For direct taxes, Budget 2021 has largely maintained status quo

Owing to deep impact on the Indian economy due to outbreak of Covid-19, the central government announced several schemes and relaxations during 2020 to boost and strengthen the economy. In the backdrop of Covid-19 cases reducing and economic recovery from third quarter, the Union Budget 2021 was presented by the Finance Minister (FM) with expectation to provide impetus to the recovery process and lay the ground for a double-digit growth target. The major focus of the Hon’ble FM has been on building the infrastructure and healthcare sector of the country by substantially increasing the allocation.

As it has always been said that the real changes are not in the speech of the Finance Minister but in the fine print. This saying stands true for the Budget 2021. A number of clarificatory and procedural changes have been proposed by the Hon’ble Finance Minister in the Memorandum relating to Direct Taxes.

To further support the start-up ecosystem, the tax holiday has been extended by one year by including start-ups incorporated till March 31, 2022 to be eligible for the tax holiday. Also, the capital gains exemption on sale of specified personal assets by promoters for investment in eligible startups has also been extended till March 31, 2022 provided the startup utilises the amount for purchase of new asset within one year from the date of subscription in equity shares by the promoters.

To promote digital transactions and reduce the burden of tax compliance on small and medium business enterprises, it has been proposed to increase the turnover limit for tax audit from current Rs 5 crore to Rs 10 crore in cases where cash receipts or payments do not exceed 5 per cent of total receipts / payments.

In order to provide quick and early resolution of tax disputes to small and medium business owners and settling them at an early stage as against the current long drawn appellate proceedings, the Government has proposed to setup Dispute Resolution Committee (‘DRC’). Disputes where returned income is less than Rs 50 lakh and the variation proposed is less than Rs 10 lakh shall be considered by DRC.  

With an objective to reduce human interface in tax proceedings and increased use of technology, the Budget has proposed to reduce the time limit for completion of assessment proceedings to 9 months (from current 12 months) effective AY 2021-22. Corresponding reduction in time limits of filing revised and belated tax returns have also been proposed. The belated and revised returns can now be filed latest by three months before the end of the relevant assessment year or before the completion of assessment, whichever is earlier. Further the Government has proposed to reduce the time limit for re-opening the assessment from exiting 6 years to 3 years though the scope for re-opening has been relatively widened where such re-opening could be based on flags raised by computer based information systems.

In line with the objective of reducing human interface, the budget has paved the way for a faceless Appellate scheme for ITAT proceedings with dynamic jurisdiction to impart greater efficiency, transparency, and accountability. Being a final fact-finding authority, it would be interesting to see how the new Scheme would achieve the objective of effective dispute resolution in a faceless manner.

It has been proposed to settle existing litigation on allowability of delay in employee’s contribution to provident fund and ESI if the payment is made after the due date specified in the relevant Act but before the due date of filing of return of income. It has been proposed to clarify that the benefit of deduction available in case of employer’s contribution would not apply to employee’s contribution as such contribution is made by the employer in a fiduciary capacity. Although, the language suggests that it is a clarificatory amendment, it has been provided that the amendment will apply from assessment year (AY) 2021-22 i.e. on prospective basis and this may open another area of litigation.

The budget proposes to overrule a popular Apex Court judgment and do away with the allowance of depreciation on goodwill even in cases where it is purchased on the basis that unlike other assets, the goodwill of a business cannot be depreciated and may rather get appreciated over the years. Accordingly, goodwill would be treated as any other non-depreciable capital assets chargeable to capital gains.

Owing to the long pendencies before the authority for advance ruling (AAR) due to the vacancies of bench members, the AAR system is proposed to be abolished and a new ‘Board for Advance ruling’ comprising of two members not below the rank of Chief Commissioner shall be incorporated. The Budget also provides that the order passed by such board shall be appealable to the High Court by the department as well as assessee.

In order to address few ambiguities in the expanded scope of Equalisation Levy (EL), the budget clarifies that income taxable as Royalty or Fee for technical services shall not be subject to EL. To provide clarity on quantum of consideration for EL, the Budget has specified different sub-activities which shall be covered within ‘online sale of goods’, or ‘online provision for services’ and consideration received or receivable from e-commerce supply or services.

Although, the expectations from the budget in terms of relief for individuals and corporates were running very high, the Hon’ble Finance Minister mentioned in her speech that a lot of relief and relaxation in terms of concessional corporate tax rates, increased standard deduction have already been granted over the last couple of years. Also, the industry was expecting increase in surcharge or levy of covid cess, but the government has not made any such new levy, which is quite comforting. The Government’s expenditure on infrastructure and healthcare will provide the required push to the recovering industry, from a direct tax perspective the Budget has largely maintained status quo.

(Vikas Vasal, National Managing Partner -Tax, Grant Thornton Bharat LLP.  The views expressed are personal.)