In light of the current global pandemic, India Inc. had its eyes set on the Union Budget 2021. Having faced numerous hardships in the current fiscal year, huge expectations had been building up to the budget day to pave the way for simplification of digitally run businesses and start-ups.
Over the years, the government has been sensitive to the needs of these companies and has done much to aid their growth. The current budget indicates the government's commitment towards the start-up ecosystem and digital businesses.
The start-up sector shares a close nexus with the digital world and plays a pivotal role in furthering growth of digitally operated business models. Presently, eligible start-ups incorporated before March 31, 2021 have been provided with the benefit of a tax holiday of 3 years out of 10 years.
To further promote the start-up space and encourage growth in this sector, this benefit has been extended by a year to start-ups incorporated until March 31, 2022. Although this is a welcome move, given the long gestation period, most startups may not be able to avail tax holiday benefits within 10 years of incorporation. Thus, the ask for an extended period say 15 years for the sector remains imperative.
Also, to widen the sources of funding for new age qualifying businesses, exemption from capital gains tax arising from the sale of specified assets has been put in place in the income-tax legislation. The exemption shall be available in cases where the transferor taxpayer subscribes to shares of the approved business from gain proceeds. The exemption is conditional upon the sale of asset by a specified date which now stands extended by another year to March 2022.
In addition to the above, a further measure has been introduced which facilitates start-ups to be set-up as One Person Companies (OPCs) by resident/non-resident Indian individual promoters without any attached conditions viz. minimum capital requirement etc. OPCs have been enabled to transition to more known structures such as private and/or public companies on a need basis.
This change will make it more fruitful for young start-ups and innovators to formalise their business at an early stage. Budget 2021 also facilitates the ease of doing business, particularly for new and small businesses, by enhancing the threshold for applicability of tax audit.
The previous budget had widened Equalization Levy provisions to include ecommerce supply of goods and services. The scope was extended without an explanatory memorandum which took the global e-commerce industry by surprise. Also, the absence of subsequent clarifications by the government since its unveiling pertaining to the scope of the levy, added to ambiguity.
One of the issues the industry has struggled with is the inter-play between the application of the new levy (2 per cent) and taxation as royalty/technical fee (10 per cent). As a welcome clarification, putting the controversy to rest, the budget clarifies that traditional taxation such as royalty/ technical fee will be excluded from the levy.
Further, the provisions were ambiguous regarding the meaning of the term, "online sale of goods' and 'online sale of services' for which numerous representations for clarification were made by the stakeholders.
The budget explicitly elucidates that activities viz. placing & accepting purchase order, acceptance of offer for sale, and payment of consideration through online mechanism under the levy have been provided. The budget also states that the levy would trigger in instances where the e-commerce supplier of goods/ services is the owner or service provider or otherwise.
On indirect tax front, the government has recently taken various measures towards ease of doing business and ease in carrying out GST compliances, like filing of nil returns through SMS, introduction of e-invoicing, and availability of pre-filled returns online among others.
This has been further supplemented by self-certification along with annual returns. The current budget has further introduced provisions linking the credit directly with furnishing of return by the supplier as one of the preconditions for availing credit.
The previous budget had also introduced withholding tax under Section 194-O to increase tax collections. The industry is facing issues around the applicability of such provisions in cases where multiple ecommerce operators (ECO's) are involved in a particular transaction.
Similarly, due to different definitions of tour operator/package under Income Tax & GST, there seems to be conflict between provisions relating to tax collection at source. This has led to increased compliance burden on ecommerce companies.
However, the issue is yet to be addressed and will require due consideration by the government. Further, as regards GST, no measures have been introduced that address certain issues like centralised registration for undertaking Section 9(5) compliances under the CGST Act, or limiting the scope of Section 9(5) to only situations where consideration is collected by the ECOs, not covering situations like pay at hotel, cash rides etc. where consideration is paid directly to the actual supplier.
Whilst the government's proposals are moving in the right direction, further intervention is the need of the hour to aid significant sectoral growth.
(The author is Partner, KPMG in India.)