Budget 2021: No Room To Cut Tax Rates For Next Few Years, Says CBDT Chairman PC Mody 
Indian two thousand and five hundred rupee notes arranged for photogaph. (Photographer: Dhiraj Singh/Bloomberg)

Budget 2021: No Room To Cut Tax Rates For Next Few Years, Says CBDT Chairman PC Mody 

The objective of Budget 2021 was to signal stability in terms of tax rates, introduce measures for speedier dispute resolution and provide more certainty in terms of tax administration, according to PC Mody.

In an interview with BloombergQuint, the chairman of Central Board of Direct Taxes shared the intent and objectives of key direct tax proposals:

  • Replacing Authority for Advance Rulings with the Board for Advance Rulings.
  • Reducing the time period for reassessments.
  • Imposing higher TDS on non-filers of income tax returns.
  • Clarifying the scope of digital tax.
  • Cracking down on avoidance mergers and acquisitions.

Edited excerpts:

Tax Rate Stability

The Finance Minister has stayed away from tinkering any rates this year. Can we take that as a signal of a stable corporate tax and personal income tax regime? In last year’s budget, both India Inc. and individual taxpayers got the option of choosing a rate with or without exemptions. So, for the next few two or three years, can we breathe easy on the tax rate front?

I think that is definitely the way to go forward. We had the Covid-19 pandemic and despite the adversities and the challenges which we had during this time, we chose not to go in for any new taxes or even go for any change in the slabs or the tax rates as they were. So, definitely it’s a pointer to the certainty which we are hoping to achieve.

Given that the contribution of personal income tax has outpaced the contribution of corporate taxes to direct taxes, can we hope to see a lowering of rates for individuals?

The decline in corporate tax is primarily on account of the rate rationalisation which we attempted last time. Given the current scenario, I don’t think there would be a case for any rationalisation of personal income tax, at the given moment. We will take a call on it as the situation unfolds and how things progress in the coming financial year.

AAR Gone! Welcome, BAR

Finance Bill, 2021 has proposed to do away with the Authority for Advance Rulings. In its place, Board for Advanced Rulings, which will have two members not below the rank of Chief Commissioner, has been proposed.

The AAR had judicial members but the BAR will have department’s own members. Isn’t there a conflict of interest here?

No, I would not say that. On the contrary, though we had an Authority for Advance Rulings but it was not manned and consequently we had a number of applications which were pending. To address this, we thought it fit to have people from the service itself manning these positions. So, at least the process could continue, and the pending applications could be disposed of.

Can we expect that you will have many more BAR branches compared to AAR?

Well, that definitely can be in the realm of possibility. Maybe not just one branch maybe multiple branches but that we will see when we finally formulate the scheme or the constitution of the Board as to how many benches would be required or how to go about it.

If this Board is able to instil confidence and becomes popular with taxpayers, can we hope to see fewer appeals by the tax department given the rulings will be by the department’s own?

That has been the whole thinking within the government. We have been very conscious of trying to resolve the disputes. Now we are trying trying to minimise the areas where we can have the dispute. So, this is all a step towards that.

Relief On Reassessments

The second important tax administration measure is changes to the provisions relating to income escaping assessment. The Finance Bill, 2021 has revised the time limit for such assessment from six years to three years. Further, for reassessment proceedings to be initiated, so far the requisite was for the assessing offcier to have a ‘reason to believe’. That’s now been amended to say ‘information which suggests that income chargeable to tax has escaped assessment’.

These changes are applicable from April 1, 2021 onwards. Should we prepare ourselves for a flurry of reassessment notices in the next two months?

No. In fact, though the changes have been made effective from that day, the underlying philosophy remains the same. We have just tried to rationalize the provision and try to bring in more certainty for taxpayers.

As you would see the provisions, they have been made very specific and it is purely information driven. You will have cases which have been flagged by the system or which have been subjected to search and seizure or any objection which has been raised by the CAG office. Those are the specific areas where we have said, would be liable for reopening and again within the time frame which we have allowed.

The Finance Bill has also done away with the provision that allowed reassessment of income from indirect transfers for assets located outside of India as far back as 16 years. Do you believe that these changes will have any tax revenue consequences given that the ability of assessing officers to initiate reassessment is being curtailed both in terms of how far back they can go and also on the grounds on which cases can be picked up for reassessment?

Certainly, it could have some sort of a tax impact—no doubt about it. But we are trying to focus now on cases which are information based and that too, of a very high value. So, a little bit of impact cannot be ruled out but at the same time, it is bringing in more certainty.

The numbers in terms of revenue lost would depend on the pieces of information which we have and within that the grading, whether they have made the cut of the threshold or not.

Onerous TDS Provision

Finance Bill, 2021 has imposed 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.

