Budget 2021: Key Tax And Regulatory Changes
A cashier counts Indian one hundred-rupee banknotes at an Oriental Bank of Commerce branch in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Budget 2021: Key Tax And Regulatory Changes

Budget 2021 announced tax and regulatory changes aimed at shoring up the economy as it recovers from a pandemic-induced recession.

Changes announced by Finance Minister Nirmala Sitharaman include a lower limitation period for reopening tax cases, easier compliance for senior citizens, focus on faceless dispute resolution, consolidation of capital market laws, how goodwill is treated in M&As, and a friendlier regime for single-person companies.

Here are the key announcements made by the Finance Minister:

Depreciation On Goodwill Of A Business Or Profession

Goodwill is a company's depreciable and intangible asset, offering value for a brand name, market standing and a company's relation with customers. In some instances, it’s the difference between the actual purchase price of a company and its assets and liabilities.

Citing a Supreme Court ruling, the government has announced that no depreciation will be provided on goodwill of a business or profession in any situation. The government has proposed an amendment in the Income Tax Act to specify that:

  • Block of depreciable assets won’t include goodwill of a business or profession.
  • In case it was included in the block of depreciable assets, the tax department will specify a method for calculating capital gains arising out of its transfer. The amendment will also specify changes for certain other instances.

Paras Savla, partner at KPB & Associate, said depreciation under the income tax law was initially allowed only on tangible assets, while intangible ones were added later.

Goodwill can have a much higher value in an M&A or purchase transaction involving an established businesses or brand, especially in new and emerging areas of business like fintech and technology sectors. The change will impact all such transactions.
Paras Savla, partner, KPB & Associates

Higher TDS/TCS For Defaulting Taxpayers

Finance Bill 2021 aims to inculcate discipline among taxpayers by imposing a higher TDS/TCS for taxpayers who default in filing their tax returns.

Any person deducting tax at source will have to deduct tax at the highest of the following rates while making payments to a defaulter:

  • Twice the specified rate under the Income Tax Act.
  • Twice the rates in force.
  • Or 5% of the value.

Consolidation Of Capital Market Laws

The government proposed to consolidate four existing capital market laws —SEBI Act, 1992; Depositories Act, 1996; the Securities Contract Regulation Act, 1956; and Government Securities Act, 2007—into a single Securities Market Code.

The 1992 Act confers power on the Securities and Exchange Board of India to regulate the securities market, promote its development and take measures for protection of investors. SEBI also exercises powers under the Securities Contract Regulation Act to regulate stock exchanges, certain intermediaries and trading of futures and options contracts. The market regulator can also regulate the setting up and operations of depositories in the country.

Anand Desai, managing partner at the law firm DSK Legal, said India currently has several laws impacting specific situations, which need a rationalisation as investors require clarity and simplicity.

A unified code will help enable clarity and safeguard investor interest. As any new law takes time to settle as has been the experience with the insolvency code, there will be initial hiccups but will have a great advantage once it’s settled.
Anand Desai, Managing Partner, DSK Legal

Rules Eased For Startups

Budget 2021 offers more incentives for Indian startups. As startups may want to be organized in form of one-person companies, the government relaxed the existing paid up capital and turnover thresholds. It also reduced the residency requirement from 182 days to 120 days, which is mandated under the Companies Act, 2013.

Paid-up capital in one-person companies will now be allowed up to Rs 2 crore, while turnover limit has been increased till Rs 20 crore.

Nishchal Arora, partner at Nangia & Co. LLP, said these amendments will immediately bring relief to companies at the threshold of being removed as OPCs, will enhance funding which was otherwise curtailed, and bring in a fresh class of foreign investors in the form of non-resident Indians.

Increasing the scope of small entrepreneurs to formally adopt a legal way of running business along with reduced compliance burden will go a long way in helping the government achieve its goal of increasing the share of organised sector players in India.
Nishchal Arora, partner, Nangia & Co LLP

The government also extended the tax holiday for startups till March 31, 2022, while existing capital gains exemption for investment in such companies has been extended by another year.

ITAT Goes Faceless

Finance Act, 2020, introduced the concept of faceless assessment and appeals under the Income Tax Act. Going a step ahead, the government has now proposed introduction of faceless proceedings before the Income Tax Appellate Tribunal.

Any appeal against certain orders passed by the appeals commissioner can be filed in the tribunal.

Rakesh Nangia, chairman, Nangia Andersen India, said the move is “another step in the inexorable march towards transparency and impartiality through digital means”. Virtual hearings option at ITAT could have huge impact on speed of resolution of disputes, he said.

“While the ‘faceless’ system endeavours to create a tax-payer friendly tax administration, appellants may find it difficult to justify claims, argue and counter-argue their cases merely by way written submissions made electronically,” he said. “The fine print of scheme in this regard would clarify certain aspects--whether hearing shall be allowed through video conferencing in all cases or personal hearing shall be granted.”

Income Tax Audits

The Income Tax Act requires every person having a registered business or profession to undergo mandatory audit beyond a specified turnover threshold. At present, businesses having turnover of Rs 1 crore and individuals having income from profession of Rs 50 lakh must undergo tax audits.

To promote digital transactions, the mandatory audit threshold has been raised to Rs 5 crore, where the cash receipts or payments by a business don’t exceed 5% of the specified threshold.

Nangia said the move will encourage taxpayers to move towards digital transactions and help reduce their compliance burden.

Dividend

The finance minister also announced changes on taxation and processing of dividend to help taxpayers and boost investment in the real estate sector. Finance Act 2021 proposes that:

  • Dividend payment to real estate investment trusts or new infrastructure trusts will be exempt from TDS requirements.
  • Dividend income of NRIs will be subjected to a lower rate of TDS.
  • Advance tax liability on dividend income income will only arise after its declaration, as its amount cannot be estimated correctly for paying advance tax.
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