2020 was a year of whirlwind changes for the world at large. The world of direct taxation was not far behind, facing its own set of challenges during these unprecedented times. With the Union Budget 2021 around the corner, expectations are high among industry experts for these challenges to be addressed.
In a major amendment last year, the government widened the scope of the Equalization Levy (popularly known as 'Google tax') to bring within its ambit a wide array of online transactions. This levy is viewed as a result of the deliberations of the BEPS (Base Erosion and Profit Shifting) project undertaken by OECD and G-20 countries to review and address shortcomings in the existing global tax framework.
The responsibility for payment of tax and the related compliance was cast upon non-resident sellers and service providers. Rushed implementation sans clarity on the scope of the levy drew flak from multinational corporations as well as foreign governments.
The US called it 'extra-territorial' and 'discriminatory', initiating a probe under the US Trade Act. India has stood by its stance, clarifying that the levy is neither discriminatory nor in violation of any WTO commitments. Despite criticism and representations by taxpayers, the government is yet to offer concessions.
Any amendment or clarifications, in the budget with respect to the scope of this levy, manner, and forms of compliance would be welcome.
Corporate tax rates
Rapidly increasing mobility of capital has prompted governments to make their corporate tax rates competitive, to attract and retain investors, which has led to the creation of a tax rate war among countries. Further, providing tax relief and leaving more funds in the hands of companies for reinvestment in productive avenues, would be a welcome step towards the revival of the economy. However, given the sharp decline in income tax collections, coupled with the dip in GDP, it may be over-optimistic to expect any further tax rate cuts, especially considering the rate reductions already announced by the government last year.
Striking a balance between boosting tax revenues to bridge the fiscal deficit, while also providing a financial impetus to corporates to jumpstart the post-pandemic economy that is just about getting on its feet, would be one of the major challenges for this budget.
Expected amendments to tax provisions
Shifting the dividend tax liability from the distributing company to shareholders was a much-anticipated amendment introduced in the budget last year. This change brought with it other amendments, such as reintroduction of Section 80M, to remove the cascading effect of dividend tax, by providing a deduction. However, this deduction is presently not available to companies incurring losses. Hence an amendment here may be expected.
Sweeping changes to the Tax Collected at Source ('TCS') provisions came into effect from October 2020. However, there is a lack of clarity regarding the applicability of the provisions in certain scenarios. For instance, while TCS is not applicable on the export of goods, its applicability in case of high-sea sales and deemed exports requires clarity.
Furthermore, the levy of TCS on share sale transactions has increased the compliance burden for the buyer as well as seller, leading to additional complications in share transactions involving non-resident entities. Suitable amendments to Section 206C(1H) to exempt certain categories of share transactions would help.
Sections 56(2)(x) and 50CA were introduced to ensure that transfers of shares and certain other assets are taxed at fair value to avoid artificially lowering the consideration in order to reduce tax liability. While the intent is being served, it hinders genuine transactions such as realignment in shareholding within a business group, leading to hardships and cashflow considerations.
A carve-out from these provisions for genuine transactions would enable smoother transactions and business reorganisation, especially in the present post-pandemic scenario where distress sales and intra-group reorganisations are becoming commonplace; an amendment to these provisions would ease the burden on these businesses.
The government has been taking several measures over the years to digitise tax related compliances, from online tax payments to filing of returns and appeals. While e-assessments have been gaining some traction since their introduction in 2019, the paradigm shift towards faceless assessments and appeals (announced in August 2020) is expected to change the landscape of tax litigation as we know it today.
The faceless assessment and appeal schemes have been introduced with the intent to increase transparency and to streamline the tax litigation process under a nationally centralised unit. However, it would be vital to invest in equipping the systems as well as personnel to adapt to this new scheme. Addressing the technological challenges and providing an option for a hybrid (face-to-face and digital) model during the transition phase, would be useful to taxpayers and tax authorities alike.
The retrospective amendments introduced in 2012 and 2015 which brought extra-territorial share transfers within the ambit of tax in India (introduced in light of the landmark decision in the case of Vodafone), sparked off a series of investment treaty arbitration cases between the foreign investors and the Republic of India.
International arbitration tribunals were constituted in this regard, to settle the dispute regarding whether the Republic of India had violated its obligations under the applicable bilateral investment treaties. In the last six months, it is noteworthy that two such cases were ruled in favour of the foreign investor and against India - Vodafone International Holdings BV ('Vodafone case') and Cairn Energy Plc ('Cairn case').
While amendments with retroactive applicability have always been contentious, two consecutive defeats in the recent past before international arbitration tribunals may necessitate a revisit to the validity of such amendments. Any amendments in this regard in the upcoming budget would be welcome.
The expectation from this budget would be to address several challenges that have arisen as a result of the pandemic and its impact on the economy, on the people, and their livelihoods. It would be unprecedented in many ways, as the government would have to focus on providing stimulus packages to revive the economy, while also identifying other avenues of revenue to bridge the widening fiscal deficit.
(Chandraprakash Surana is Partner, Deloitte India; Supraja Srinivasan is Deputy Manager, Deloitte Haskins & Sells LLP.)