The Union Budget was presented in the backdrop of possibly one of the worst ‘black swan’ events in the last 100 years. Against this backdrop, it was a very difficult balancing act, in the context of the need to spend to boost the economy, and on the other hand, to be cognisant of revenue mobilisation. In this context, there was an apprehension of additional taxation, including a ‘onetime’ Covid cess and potential wealth tax on high net-worth individuals. Fortunately, none of these fears have come true.
A lot of revenue mobilisation seems to have been anticipated through growth of the economy and public sector enterprises’ divestments, the latter to the extent of Rs 1.75 lakh crore. Incidentally, against the target of Rs 2.1 lakh crore, divestment in the current financial year of less than Rs 20,000 crore has actually happened.
In the light of the above, here are some important aspects on the direct tax front.
On direct taxes, this budget is more important for what has not happened, as opposed to what has been done. As mentioned earlier, the fact that taxes have not been raised is a positive. This is especially so in the context of the fact that corporate tax rates are very reasonable at 25%. Possibly, having reduced the rates a couple of years back, it was not feasible to do a roll-back. Also, in the context of individual taxes, given the 43% tax, how much further could taxes have been increased on individuals? However, it is disappointing that the consistent representations made for reduction of tax on partnerships and limited liability partnerships at 35% have not been heeded, and the 35% is higher than that for companies at 25%.This higher rate for partnerships and LLPs is predicated on the back of a misconception regarding the fact that shareholders of companies pay tax on dividend, but partners do not pay tax on withdrawal post-tax.
What is forgotten is that only a small percentage of PAT is distributed by companies, and in the context of the crying need to boost the MSME sector, partnership, and LLP rates should have been reduced to at least 30% (if not 25%), and it is disappointing that this has not been done.
There is surprisingly no mention of the much-awaited number of days of stay relaxation for non-resident Indians for FY 2020-21. The tax residency rules were expected to undergo a change, so as to provide relief to those NRIs who were traveling to India before the lockdown and have been unable to return due to restrictions on air travel, in India and across the world. This has led to issues relating to their residential status as they have ended up spending a greater number of days in India during the lockdown.
In order to address this issue, the Central Board of Direct Taxes had issued a circular that clarified the residency situation of NRIs and foreign visitors whose stay in India during the year 2019-20 lasted longer than they expected, due to the COVID-19 lockdown. Relief was expected on similar lines for FY 2020-21, but has not happened. A clarification is badly needed, but the Finance Bill is silent on this aspect.
Also read: Budget 2021: Key Tax And Regulatory Changes
Restructuring and mergers and acquisitions have serious tax hurdles and several representations were made in the context of the need to de-clog, demystify and rationalise the provisions. Representations were made to rationalise and clarify the meaning of ‘demerger’ to clarify that investments in companies (at least subsidiaries) should form part of the term ‘undertaking’.This would have allowed set off and carry forward of loss for all types of mergers (not just manufacturing companies and PSU banks, and a couple of others), to allow carry forward of loss for the takeover of even closely-held companies, and indeed, very importantly, to clarify that write-back of haircuts by borrowing companies in relation to loans should not be taxable.
The last one is a crucial one for non-performing asset resolution, and the continuing uncertainty around this is extremely negative. None of the above amendments have been made.
A few amendments have been made from an M&A standpoint, but they are more in the nature of neutralising judicial precedents and plugging what the government possibly considers unjustified revenue loss. These include:
- Depreciation on goodwill not to be allowed. It has been held to be allowable basis judicial precedents including a Supreme Court judgment.
- Judicial precedents to the effect that slump exchange (eg: shares received against the sale of business undertaking) was not taxable, and this has now been negated.
- The amount received by a partner in excess of capital balance on retirement from partnership/LLP in certain cases will now be taxed. All these are effective from the current financial year March 31, 2021, itself. These amendments are, therefore, retroactive, in the sense that they impact past transactions also; for example, if depreciation of goodwill was being claimed for the last three years for an acquisition made three years back, the deduction will not be available in respect of goodwill from this financial year itself.
Some measures have been taken in relation to dispute resolution and some of these are as follows:
- The Income Tax Settlement Commission was applicable in respect of limited categories of disputes has been abolished.
- The Authority for Advance Ruling which was primarily relevant for non-resident taxation was almost non-operative and instead of six months, the so-called advance rulings were (absurdly and embarrassingly) taking three-five years in many cases. This body has been abolished.
- The ‘Board of Advance Ruling’ has been introduced, but the scope seems to be the same as the AAR – i.e. a very narrow scope. It will have two members and both of them will be senior income tax officials, not below the rank of Principal Chief Commissioner of Income Tax. The composition of this body and the very limited scope is likely to kill the efficacy of this initiative, and it will possibly go the same unfortunate route as the AAR.
- A Dispute Resolution Committee for small and medium taxpayers has been introduced and is applicable where the returned income is up to Rs 50 lakh and the disputed income is up to Rs 10 lakh. If handled well, this can reduce litigation, but focussed and sensible architecture and robust execution will be the key.
On the real estate front, the exemption to developers for affordable housing has been extended for one more year i.e. up to March 31, 2022, and also the scope of the deduction has been extended to notified rental housing (to promote affordable rentals). Also, under Section 80EEA of the Income Tax Act, a deduction in respect of interest on a loan taken for a residential house from a financial institution, is deductible up to Rs 1.5 lakh, if the loan has been sanctioned up to March 31, 2021, and the stamp duty value of the residential property does not exceed Rs 45 lakh – this provision has been extended up to March 31, 2022.
Further, under Section 43CA of the I-T Act, there was a safe harbour of 10% of the stamp duty value as a shelter against deemed capital gains tax. This, as a measure to boost real estate demand and to enable real estate to liquidate unsold inventory, has been increased from 10% to 20%, subject to certain conditions (consideration not exceeding Rs 2 crore, the transfer is by a first-time allotment by builders and transfer takes place up to June 30, 2021). Also, TDS on dividend by SPV to a REIT or InvIT is not applicable any longer.
- Tax deducted at source has always been a major bugbear and in this context, it is disappointing that the relentless expansion of TDS and its consequential compliance burden keeps getting broader. A new Section 194Q has been inserted to provide for 0.1% TDS on purchases in excess of Rs 50 lakhs by an assessee whose gross turnover/receipts exceed Rs 10 crore during the financial year immediately preceding the financial year in which the purchase of the goods is carried out.
- In relation to various funds registered outside India, any transfer of assets, by way of relocation, by a fund registered outside India to a fund in India (established in an IFSC) shall not be considered as ‘transfer’ for capital gain tax purposes; the objective is to incentivise the relocation of funds to an IFSC in India.
Ketal Dalal is Managing Partner at Katalyst Advisors LLP.
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