The adverse economic impact of the coronavirus pandemic has been felt by everyone, be it MNCs, big domestic companies or micro, small and medium enterprises (MSMEs). Though there are a few sectors which have been resilient to the pandemic, most others are reeling, and at this juncture, may need some support from the government.
The government has taken several steps to support and revive the economy such as introducing labour reforms, production-linked incentives, and relief packages particularly for the MSMEs. In line with earlier relief packages, there is a lot of expectation from the upcoming Union budget on 1 February.
While corporate taxpayers have a long wish list for this year’s budget, some of the key ones are:
Status quo in corporate tax rates
Corporate tax rates were reduced last year to make them globally competitive, the reduced rates being 15% for new manufacturing companies and 22% for others who forgo certain exemptions/deductions. It is hence important that these rates are not increased in any form, be it the base rate or by imposing additional surcharge and cess.
To garner additional funds, the government may consider other non-tax measures such as divestment of its stake in public sector enterprises. In the event, due to fiscal deficit, it becomes unavoidable for the government to increase surcharge or impose an additional covid cess, then an exception should be made for MSMEs.
Manufacturing: Clarity required
The lower rate of 15% for new manufacturing companies is based on fulfilling prescribed conditions. One such condition is that the manufacturing company must be set up after 1 October 2019 and should commence production before 31 March 2023. In many cases, developing the entire infrastructure for a manufacturing unit takes several years. Considering that last year the setting up process was slowed down due to lockdowns and pandemic-induced restrictions, it is desirable that this date for commencement of production is extended at least by one year i.e. 31 March 2024.
The term ‘manufacture’ has been defined very widely under Income Tax provisions. There has been a lot of litigation in the past, as to what constitutes ‘manufacture’. It is recommended that the government issues guidance on what constitutes ‘manufacture’ for this purpose. It is advisable that a liberal view is adopted on this subject and almost all the manufacturing activity is covered within the ambit of these beneficial provisions. After all, the overall aim is to boost investment and create employment opportunities in the country. Thus, this noble cause should not get into interpretation issues and unnecessary litigation.
Make In India: Support through encouraging consumption
To promote travel and tourism in India and incentivizing companies manufacturing in India, a one-time tax deduction may be provided to the taxpayers for expenditure incurred on travel and stay in India, purchase of electronics, white goods, and vehicles, manufactured in India. This move would help revive these ailing sectors.
Relaxation for startups
Startups can contribute in a big way to employment generation in India and are an important pillar of India’s vision on “local to global". At present, a tax holiday for three years is available to startups that are incorporated on or before 1 April 2021. It is desirable that this is extended for start-ups incorporated after 1 April 2021, at least for a few years.
Another key area of concern for startups has been tax rules surrounding their valuations. There is an urgent need to relax these provisions as well.
Relaxation of thin capitalization rules
Currently, if interest paid to a non-resident associated enterprise exceeds `10 million in a financial year, tax deduction is restricted to 30% of earnings before interest, depreciation, and taxes (Ebidta). The balance amount can be carried forward for eight years and can be claimed as deduction within these prescribed limits.
Earnings of many sectors have been adversely impacted by the pandemic, thereby resulting in a low or negative Ebidta. Further, obtaining loans from associated enterprises is a widely used option to raise funds for immediate needs. Accordingly, these provisions should be deferred for a few years so that deduction for entire interest can be claimed without any limitation.
The pandemic transformed the way businesses work. Work-from-anywhere has become the new normal. Corporates have also realized that it is a cost-effective way to operate in the future. In addition, the overall benefits to the country such as decongestion of big cities, reduced strain on urban infrastructure and reduction in air pollution are also evident.
There have been some relaxations for permitting work from anywhere in case of Special Economic Zones (SEZs) which are typically area/rule-bound. It is desirable that considering these economic and social benefits, permanent relaxation is provided and SEZs are provided freedom to decide the place from where their employees operate in future. Suitable safeguards may be built in to avoid any misuse of these relaxations.
Changes in taxation of Esops
Currently, Employee Stock Option Plans (Esops) are taxed as perquisites when they are exercised and as capital gains when sold by the employees. Last year, some relief was provided to employees of eligible startups. In the pandemic era where there have been many cases of salary cuts, deferments and negligible increments, Esop can be used as a good option to remunerate and retain talented employees. It is hence desirable that Esops be taxed only at the time of sale, when the actual benefit is realized in cash by the employees.
Rationalization of TDS/TCS provisions
Over the years, the scope of Tax Deduction at Source (TDS)/Tax Collection at Source (TCS) provisions has been expanded a lot. There are numerous rates and interpretation issues relating to classification. This has led to unnecessary litigation. It is important that these provisions are rationalized. It is desirable that a reduced rate of 1% or 2% should be prescribed for all cases. This will enable the government to gather the necessary information it desires, while reducing litigation on interpretation issues. It will also help address cash flow issues for businesses, which have been aggravated by the pandemic. This is a revenue-neutral measure which can help improve ease of doing business in India.
Deduction for CSR expenditure
Under the Companies Law, it is mandatory for specified companies to spend 2% of their average profits towards Corporate Social Responsibility (CSR). Tax deduction for these expenses is not available on the rationale that these are connected to social and charitable causes and are not incurred for the purpose of business. Recently, the ministry of corporate affairs has permitted the funds spent on awareness programmes and public outreach campaigns regarding the covid-19 vaccination drive to be classified as CSR activity. It is desired that these provisions denying tax deduction for CSR expenditure are revisited and deduction is allowed.
Finance minister Nirmala Sitharaman has promised a “budget like never before" and has patiently listened to the concerns of all categories of taxpayers. While taxpayers indeed have a long wish list, it is expected that Budget 2021 will also leave no stone unturned to boost economic activity and steer the pandemic-hit economy towards higher growth path.
Richa Sawhney and Ankita Chowdhry contributed to this article.
Vikas Vasal is National Managing Partner, Tax at Grant Thornton Bharat LLP.
This article appeared in Live Mint on 21st Jan, 2021.