India has been has been heavily impacted by the Covid-19 pandemic resulting in contraction in GDP growth. The finance minister (FM) faced the onerous task of matching expectations of lowering effective tax rates vis-a-vis huge expenditures to re-capture growth. Considering long-term growth, the Budget proposals focus more on boosting demand and supply through increased expenditure in sectors like health, education, infrastructure, power, innovation, and digitisation.
The FM has not tinkered with the tax rates (both corporate and personal) but has instead leveraged the need for transparency and efficiency, while focusing on promoting investments and employment with minimum compliance burden on taxpayers. Accordingly, proposals have been formulated around removal of difficulties and rationalisation of provisions, and incentives in line with the vision.
For the common man
Salaried individuals are facing difficulties in claiming leave travel concessions due to travel restrictions during the pandemic. To overcome this challenge, an alternate exemption has been offered up to lower of Rs 36,000 or one-third of specified expenditure. To simplify e-filing of returns, additional details will be pre-filled in the tax return form. Relaxation from filing returns has been provided to resident individuals of 75 years and above, having only pension income and interest income, if any, received from a specified bank, provided they file a prescribed declaration with such bank, subject to certain conditions.
The timeline for claiming additional deduction on account of interest on loan for first-time homebuyers, with stamp duty value up to Rs 4.5 million, has been extended up to March 31, 2022. Sunset for incorporation of eligible start-ups to avail tax holiday has also been extended to March 31, 2022. The threshold of gross receipts from business for tax audit from Rs 50 million to Rs 100 million, subject to fulfilment of prescribed criteria. Small and medium taxpayers can opt for dispute resolution through the Dispute Resolution Committee.
If annual premium of Unit Linked Insurance Policy exceeds Rs 0.25 million, the sum received from such policy would now be taxable. Interest accrued on employees’ contribution above Rs 0.25 million p.a. in notified provident fund would now be taxable. Mismatch in timing of taxation on withdrawal from specified overseas retirement funds sought to be removed by incorporating suitable rules to address the difficulties in claiming tax relief.
Tax incentives & promotion of investment
Stimulus to investment in International Financial Services Centre (IFSC): Tax exemption offered to ‘investment divisions of offshore banking units’ registered as Category III – Alternate Investment Funds, subject to prescribed conditions. Existing offshore funds allowed to relocate to the IFSC through tax neutral transfers, enabling carry forward of loss by investees due to change in shareholding, wherein relocation is completed by 31 March 2023. Exemption offered on transfer of an aircraft or aircraft engine already leased by a unit in the IFSC to a domestic aircraft operator. Exemption proposed on royalty income of a non-resident on lease of an aircraft by units in IFSCs. The proposed incentives, except the relocation, have a precondition of commencing operations by 31 March 2024.
Safe harbour on real estate: The threshold of difference between the transaction vale and the stamp duty value enhanced from 10 per cent to 20 per cent for new residential units of value not exceeding Rs 20 million sold between 12 November 2020 to 30 June 2021. A similar enhancement of threshold is applicable for homebuyers.
No tax deduction at source (TDS) on dividend to business trusts: No tax deduction on dividend paid by a special purpose vehicle to a resident business trust with effect from FY 2020-21.
Relaxation from MAT calculation: Foreign companies not to include dividend income in MAT calculation, in case the dividend is subjected to a lower tax rate as per the tax treaty. Corresponding expense also not to be allowed for computing MAT liability.
Disinvestment of public sector companies (PSCs): The Government has approved the policy of strategic disinvestment of PSCs, estimating receipts of Rs 1750 bn in FY 2021-22. To augment the divestment roadmap, demergers carried out by PSCs to be exempt from capital gains and allow carry forward and set-off of accumulated loss and unabsorbed depreciation from amalgamations involving PSCs in specified circumstances.
Exemption to notified sovereign wealth fund and pension fund: Proportionate tax exemptions available based on quantum of investment/ lending (as the case may be) on dividend, interest and long-term capital gains income of the funds.
Education and specified health care institutions: Ambit for blanket exemption enhanced for such not for profit institutions with receipts up to Rs 50 million in a year from the erstwhile limit of Rs 10 million.
Tax treaty benefits for foreign institutional investors: The beneficial tax rates of the tax treaty are available on tax withholding on income from securities.
