Covid-19 Tax Controversy: ‘FORCE’D Out—The Good, Bad, And Ugly

Some of these recommendations, coming as they did from IRS officers, spooked corporates and the rich taxpayers alike, especially at a time when businesses are already facing existential pressure.

A day later, both the Ministry of Finance and the CBDT distanced themselves from the said report saying it does not reflect the official policy of the government, since neither the ministry nor the CBDT had requested the IRSA to prepare such a report. Further, an inquiry has been initiated and charges have been pressed against the concerned officers for presenting their “ill-conceived views” without government permission.

Although the report has been discarded officially, it would be important to understand the ‘good, the bad, and the ugly’ measures, as were suggested.

The Ugly

First, as always, the ugly. The approach of the revenue authorities has always been to maximise taxes de hors of the ground reality that the viability of even the relatively stronger business houses is in question today.

In these circumstances, the report’s recommendations, such as increasing the tax rate for the ‘super rich’ (i.e. individual taxpayers with total income of Rs 1 crore and more) by increasing the highest slab rate (the number of such individual taxpayers is approx. 97,000 i.e. 0.18 percent of the total number of individual taxpayers) to 40 percent (implying a whopping effective tax rate of 59 percent, including surcharge of 37 percent, for the highest income earners) and imposing a “Covid Relief Cess” at 4 percent in addition to the existing cess of 4 percent for all taxpayers would tantamount to a significant burden, where the government is trying to gain the trust of the corporates through collaborative measures.

Similarly, the notion of re-introduction of wealth tax for net wealth in excess of Rs 5 crore will lead to additional burden on the taxpayer as such, since wealth tax on passive assets will have to be met out of income earned itself, either through regular income stream or capital gains on sale of assets itself. As one would recall, wealth tax was abolished only recently in 2016.

Further, the idea of re-introduction of inheritance tax (its earlier avatar, estate duty, was abolished earlier in 1985) is clearly out of sync in these times when the asset or the wealth pool itself has taken a serious blow in terms of valuation and therefore, has clipped the entrepreneurial wings of the business community and would also pose a huge distraction.

Further, for a capital-deficit nation such as India, imposing additional tax liability on interest, royalties, etc., by introducing Base Erosion Anti-abuse Tax or BEAT would prevent multinational enterprises from shifting or setting up their base in India, especially when such payments are taxed at source in India even presently.

In the same breadth, increase in equalisation levy (i.e. Google Tax) on e-tailers and ad agencies would also disincentivise global tech companies from transacting in India.

The Good

Secondly, the good. Ironically, the report acknowledges that the government should not turn to excessive taxes on businesses as it may “kill the bird which lays golden eggs”.

Therefore, in order to enable taxpayers withstand the pandemic uncertainty, the report has recommended certain bold measures, taking a cue from the policies of developed countries, although some of these may encounter implementation challenges.

Recommendations such as allowing set-off of short-term capital losses against salary income are welcome, but the scope should logically be increased for set-off of genuine losses (short-term or long-term) against any income.

Further, since medium, small and micro enterprises would be hit badly, recommendations such as permitting “carry back” of net operating loss of current and previous financial year for a period of five years, thereby, improving the cash position through tax refunds, is definitely a good recommendation.

However, a proactive implementation to actually enable cash flows back to MSMEs would be necessary. For example, if the MSME is expecting a tax loss in the current year, there should be a mechanism of a provisional return to be filed in the current year, against which the tax liability of the earlier years is set-off and a provisional tax refund is granted.

From a procedural perspective, recommendation of ‘zero scrutiny year’ would definitely be a bold step and would add to the “ease of doing business in India” efforts.

Certain sectoral reliefs or incentives such as increasing the tax holiday period by five years for IT companies, capital-expenditure linked and research-linked tax deductions for healthcare sector are obviously beneficial as is the recommendation to increase the tax deduction limit for provision of bad debts for Indian banks and financial institutions as this would translate into tax breaks for such lending institutions and therefore, increase their lending ability.

However, since there should simultaneously be clarity on taxability of loan write-backs for borrowers on account of any haircut resulting from debt restructuring.

Measures such as one-time reduced tax rates for stressed sectors, additional depreciation to incentivise capital expenditure, speedy processing of tax refund and de-tabooing certain procedural non-compliances (filing returns, delay in TDS deposit, etc.), treatment of contribution to chief ministers’ relief funds for corporate social responsibility purposes, incentivising contribution to the PM CARES Fund, reduction in installments of advance taxes, allowing assessees to pay self-assessment tax after 6 months of return filing, deposit of TDS deducted at the end of financial year instead of monthly deposit, etc., would certainly irrigate the cash flow drought caused by Covid-19.

The Bad

Lastly, the bad. The report veers to both extremes and fails to recognise that unnecessarily complicating the law, its interpretation and implementation, increases its adversarial nature. Especially for a law that’s in urgent need of simplification.

Further, certain entity-restructuring friendly measures such as permitting continuity of business losses on takeover of a private, unlisted company, and continuity of business losses without any conditions precedent or sectoral restrictions (relevant for service sector especially NBFCs) are a clear miss in the report.

In conclusion, it should be appreciated that these are unprecedented times for all humanity and thinking of solutions on a war-footing is the need of the hour. Therefore, any attempt at reviving the economy through tax reform should be a joint and collaborative effort taking into consideration all stakeholders—businesses, regulatory bodies, financial institutions, technocrats, revenue authorities, etc. Siloed efforts can be counter-productive, as is evident in this case. The CBDT has rightly discarded the report.

Ketal Dalal is Managing Partner at Katalyst Advisors LLP. This article was written with inputs from Binoy Parikh.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.