Set to be presented on February 1, the government shall announce the Budget 2021 with a view to put in place a system-based governance and address the woes of different sectors of the economy. Through its innovative reform stratagems, the Centre has always tried to ensure that India evolves incessantly and has always been responsive to the needs of the taxpayers. With Budget 2021 just around the corner, it is time again for the government to meet the high expectations of pandemic-struck India.
The SEZ boom is part of a new wave of industrial policies and response to increasing competition for internationally mobile investment. Three out of every four countries have at least one SEZ. Countries like China, Republic of Korea, Ireland, New Zealand and the United States are successful economies in leveraging SEZs to achieve far-reaching economic transformation.
Since SEZs are key contributors of foreign exchange and employment, steps are needed to ensure that SEZs continue to draw investment. For reviving exports and making India competitive, the government should extend the sunset clause under section 10AA of the Income Tax Act for another 5 years.
Further, a reduced corporate tax rate of 15% is applicable to all new manufacturing entities. Worldwide, countries do not have a separate tax regime for the manufacturing and services sector. With limited fiscal impact, it would provide huge stimulus to service sector companies if such newly incorporated organisations are also brought in the net of the reduced rate.
The need to strengthen our healthcare infrastructure has been highlighted by the COVID-19 crisis. In order to finance government relief measures towards vaccination, distribution infrastructure, grants to affected states and to provide a stimulus to the infrastructure sector, the government might consider issuing "tax-free Corona bonds" to be subscribed by the public at large, with an attractive return.
Certain benefits such as exemption of tax on interest on corona bonds up to some limits, say Rs 2.5 lakh, could be considered by the government to prompt sizeable subscription by public.
As compared to other competing economies, India's expenditure on Research and Development (R&D) is quite low. While countries like the US, China, Israel, and Korea spend between 2.1-4.2%, India spends merely 0.6 - 0.7% of GDP on R&D activities.
In order to make India self-sufficient and an export powerhouse, it is quintessential to invest in R&D. Extending weighted deduction of 150% beyond financial year 2020-21 under section 35(2AB) could incentivise companies engaged in scientific research.
With the consolidation of twenty-nine central labour laws into four labour codes, a new labour law regime is expected to be unravelled in the near future. Fixed-term employment will see an important change. Tenure-based benefits, like the permanent workforce, will also be accorded to the employees engaged for a specified duration. In order to inspire industries to embrace the new model, the deduction under section 80JJAA may be expanded to cover such payments.
Lately, "faceless appeals scheme" was introduced under which, an assessee's request for a personal hearing is only possible in certain, yet to be prescribed circumstances and is subject to the approval of the Chief Commissioner or Director General of Income-tax.
This might prove to be a hindrance, particularly in complex cases of cross-border taxation or interpretation of tax treaties where personal interactivity becomes crucial to explain a position on an issue.
It will be challenging for taxpayers to explain, and for tax officials to understand, the complex business transactions and legal positions so adopted, merely by way of written submissions made online. Consequently, there would be a surge in litigation.
The government may consider incorporating a mediation process whereby international investors can mediate their complex tax disputes within the territory of India. External, neutral mediators may be a part of the "process" of analysing tax laws and all relevant facts in detail to reach a legally binding final settlement, within a definite timeline, amongst all parties to the mediation.
Owing to the COVID-19 pandemic, the government was swift to recognise and provide relief to the tax-residency related conditions for stranded individuals for the year ended March 31, 2020. Relief, which may be in the form of exemption for stay for a part of the year, say up to July/September, for all stranded individuals, might also be pronounced in the awaited budget for fiscal year 2021-22.
Similarly, in order to avoid litigation, necessary clarification shall also be necessary in case of foreign companies that carry an exposure of constituting PE owing to unwanted stay of its employees in India.
Tax policies must adapt to changing times to provide buoyancy and enable companies to undertake business in a time-bound and efficient manner. While expectations are plenty, it remains to be seen what the government has in store for taxpayers.
(The author is Chairman, Nangia Andersen India.)