Efficiencies to remove difficulties
Conversion of Urban Cooperative banks (UCBs) to banking companies: The Reserve Bank of India has permitted UCBs with high growth and operations in multiple states to convert voluntarily into Small Finance Banks. To facilitate such conversion, the same has been proposed to be tax neutral for the UCBs and their shareholders. The amendment is proposed to take effect from FY 2020-21 onwards.
Discontinuance of Settlement Commission: The Income-tax Settlement Commission shall cease to operate on or after 1 February 2021. Pending cases shall be settled through interim board(s) to be set up for this purpose. Vivad se Vishwas scheme shall not apply to any proceeding arising from an order of Settlement Commission.
Board for Advance Ruling: The authority for advance ruling shall cease to operate from a notified date and one or more Boards shall be constituted, comprising two members not below the rank of Chief Commissioner. Unlike the erstwhile Advance ruling provisions, the order of the Board for Advance Ruling shall be appealable before the High Court.
Income escaping assessment: With effect from 1 April 2021, an opportunity of being heard has to be provided before issuance of notice for assessment or reassessment in case of income escaping assessments, other than search cases. The period of reassessment shall be limited to three years (or ten years in case evidence of concealment of income of Rs 5 million or more) from the end of the relevant assessment year.
Timeline for compliances & assessment: The timelines for compliance & assessment procedure has undergone change as tabulated below.
Delayed deposit of employee contributions: Delaying the deposit of employees’ contribution to specified welfare funds beyond dates prescribed in respective laws would be considered as taxable income.
Rationalising faceless proceedings: Scheme for faceless proceedings before the Tax Tribunal being framed.
Scope of return processing expanded: The scope of adjustments permissible at the time of processing of return increased to consider income also.
Slump sale implications widened: Taxability of slump sale extended to cover slump sale by means other than sales, such as slump exchange, from FY 2020-21 onwards.
Taxation on dissolution or reconstruction of firms, etc.: Computation of capital gains on transfer of capital asset to a partner or member at the time of dissolution or reconstitution of specified entities to be undertaken without considering impact of revaluation of assets, self-generated goodwill or any other self-generated asset in the entity’s books for the purpose of determining cost of acquisition. Similarly, on receipt of money or other asset by the partner or member, the aggregate value of money and the fair market value of the asset on the date of dissolution to be considered as the full value of consideration.
No more depreciation on goodwill: To settle the long-drawn controversy, it has been proposed to remove goodwill from the ambit of depreciable assets from FY 2020-21 onwards. In case of transfer of purchased goodwill, the cost of acquisition of the assessee would be considered after deducting the depreciation already claimed from the purchase price.
Presumptive taxation for professionals: The option of presumptive taxation for professionals is clarified to be available to individuals, HUF and firms, but not LLP.
Equalisation levy: For triggering equalisation levy, the 'online sale of goods' and 'online provision of services' shall include any of the following online activities: (i) acceptance of offer for sale (ii) placing of purchase order (iii) acceptance of purchase order (iv) payment of consideration (v) supply of goods or provision of services, wholly or partly. Transactions taxable as royalty or fees for technical services in India shall not be liable to equalisation levy.
Fake invoices: Provisional attachment provisions are proposed to be expanded in cases of penalty for fake invoices/false entries where penalty is likely to exceed Rs 20 million.
Advance tax on dividend: Advance tax on dividend income would now be payable after the declaration of dividend.
Corpus donation in charitable trusts and institutions: Corpus donations not invested in specified modes would be considered income. However, expenditure from corpus funds invested in specified mode and not considered part of total income shall not be considered as an application of income. The amount applied out of loan or borrowing shall not be considered as an application of income. However, repayment of such loan or borrowing out of income of the trust shall be considered as application in the year of repayment. It has also been proposed that excess application of preceding year cannot be considered for the purpose of application of subsequent year.
Transfer pricing: Any adjustment made in the books of accounts of the current year, pursuant to an Advance Pricing Agreement or a secondary adjustment, needs to be now considered for recomputing the book profits for MAT. This would ensure parity between the MAT and normal tax computation. This amendment will be effective from 01 April 2021 and accordingly will apply from FY 2020-21 onwards.
TDS/ TCS provisions: TDS on supply of goods: A new TDS provision has been introduced on purchase of goods wef July 1 2021.