Budget 2021 Overview of significant tax proposals

As Finance Minister Nirmala Sitharaman presented the Budget on 1st February 2021, the government has certainly made its intentions clear with respect to reviving the economy from a pandemic-induced slump.

Though the tax slabs were left untouched, some noteworthy changes towards the common man were made, which included reduction of compliance burden for the senior citizens having age 75 or above by providing them a waiver from filing income tax returns. Relaxation has been provided with respect to housing loans whereby additional deduction up to Rs 1,50,000 has been allowed in relation to interest on loan taken. A new dispute resolution committee is to be formed by the government to address disputes of the small and medium taxpayers. In a welcome move, gig workers now have been given the benefit of social security schemes and E-commerce workers will now be covered under Employees' State Insurance Scheme (ESI), Employees' Provident Fund (EPF) and the minimum wage rule. The customs duty on cotton has been raised from nil to 10% and on raw silk and silk yarn from 10% to 15%. Also, a new 'agriculture infrastructure & development cess' on certain items, earmarked cess for improving agricultural infrastructure, has been announced.

Changes in the tax litigation landscape include the constitution of Board for Advance Ruling, for replacing the Authority for Advance Rulings to dispose of appeals in timely and efficient and to address the gaps and long waiting periods associated with obtaining an advance ruling in India. The discontinuance of the Income-tax Settlement Commission is with immediate effect, i.e., from February 1, 2021. This implies that no applications can be filed after this date and for pending cases, an Interim Board of Settlement shall be constituted. The time limit for reassessment has been reduced from six years to three years, and for undisclosed assets, it has been reduced from 16 years to 10 years. In line with the e-Governance initiatives, in the last fiscal, India launched its faceless audit and appeals scheme. In further continuance, Ms. Sitharaman announced extending the scheme to Income Tax Appellate Tribunals as well.

In a step taken with a view to bring clarity towards foreign investor taxation, the budget provided lucidity towards India's digital tax (known as the equalization levy) by restricting its scope on income streams already categorized as royalties or fees for technical services, and providing certain clarifications concerning the nature of activities – these appear to expand the scope of the levy. Further, the Budget has proposed clarifications affecting international taxation, such as a clarification of the scope of applicability of domestic tax deductions at source when income is not taxable under a tax treaty and clarification of transfer pricing secondary adjustments and advance pricing agreement related adjustments, and has proposed introducing a definition of "liable to tax," which is expected to facilitate determinations under multilateral instrument signed by India under the OECD/G20 BEPS Inclusive Framework and India's double tax treaties, apart from provisions in the Act.

On the corporate tax front, the FM's proposed reformative measures such as disinvestment and land monetization have been banked upon to narrow the staggering fiscal deficit gap of 9.5%. In order to address the difficulties faced by Sovereign Wealth Funds and Pension Funds availing exemptions, certain relaxations in the conditions for availing 100% tax exemption such as prohibition on loans or borrowings, restriction on commercial activities, direct investment in entity owning infrastructure, etc. have been proposed by the budget which will serve as relief to the investment funds by reducing practical difficulties. All this may aid in providing a push to the overall infrastructure sector of India. Separately the budget has amended provisions on slump sale and provided that goodwill shall no longer be depreciable.

In a welcome move for IFSC's, the income arising to such units shall be exempted to the investment division of offshore banking unit to the extent attributable to the unit established in IFSC. Further tax holidays and exemptions on capital gains pertaining to start-ups have been extended by another year.

The proposals in the budget align well with India's stated goal of being at the forefront of foreign investment and becoming a five trillion economy by 2025. From a tax viewpoint, the budget aims to deliver on the government's vision to simplify the tax regime, ease compliance and reduce litigation.

The author is Seema Kejriwal Partner, BMR Legal Advocates and was assisted by Saurabh Nandy.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.