Covid-19 has impacted businesses in an unprecedented way. While the vaccines have raised hopes of regaining normalcy, businesses continue to face a difficult recovery terrain due to the lasting changes from the pandemic. Like most countries, India has been forthcoming in extending financial packages to aid businesses. With Budget 2021 around the corner, beleaguered businesses have hopes on increased relief from the Finance Minister’s tax proposals.
Need for focused tax incentives
Liquidity and solvency have emerged as two key imperatives for the survival of a business. The effects of the pandemic have made it clear that organisational outlook and consumer behavior have both undergone a change. Not only have some sectors been hit hard (such as tourism, hospitality, retail, automotive, real estate, MSMEs), consumption too has significantly evolved through digital means. Some sectors on the other hand, such as medical and pharmaceuticals, processed foods, online education, gaming, media, have witnessed tremendous growth during this period.
The government must attempt a carefully screened fiscal support package for the sectors hit by the pandemic and make up for such package through sectors that have seen an upside. To support the beleaguered sectors, the government may consider introducing a five-year tax holiday for businesses that invest over a threshold ($100 million or more) in labour-intensive sectors such as textiles, food processing, travel and logistics, leather, automotive. An alternate to this could be to provide accelerated depreciation for assets deployed in sectors that have been hit hard by the pandemic; this will help them conserve resources to bring about necessary changes in business to adapt. GST rates for products and services associated with such sectors may be tempered to provide a fillip to demand.
Since technology, pharma and health care are seeing an upswing, the government may promote investments in these sectors by advancing select fiscal benefits to R&D activities such as more than 100% deduction or by giving of R&D credits. As these sectors do well, they should help balance out the strained fiscal deficit situation.
While the government introduced equalisation levy at the start of the pandemic to target non-resident e-commerce operators, there is need for clarity and certainty on the provisions to facilitate proper implementation and aid tax collection. Similarly, the scope of TCS on sale of goods and TDS on e-commerce operators also need to be clarified and restricted such that where such deduction/ collection result in unnecessary cash traps with the government, they should be rolled back. Thus, there is a need for simpler and clearer provisions.
Rationalisation of tax administration
Recognising the need to ease tax administration in the country, faceless schemes for tax assessments and appeals were announced in August 2020. As with any big change, these schemes are not devoid of issues and further rationalisation is desirable. For instance, the scope of the schemes does not include transfer pricing and international tax; these areas of tax administration remain under earlier assessment/appeal schemes and continue to be driven by unrealistic revenue targets. The government should include all assessments under the faceless assessment scheme and should further leverage technology to enhance taxpayer service.
During the pandemic, the government proclaimed of having released Rs 1.57 trillion in refund to taxpayers. While this is commendable, practical difficulties still exist for corporate taxpayers in obtaining refunds. Multi-level approvals are still required in the tax department for release of refunds approved pursuant to scrutiny tax assessment. Playing passing the parcel within the tax department and refund bankers creates working capital problems. Automation of the approval mechanism of refunds and strict adherence to the newly released Taxpayers’ Charter is highly desirable in such distressed times.
Facilitating international trade
The digitalisation of economies continues to raise questions on the allotment of taxing rights on income. Till 2020, most countries had committed to multilateralism to achieve consensus-based solutions. The pandemic has led to some countries, including India, to introduce unilateral measures in the form of equalisation levy to tax specified income arising out of digitalisation. However, it is important for India to revisit these unilateral measures and contribute to be an integral part of the discussions for a unified solution.
In a nutshell, the times are ripe for the government to showcase bold reforms by adopting a sector-specific approach for fiscal incentives and to boost consumer demand. Stable and clearer tax provisions, supported by a neutral approach to tax administration, should help improve investor sentiment towards doing business in India.