Surprising everyone, especially the markets which closed with the biggest Budget-day gains of 5 per cent, the Union Budget 2021 left all taxes unchanged barring for some cess to fund the farm sector or increase any direct taxes. All it did was tweak the customs and excise duties on certain products to rationalise them.
Taxation experts opined that the Centre's decision to make no major changes in the tax structure signals a strong resolve to ensure stability in the tax regime and at the same time, generates hope that the economy will return to fiscal consolidation sooner than later.
EY India's Sudhir Kapadia said no major changes in the design or rates of direct taxation signals strong resolve to have stability in the tax regime. Though foreign shareholders in domestic companies will get the benefit of lower withholding rates on dividends under tax treaties, disallowance of deduction on goodwill in merger transactions is an unexpected dampener, he added. Also, the proposed dispute resolution committee for only small taxpayers is disappointing, as there is a crying need for an omnibus mediation channel for all taxpayers, especially where large tax disputes are likely to arise, he said.
Abhishek A Rastogi of Khaitan & Co said tax holiday extension for start-ups till March 2022 gives a necessary boost to the new age economy. The moot point, however, remains whether this extension is enough for start-ups to come to the normal growth rate trajectory, and whether there will be any further extensions as we move closer to the new deadline. Interestingly, capital gains exemption on investments in start-ups have also been extended to March 2022, incentivising investment especially in the promising ventures, he said.
On the proposal to prospectively amend Section 2(42C) of the Income Tax Act defining slump sale may impact computation of capital gains in case of slump exchange transactions. The slump exchange transactions are a regular feature in holding-subsidiary slump exchange model with a view that capital gains are not applicable, he said. While the government has been working to curb tax evasion, a move towards de-criminalisation of offences will help the economy in the long-run. While steps towards decriminalisation have been taken with respect to LLPs, a move in that direction for GST is of utmost importance, Rastogi told PTI.
Sanjay Tolia of PwC India said the proposed board for advance rulings and a dispute resolution panel for small taxpayers will pave the way for further tax certainty. Pranav Sayta of EY India said though the Budget has done well by focussing on reviving growth rather than being unduly worried by the immediate-term fiscal deficit given the special circumstances.
One does hope that returning to the path of fiscal consolidation happens sooner than later, he added. Sonu Iyer of EY India said the continued focus on making the lives of the taxpayers easy by measures like no tax return filing requirement for persons over 75 years and above earning only pension income, pre-filling of tax returns with capital gains and interest income details, and faceless tax assessments expanded to include tax tribunals and dispute resolution committee, among others, is very positive.
S R Patnaik of Cyril Amarchand Mangaldas said the reassessment period, reduced from six to three years, will help reducing the number of cases in going forward and also shows that the government is willing to trust its citizens. On the impact of the proposed faceless appellate scheme, it will have to be seen as to how the scheme is going to be implemented because unlike the first appellate system, which was still within the executive control of the government, the ITAT is an independent body.
On totally removing tax on REITs and InvITs dividends, he said it will enable a greater acceptability of such schemes. Harpreet Singh of KPMG India said the agriculture infrastructure and development cess on imported apples, peas, lentils, alcohol, chemicals, silver and cotton is aimed at encouraging domestic products and not imports.
NRIs will soon be able to float one person companies
Seeking to further improve the ease of doing business, Sitharaman said NRIs will be allowed to set up one-person companies, the definition of small companies will be revised and various provisions of the Limited Liability Partnership (LLP) Act will be decriminalised. The proposed relaxations to rules governing One Person Companies (OPCs) are expected to benefit startups and innovators.
Dedicating a separate portion of her 2021-22 Budget speech to company matters, Sitharaman said in the next fiscal year, MCA 21 portal will be driven by data analytics, artificial intelligence and machine learning features as well as have additional modules such as for e-adjudication and compliance management. MCA 21 portal is used for submitting various documents as part of compliance requirements under the companies law.
Sitharaman, who is also in charge of the corporate affairs ministry, said the decriminalising of the procedural and technical compoundable offences under the Companies Act, 2013, is now complete, and that the next step is to take up decriminalisation of the LLP Act, 2008. Further, she proposed revising the definition of small companies under the Companies Act, 2013 by increasing their thresholds for paid-up capital from 'not exceeding Rs 50 lakh' to 'not exceeding Rs 2 crore' and turnover from 'not exceeding 'Rs 2 crore' to 'not exceeding Rs 20 crore'.
"This will benefit more than two lakh companies in easing their compliance requirements," she said. Regarding OPCs, the minister said she is proposing to "incentivise" the incorporation of such companies.
OPCs will be allowed to "grow without any restrictions on paid-up capital and turnover, allowing their conversion into any other type of company at any time, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allow Non-Resident Indians (NRIs) to incorporate OPCs in India". OPCs, which have lesser compliance requirements, can be set up with one member.
Further, the minister said the National Company Law Tribunal (NCLT) framework will be strengthened, e-courts system shall be implemented and alternate methods of debt resolution and special framework for MSMEs shall be introduced. These are to ensure faster resolution of cases.
Interest on Provident Fund
Interest on employee contributions to provident fund over Rs 2.5 lakh per annum would be taxed from April 1, 2021, a move aimed at taxing high-value depositors in the EPF. Sitharaman said the Employee Provident Fund (EPF) is aimed at the welfare of workers and any person earning less than Rs 2 lakh per month will not be affected by the Budget proposal.
Expenditure Secretary T V Somanathan said the number of people who actually contribute more than Rs 2.5 lakh is less than 1 per cent of the total number of contributors in the EPF. Employees' Provident Fund Organisation (EPFO) has over six crore subscribers.
"In order to rationalise tax exemption for the income earned by high-income employees, it is proposed to restrict tax exemption for the interest income earned on the employees' contribution to various provident funds to the annual contribution of Rs 2.5 lakh," Sitharaman said in her Budget 2021-22 speech. This would come into effect from April 1. Addressing a post-Budget press conference, the minister said up to Rs 2.5 lakh has been kept as the deposit limit for which interest is tax-exempt.
"We are not reducing any workers right. But at the same time, getting tax exemption and 8 per cent rate of interest for somebody who puts Rs 1 crore into the account, we thought it is maybe not correct. And therefore we have put the ceiling," she said. It is only the big-ticket money which comes into the fund and gets tax benefit as well as assured about 8 per cent returns that would come under the tax ambit.