. Accordingly, this time, the anomaly of mismatch of effective date of
income tax exemption with the applicability of equalisation levy has been addressed. It has also
been clarified that income subject to Equalisation Levy shall be exempt from Income Tax with effect
from AY 2021-22. Additionally, it has been explained that consideration taxable as FTS or royalty shall
be excluded from the purview of EL. Clarifications as regards what constitutes online sale of goods
and online provision of services have now been provided. It has been laid down that ‘Online sale of
goods’ and ‘Online provision of services’ shall include acceptance of offer for sale,
placement/acceptance of purchase order, payment of consideration, supply of goods or provision of
services, partly or wholly.
Limited Liability Partnerships
LLP is a legal structure commonly used by small and medium enterprises for doing business in India.
Decriminalizing of the procedural and technical compoundable offences now extends to LLPs in
addition to companies. Decriminalisation of offences, which do not involve substantial violations,
shall incentivise compliance, sluice the criminal justice system and stimulate congenial business
climate for LLPs.
LLPs do not enjoy the benefit of lower tax rate as accorded to companies, while being regulated the
same way as companies in respect to conduction of audit, maintaining books of accounts, etc. Now,
by way of the Budget, it has been directed that LLPs cannot even opt for presumptive taxation
(which is available to partnerships). Therefore, amidst rife expectations, that some benefit in the
form of rationalisation of provisions would be accorded to LLPs as well, they continue to hang in
between with extensive regulatory requirements with no favourable tax structure.
Revamping Assessment/ Reassessment procedure
Owing to the digitization drive in the tax department, it is now collecting information from law
enforcement agencies and third parties in the form of Statement of Financial Transactions (SFT) and
is disseminating the same to the taxpayers. Consequently, the assessment and re-assessment is
largely information driven. In view of the same, the government has come out with a new way of
conducting such proceedings. It has been proposed that before the issuance of notices for
reassessment (other than search and requisition cases) the tax officer will conduct enquiries and give
an opportunity of being heard to a taxpayer before determining whether such case is fit to be for
further action. The time limit to issue a notice of reassessment in normal cases is proposed to be
reduced from six years to three years from the end of the relevant assessment year. In specific cases,
where there is evidence available that income escaping assessment amounts to INR 5 million or
more, the time limit to issue notice is 10 years, subject to approval of PCIT.
Eyeing the HNI’s income from Provident Fund with interest
The prevailing provisions of the Income Tax Act grant an exemption in respect of any payment from
specified provident funds. Additionally, accumulated balances due and payable to an employee by
specified provident funds are also exempt subject to certain conditions. It has now been proposed to
tax the interest income accrued on account of employee’s contribution in excess of INR 2.5 lakhs in
any previous year. This amendment will be effective from Financial Year 2021-22 onwards.
The amendment is targeted towards high-income salaried class, who stash away a huge chunk of
their salary in these funds. Apart from earning high-rate assured returns, they also get tax exemption
on the same. The proposed amendment shall not have a bearing on the middle-income group
earning income up to INR 20.83 Lakh (assuming that 12% of the same is contributed to the Provident
Fund). However, high-salaried individuals may be dragged into the tax net since their contribution
may exceed INR 2.5 Lakhs.
Imposing Agriculture Infrastructure Development Cess (AIDC)
To finance the improvement of agriculture infrastructure and other development expenditure, it has
been proposed to impose AIDC on the import of specified goods. It has been declared that rate of
AIDC would not exceed the rate of customs duty and would be calculated as a percentage of value of
goods, determined in the same manner as the value of goods is calculated for the purpose of
customs duty under Customs Act. Further, AIDC is in addition to any other duties of customs
chargeable on such goods, under the Customs Act or any other law for the time being in force. The
corresponding reduction of basic customs duty shall ensure that AIDC does not lead to additional
burden on the consumer.
Indirect Tax Measures
Budget 2021 served as a means to address the perplexities revolving around the taxation laws,
thereby making taxpayers happy without impinging government’s funds too much. India is in the
fourth year of the GST regime. While numerous measures such as filing of nil return through SMS,
quarterly return and monthly payment for small taxpayers, electronic invoice system, pre-filled
editable GST return, etc. have already been introduced, Budget 2021 focussed on removing further
irregularities in the new Act. For instance, the provision requiring payment of GST on net basis has
been introduced with retrospective effect from 1 July 2017 providing much needed relief to
taxpayers. Changes have been made in the GST Legislation to restrict the zero-rated supply on
payment of integrated tax only to a notified class of taxpayers or notified supplies of goods or
services only. Further, it has been proposed to allow taxpayers to file a self-certified annual return
(GSTR-9) along with a reconciliation statement (GSTR-9C), instead of certification by a Chartered
Accountant /Cost Accountant.
With the twin objective of promoting domestic manufacturing and helping India get onto a global
value chain and export better, major review of more than 400 old Customs exemptions are proposed
to be conducted through extensive consultation. From 1st October 2021, a revised customs duty
structure, free of distortions is proposed to be introduced. Any new customs duty exemption
henceforth would have validity up to the 31st March following two years from the date of its issue.
According benefits to International Financial Services Sector
IFSC’s ranking among global fund jurisdictions in the last two years has significantly improved owing
to several ingenious and swift changes to IFSC framework in the last two years. In furtherance
thereof, the finance minister has come up with extensive new changes. Though widely anticipated,
exempting funds and fund managers from safe harbour rules for managing offshore funds from
India, is an extremely intrepid and encouraging move. Extending tax holiday to investment division of
banking units in IFSC on the lines of Cat III AIFs investing in India will enable such banks to invest in
the rupee market without taxation.
Exemption to foreign aircraft lessors from aircraft lease rentals paid by a lease in IFSC will add a new
dimension to the way aircraft leasing is structured. Currently, such leasing companies are housed in
countries like Ireland. If a foreign lessor as well as a lease in IFSC are exempted from Indian tax
(under existing tax holiday scheme), new structures will emerge for global aircraft leasing such as
Ireland and Hong Kong.
Providing for tax neutral relocation of foreign funds to IFSC with continuity of original treaty benefits
on the lines of merger/demerger provisions will encourage funds from countries to move to IFSC.
Conclusion
The government, with its unconventional and admirable methods has helped India emerge as a
strong yet liberal nation with clear signs of progress. The Budget 2021 was surely an enthralling one
as India’s expectations were running high. The well-structured Budget portrayed an honest effort of
the government to address the fiscal and economic issues and render procedural simplification.
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