Budget 2021: A Tax Plan To Foster Growth And Resilience
A steel slab passes through a rolling machine inside the SAIL plant in Rourkela, Odisha. (Photographer: Dhiraj Singh/Bloomberg)

Budget 2021: A Tax Plan To Foster Growth And Resilience

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After a devastating year of health and economic crises due to the Covid-19 pandemic, India is beginning to show signs of recovery. Following two successive quarters of GDP contraction, India’s growth could be in the positive zone for the remaining fiscal, even though overall GDP is likely to contract by 7.7% in 2020-21 compared to 4.2% growth in the previous year. The vaccine rollout has also given hope that economic activity will resume normalcy soon.

Budget 2021: A Tax Plan To Foster Growth And Resilience

The fiscal options for the government are significantly constrained. Tax revenues have suffered on account of a slowdown in the economy even before the coronavirus, and, later due to the pandemic-induced lockdown.

The centre’s gross tax revenues contracted by 12.6% during the first eight months of FY21.

Even non-debt capital receipts like disinvestment receipts are far lower than budgeted. As a result, the fiscal deficit is likely to be upwards of 6% of GDP as against the budgeted 3.5% of GDP.

The government will need to live with the fiscal handicap in the short-term and spend more to turnaround the economy. The need of the hour is to focus on productive, capital expenditure for its multiplier impact on employment and growth for all segments of industry, including small and mid-sized sectors. In this regard, one hopes to see a significant outlay towards creating productive infrastructure. Improved infrastructure could also help significantly enhance the productivity, efficiency, and cost competitiveness of Indian corporates in a fiercely competitive global landscape. Additionally, it could also generate employment & provide a much-needed demand push to boost growth.

The government has made its policy of ‘low tax rates - no incentives’ abundantly clear. However, some areas deserve special attention in the current fragile environment.

Changes To Consider

In the past few months, the government announced several initiatives towards ‘Atmanirbhar Bharat’, with the underlying objective of strengthening the Indian manufacturing sector and making it more competitive. The National Infrastructure Pipeline envisages an investment of over Rs 111 lakh crore over the period FY20 to FY25, with more than one-fifth to be contributed by the private sector. The budget should consider incentivising private investments, which have been declining in the past few years. Private investments in infrastructure, in particular, could supplement government investments with all the attendant benefits.

Exemptions For Infra Investment

Recognising the need to incentivise private investments in infrastructure, the last budget granted exemption from capital gains, interest, and dividends to sovereign wealth funds and pension funds, from long-term investments in specified infrastructure activities for investments made up to March 31, 2024.

Taking this forward, the government could consider introducing an exemption on the lines of erstwhile Section 10(23G) to attract investments in infrastructure.

Any investor committing long-term funds for infrastructure, subject to certain conditions, may be allowed an exemption for income by way of dividend, interest, and long-term capital gains arising out of such investments. Such a measure may not have any immediate adverse revenue impact for the government but can provide a tremendous boost to private investments in infrastructure.

Association of Persons In Super-Rich Net

The Finance (No.2) Act 2019 increased the surcharge rate for individuals, HUF, Body of Individuals, and Association of Persons, the highest surcharge rate being 37% on income above Rs 5 crore. Such a high surcharge on AOPs appears to be an unintentional fall out of the ‘super-rich’ tax on such individuals. There is a need to address the unintended anomaly of ‘super-rich’ surcharge on AOPs with corporate members, formed for executing infrastructure projects.

Weighted Deduction For R&D

Globally, countries have been incentivising research and innovation even while providing a low corporate tax rate – for instance China, Singapore, etc. Given the significance of innovation, creation of new products, services, and technologies for an economy to remain competitive and self-reliant, India must continue to incentivise R&D. India has the inherent demographic advantage of a young, educated, and technically skilled workforce. A supportive nudge from the government will enable the Indian industry and its employees to move up the value chain and improve its technological prowess in a world in which it seems increasingly evident that being at the forefront of cutting edge technology will determine the leaders of tomorrow.

The government should consider the reintroduction of a weighted deduction for R&D especially of 200% for in-house R&D facility.

The approval process for the same should be liberalised too for improving ‘ease of doing business’.

Corporate Tax: Extend Deadline For New Manufacturing

The government’s bold move to provide for a corporate tax rate of 15% (plus surcharge/cess) for any domestic company incorporated on/ after Oct. 1, 2019, and which commences manufacture on or before March 31, 2023, subject to specified conditions, has catapulted India into a very competitive position compared to similar jurisdictions. Since then, however, the pandemic has severely impacted domestic investments, with investors waiting for the economic situation to stabilise before committing to fresh projects. Further the pandemic has also severely impacted, implementation of planned projects, as well as project completion and progress of those under implementation. Considering the aforesaid, the government should consider extending the cut-off date for commencing manufacture from March 31, 2023, to March 31, 2025.

Further, the benefit of the lower tax of 15% should be extended to the services sector focussing on research and development—in sectors such as pharma, electronics, etc—and those with significant employment generating potential like retail, e-commerce, hospitals, hotels, etc.

At this stage, it would be best not to succumb to the temptation of raising or introducing new taxes.

This is the time to focus on providing stability and continuity. The lowering of corporate tax rates resulted in an immense positive perception for India among investors. This advantage should not be disturbed or frittered away, especially at the present opportune time when businesses globally are looking at investments into India to diversify global supply chains. The need of the hour is to stay the course of economic reform. The temporary downturn it seems is already being corrected through a V-shaped economic recovery. Focussing on economic and regulatory reform, ensuring ease of compliance, through simplification, rationalisation, and clarity/certainty, and providing a stable, predictable and welcoming environment should be the guiding forces for the budget.

Parnav Sayta is Partner and National Leader – International Tax and Transaction Services, at EY India.

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

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