As India sets on the path of recovery after the devastating COVID-19 blow, it is now time for the Finance Minister to “unlock” the Budget briefcase. There are high expectations from the Budget, especially given that the Finance minister has described the upcoming Budget as a ‘never before’ event.
The tax reforms in recent years, including the significant reduction of corporate tax rates, giving legal sanctity to the taxpayer charter, use of technology to ensure frictionless interaction for assessments and appeals, introduction of Vivad Se Vishwas (VSV) scheme, etc. have considerably improved the image of India as a tax friendly jurisdiction. With all these reforms already in place, the focus of this year’s Budget should be around the themes of ‘Tax Certainty’ and ‘Ease of Doing Business’. In this regard, some of the key Budget expectations of corporates are outlined below.
Proposals for enhancing Tax Certainty
Mitigating tax disputes
Considering the large chunk of cases that are stuck up in litigation, last year, the Government introduced the VSV scheme with the noble objective of settling the pending direct tax disputes. While VSV will help address the past tax litigations, it is now time to introduce a mediation scheme which will help resolve disputes right at inception, by allowing the taxpayers and the Tax Department to settle the dispute in an amicable manner, thereby curtailing litigation.
Effective 1 April 2020, the scope of Equalisation Levy (EL) was significantly expanded to cover sale of goods / provision of services by non-resident e-commerce operators through digital / electronic facility. The way the provisions are drafted, there are copious interpretational issues and ambiguity surrounding them (e.g. applicability of EL, where the transaction is entered into online but the delivery of the goods is made offline, where transactions are undertaken by traditional means over emails or accounting/ ERP software, consideration on which EL is payable, the issue of potential double taxation for FY 20-21, etc). It would do well for the Government to demystify the plethora of issues vis-à-vis EL in the upcoming Budget.
Principal Purpose Test (‘PPT’)
As an outcome of the OECD BEPS project, Multilateral Instrument (MLI) was introduced to prevent base erosion and profit shifting. Article 7 of MLI deals with the concept of PPT, by invoking which, the Tax Authorities can deny tax treaty benefits to taxpayers where one of the principal purposes of an arrangement was to obtain tax benefit. This could likely throw open the floodgates of litigation on international tax matters in the future. With a view to address this, as in the case of GAAR, it should be provided in law that in all cases where the Tax Administration proposes to invoke PPT to deny tax treaty benefits, the matter should be referred to an Approving Panel, for its decision thereon.
It is a standard practice of the Tax Department to initiate penalty proceedings for all additions made in assessment of a taxpayer, regardless of merits of the case. With a view to provide respite to taxpayers, the Government should expressly provide that no penalty shall be levied in cases where the taxpayer’s view is a bonafide view, especially where it is based on decision of an appellate authority or a Court.
Proposals for facilitating Ease of Doing Business
Relief for internal restructuring
Having regard to section 50CA and section 56(2)(x) of the Income Tax Act (‘Act’), in case of transfer of unquoted equity shares at less than FMV (as prescribed), it results in taxation, both, in the case of the transferor and the transferee on the same transaction. These provisions act as an impediment for genuine transactions involving internal group restructurings. Suitable amendment may be made to the Act to address this issue, so as to enable group restructurings in a seamless manner.
Amalgamation of companies
In case of amalgamation of companies, losses of the amalgamating company are allowed to be carried forward to the amalgamated company only to a certain class of companies. Section 72A of the Act should be amended to allow benefit of carry forward of losses to all companies irrespective of their nature of business.
Credit of Tax Deducted at Source (‘TDS’)
The taxpayers are allowed to claim credit of TDS only if the corresponding income is offered to tax in a particular year. There can be timing differences between the year in which tax is deducted by the deductor and the corresponding income is offered to tax by the deductee. This puts onerous burden on large companies to reconcile the TDS with the corresponding income and the year in which it is offered to tax. The tax law should be suitably amended to state that TDS credit reflected in Form 26AS will be allowed to the taxpayer, without having the taxpayer to conduct the reconciliation between the TDS and the corresponding income.
The Union Budget 2021 is being looked upon as a once-in-a-lifetime Budget exercise. In the backdrop of the Indian economy hitting a historic degrowth owing to the pandemic, the Government has given every indication that recovery of the sluggish economy and bringing the demand back to the pre COVID levels is its top priority. Coupled with this, it will be helpful if the Government provides respite on the aforesaid tax issues, which can act as a much-needed vaccine for the Indian taxpayers !!