Budget 2021: Don’t Need Big Bang Tax Changes, India Inc. Says

It’s about the small fixes that can make a big difference. Of over a dozen tax experts BloombergQuint spoke with, most pointed to small tweaks in the direct and indirect tax laws which can help businesses revive and navigate through the current pandemic-led economic stress.

From ESOP troubles of startups to tax sops for Covid-19-related costs, here are the top five tax asks of India Inc.

Startups: ESOP Troubles

To help startups attract talent, Budget 2020 had brought in a welcome change to how employee stock options are taxed. The government had deferred the tax incidence on notional benefits on the conversion of ESOPs into shares.

Until last year, employees were subjected to tax in the year they exercised their option to purchase the shares, leading to tax incidence despite not incurring any cash gain. The Finance Act, 2020 amended the provision to say that ESOPs will be taxed after the expiry of five years from the year in which the employee signed up for it, at the time of sale or when the employee leaves the company, whichever is earlier.

But this relief is applicable to only eligible startups — those that can get a certificate from the inter-ministerial board for being “innovative” and were incorporated after April 1, 2016.

As a result of these conditions, only around 300 startups hae been able to avail the ESOP relief introduced via Budget 2020, Sachin Taparia, founder of LocalCircles, told BloombergQuint.

Approximately 900 startups have submitted an additional declaration to the CBDT and have received the angel tax exemption certificate. The ask is that at least these startups be auto-qualified for ESOP benefits.

Sachin Taparia, Founder, LocalCircles

GST: Undue Burden On Buyers

The goods and services tax makes a buyer liable if a seller fails to deposit tax with the government. A buyer is disallowed input tax credit for supplies on which the seller has failed to pay the tax to the government.

It’s a troublesome issue across industries, Sanjeev Gemawat, executive director and group company secretary with Dalmia Bharat Group, said.

As a buyer I’ve paid the tax on all the invoices. If the seller or vendor is not depositing this tax or filing its quarterly results, I’m supposed to be liable. How can I ensure compliance on behalf of my vendors? Buyers are suffering as a result of non-compliance by vendors.

Sanjeev Gemawat, ED and Group Company Secretary, Dalmia Bharat Group

So, in a situation where everything is digitised and the vendor is registered, it’s not fair to shift the onus on buyers to ensure tax compliance, Gemawat said.

Covid Costs

India has rolled out the Covid-19 vaccination programme in a phased manner this year. Some businesses may want to contribute towards the wellness of their employees by bearing the cost of such vaccination. Thus, any tax sops by the government will aid businesses on this front.

Ankit Jain, partner at Ved Jain and Associates, said the government should allow a weighted deduction to businesses for the amount spent by them on vaccination of employees and their families. This will incentivise businesses to participate in the vaccination drive and reduce the government’s burden as well, he said.

Set-Off Benefit

The tax law classifies income of a person under four broad heads — income from salary, business or profession, house property and other sources. A taxpayer can adjust losses arising from one head against the profits from the other subject to certain conditions.

Business losses, however, can be carried forward and set off in the eight subsequent financial years only against business profits. Experts said it’s the right time for the government to tweak this provision.

The finance minister should consider extending the period of carry forward and set off of business losses beyond eight years, Anish Thacker, partner at Ernst and Young LLP, told BloombergQuint.

Financial year 2020-21 was an especially difficult year for businesses. As such, a loss for this period should be allowed to be carried forward for an indefinite period.

Anish Thacker, Partner, EY

Paras Savla, partner at KPB & Associates, agreed. Given the losses during FY2020-21, the government may think of conditionally allowing businesses to “carry back” future losses against profits earned in the past. This is permissible in many foreign jurisdictions like France, Germany, Netherlands and the U.K., he said.

Income tax previously paid by a company may transform into refunds if such carry back is allowed, he said.

Boosting Cash Flow

Many Indian firms faced a liquidity crisis last year due to the Covid-19 pandemic. Some may have resorted to intra-group fund transfers during this time. Such transactions, however, may attract tax liability if they are deemed as a dividend by the taxman.

That’s because, according to the Section 2(22)(e) of the Income Tax Act, when a closely held company extends a loan or advance to specified entities within the group, such income will be deemed as a dividend.

Shefali Goradia, partner at Deloitte India, said the government may think of relaxing deemed dividend provisions through this budget to help ease liquidity concerns.

MNCs with several businesses are likely to have excess cash in some entities which can be utilised in other ones. To facilitate tax-free flow of funds within the group, the deemed dividend provisions may be relaxed for a couple of years as even the corporate law permits borrowings between related parties subject to certain conditions.

Shefali Goradia, Partner, Deloitte India

Reduced rates of TDS on domestic payments and allowing small businesses to defer deposition of TDS on a quarterly interval can also boost the cash in the ecosystem, she said.