To understand the implications of this provision, let’s take the example of a tenant paying rent to his or her landlord on which TDS is supposed to be deducted. Now, the new provision makes it the responsibility of the payer or the tenant in this example to find out whether or not the landlord has filed his returns and then determine the TDS rate. And this is applicable to a variety of transactions where TDS is applicable. How will this work and who will willingly share their tax return information or is this all to work on declarations now?

Initially, it will work on declarations only but subsequently let me tell you the system, the tech advantage is always with us to find out whether that has been correctly declared or not.

In the beginning, let’s say, the person or the entity who’s supposed to deduct this TDS can just go on the basis of the declaration from the other party that they have filed their tax returns. In such a case, the person who is supposed to deduct the TDS will not get penalised for it; right?

But at the same time once he files the statement, he will be putting the entire transaction along with the PAN of the deductee [person receiving the payment] also and the system will be able to flag whether the deductee has filed the return or not.

If you will in any case get the PAN information for these taxpayers, why can’t the system in the present shape and form take care of this? Why do you need to bring such onerous provisions of TDS year on year?

Primarily, the issue is that there is some sort of a gap in terms of understanding of the TDS provisions so far as the deductors and the deductees are concerned but as things kind of stabilise, I’m sure this kind of a problem will not remain.

Digital Tax Expanded?

The government has issued a clarification on digital tax or equalisation levy in the Finance Bill, 2021. Last year, the government had imposed a 2% tax on the sale of goods and services that take place through non-resident digital operators having an annual turnover or sales of more than Rs 2 crore.

The clarifications says e-commerce supply or service will be subject to equalisation levy when any of the following activities take place online:

  • Acceptance of the offer for sale.
  • Placing the purchase order.
  • Acceptance of the purchase order.
  • Payment of consideration.
  • Supply of goods or provision of services, partly or wholly.

The levy, as per the clarification, will apply on the total value of the sale of goods or provision of services by e-commerce platforms and not just on their commission.

I’m going to use certain illustrations to understand your approach and views on this. Let’s say payment gateways and payment aggregators that may only be facilitating the online payment for an offline transaction will now potentially come under the levy of digital tax. Online marketplaces- let’s say that are only taking a commission for selling someone’s goods may now have to pay tax not just on the commission but the entire sale amount. Is that really the intent of equalisation levy?

The law was what it was, it always stood like that. The only thing is we have tried to clarify that equalisation levy would apply when one or more of the mentioned activities take place online. I mean these were certain areas where there were some doubts whether they are subject to equalisation levy or not. So, we have just tried to clarify that.

So the intent was always to cover payment gateways and aggregators and to impose it on the full value of goods and services and not just their commission?

Taxing them at the gross level is much better than taxing at the net level.

Better for whom – the tax department?

Yes, in terms of compliance, it becomes much easier.

We have the USTR 301 investigation that only recently came in and it held the India’s equalisation levy is discriminatory and wide. With these clarifications, some say, the scope of the levy has been expanded. How will you explain all of this if the USTR takes the next step in a 301 investigation?

I think we will cross the bridge as it comes. Why prejudge a reaction or a solution to the problem?

I’ll go back to the 301-investigation report by USTR which pointed out that stakeholders have been asking for certain clarifications and the department has not been forthcoming. Is that not a fair ask that you clarify the doubts of stakeholders?

There the stand was clear. The law is very clear, and it does not admit of any FAQs. Whatever little clarification was to be given or required has been brought about in this Budget.

There the stand was clear. The law is very clear, and it does not admit of any FAQs. Whatever little clarification was to be given or required has been brought about in this Budget.

Despite these clarifications being issued, should there be any gaps, they can flag it to us, we will again consider it. No issues.

Crackdown On Avoidance M&A

The Finance Bill, 2021 has made two amendments that are critical for deals-

  • First, no depreciation will be provided on goodwill of a business or profession in any situation.
  • Second, the meaning of slump sale has been expanded to include all transfers under the section 2(47) of the Income Tax Act, namely the sale, exchange or relinquishment of the asset, extinguishment of any rights etc.

There were several judicial precedents in favour of taxpayers on both these provisions. What prompted you to negate them?

On goodwill - this was purely an anti-abuse provision let me put it fairly and squarely. I mean, wherever goodwill has been acquired on payment basis, that would be acquisition but where the differential is nomenclatured as goodwill, on a revaluation of assets, that is certainly not what the intent ever was. That is clear-cut brought out. The rulings also did not make that distinction. They purely went by the concept of depreciation on goodwill as an intangible asset but there were other provisions which were not taken into consideration when the Supreme Court ruling came.

On slump sale- Again, the question was whether the exchange by a non-monetary medium could be considered as a transfer or not. We’ve put the controversy at rest. We found that unnecessary litigation was there and the intent of the law was never what the taxpayers were trying to claim or convey. In order to set the entire controversy to rest we have brought about these clarificatory changes.

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