Union Budget 2021 will have to deal with various facets i.e. Aatma Nirbhar Bharat, dip in economic growth, fracture caused by COVID-19, provide further stimulus, boost exports, setting new equations with the US, etc. Interestingly, GST has shown healthy collections, and hence the focus should be to garner revenues through divestment programmes; this will allow industry/corporates to recoup and revive from the after-effects of pandemic and thereby contribute to the healthy and pragmatic growth in the economy. Budget 2021 will have to be more pragmatic and forward-looking to support budding new age technology, development of infrastructure, generate employment and attract investment/boost capex in manufacturing.
The Finance Minister has already set the expectations high by promising a budget like “never before” (and a paperless Budget) to address the biggest concern being likely contraction in GDP of 7.7 percent [as per advance estimates on the Indian economy by the National Statistical Office (NSO)] as uncertainties around a sustainable rebound of demand continue to weigh on economic activity.
The key would be to prioritise spending and take adequate measures to fill up the gaps created by pandemic. With the fortune of many multinational corporations (‘MNCs’) being affected by the pandemic, the expectation of India Inc in the form of government support through corporate tax reforms is widely anticipated.
Union Budget 2020 expanded the scope of the hotly debated Equalisation Levy (‘EL’) to cover e-commerce supply or services provided by a non-resident e-commerce operator. There has been ambiguity regarding its applicability in view of the broad scope and in the absence of FAQs or Explanatory Memorandum in Budget document. Further, the absence of clarity on the availability of tax credit for EL in the resident country has also raised apprehensions about the increased cost of transactions. Given that the US has released its Investigation report on EL, one could expect clarifications on various ambiguities.
The pandemic has been harsh on sectors viz. infrastructure, hospitality, etc. and therefore, companies have incurred huge business losses during the fiscal year 2020-21. Though the traditional way of consolidation of business by way of merger/acquisition seems to be one of the plausible options, it involves transaction-specific costs. To encourage revival and possible foreign direct investment, the government may consider providing relaxation in conditions for carrying forward and set-off of business losses to stressed industries including the introduction of consolidation at the group level (i.e. fiscal consolidation).
Global supply chains are undergoing a radical reconfiguration, against the backdrop of the COVID-19 pandemic, rising economic nationalism across the world, and significant geopolitical shifts. In order to provide a boost to the manufacturing sector and thereby give further impetus to the ‘Atma Nirbhar Bharat ’ initiative of the Government, the following aspects may merit due consideration:
The revival of Investment-linked deductions e.g. Section 32AC for investment in new plant and machinery; and
Reinstating tax exemption to units set up in Special Economic Zones (SEZ) to incentivise exports.
The intention of the government has always been to reduce tax disputes/ litigation and a commendable step in this direction was taken by way of introduction of amnesty scheme viz. Vivad Se Vishwas Act, 2020. The amnesty scheme had to a large extent served the dual purpose of liquidating tax collections and quick resolution of existing tax disputes with tax authorities. However, in view of the high number of tax disputes and the constant pressure on the current dispute resolution mechanism, ‘mediation’ as an alternate dispute resolution mechanism could be considered for tax matters.
Internationally, mediation is extensively and successfully used to resolve tax disputes e.g. UK, US, Australia, Mexico, Belgium and Netherlands where mediation in tax disputes has been effective. Some key aspect of ‘tax mediation’ which may be considered in the Indian context could be:
The mediator should be an independent autonomous body/ panel comprising people of eminence and expert in the field of taxation such as retired SC/HC judge or any professional/legal practitioner with a standing say of 15 years or more in the field of taxation/Transfer Pricing
Option for mediation should be available at assessment as well as appellate stage and existing dispute resolution mechanism could continue in case of unsuccessful mediation;
Mediation proceedings should be completed within a specified time frame (e.g. 90 days).
Broad guidelines could be provided on scope and coverage of the issue-wise settlement that could be taken under the mediation route; and
Mediation Agreement should be final, enforceable, and binding on both parties.
The government has taken lead on tax technology and now it is the opportunity to take a Quantum Leap by focusing on economic growth for a $5 trillion dream. This is the time to implement the key asks from the industry and stakeholders. This is the now or never opportunity to introduce measures to propel economic growth and drive the government’s agenda to bring the Indian economy back onto a growth trajectory. While the US is likely to see an increase in tax rates, it's time for India to ensure a sustainable transparent tax regime by keeping tax rates lower.
— Samir Kanabar is Partner, EY. Ankit Kochar, Senior Manager, EY also contributed to the article. Views are personal
