The Indian economy has shown great resilience amidst severe pandemic disruption. Guided by the Government’s supportive policies, India is now back on growth track with four consecutive quarters of growth and the feasibility of 9.5% annual growth for this fiscal. At this juncture, India Inc would like the forthcoming Budget to continue its structural reforms agenda by focusing on investments, greater capital expenditure on infrastructure and further simplification and rationalisation of tax laws. Health infrastructure should continue to be a priority, given the fresh concerns about the new COVID variants.
Fiscal consolidation likely to be on-track
India witnessed the fastest growth among major economies this year, as the second quarter GDP grew by 8.4% to cross pre-pandemic levels. Buoyed by a nominal GDP growth of 23.9% in the first half of the financial year, Centre’s gross tax revenue collections have seen an unprecedented growth of 64.2% and a high buoyancy of 2.7 vis-à-vis the same period last year. The GST collections too rose to INR 1.32 lakh crore in November 2021, the second highest collection ever since its implementation in July 2017.
The strong tax collections imply that the Government is comfortably placed for meeting the fiscal deficit target of 6.8% of GDP for FY22 while leaving room for continued expansion of government capital expenditure. The Government has also set a disinvestment target of Rs 1,75,000 crores. Accelerating the disinvestment agenda will yield additional resources that will further help to consolidate the fiscal deficit position.
With a comfortable fiscal position, the tax proposals in the Budget should maintain stability, promote growth, bring simplification, and ensure tax certainty for taxpayers.
Simplify tax laws further
Over the past few years, the tax law has been rationalised and simplified to a large extent. Some areas, however, still need attention such as the capital gains taxation.
The current capital gains provisions are highly complex due to inconsistency in the holding period and tax rates for different asset classes. For instance, the holding period for REIT/InviT units to turn long term is three years whereas holding period for listed shares and equity oriented mutual funds is one year and direct holding of immovable property is two years. Similarly, the tax rate for long term capital gains on unlisted shares for non-residents is 10% whereas it is 20% for resident investors. A simple and well-defined structure for taxation of capital gains is the need of the hour.
Another area that requires clarity is the taxation of Hybrid Annuity Models (HAM) in which the concessionaire gets compensated by fixed annuity payments during construction and operation and maintenance phase. These models are increasingly being used in construction projects. However, there is ambiguity on tax treatment of HAM since the revenue is not earned from toll but by way of fixed annuities for construction and O&M components. There are apprehensions that construction annuity may get taxed upfront on completion of construction by following Percentage of Completion Method under ICDS, although 60% is received over the concession period. The government should clarify that just as in the case of BOT revenue model, the construction cost of the project will be treated as capital expenditure but amortised over the O&M period.
Businesses have been aggrieved by the compliance burden caused by the withholding tax provisions on purchase and sale of goods, introduced in the last two years. Government’s intent to widen and deepen the tax base is well appreciated. However, entities with turnover of Rs 10 crores or more and/or transaction value of Rs. 50 lakhs or more are already within GST regime and provide the relevant information in the GST returns. For such entities, additional withholding tax compliance should be removed. Alternatively, instead of tax withholding, the purchasers/sellers may be required to file Annual Information Returns. This will have no revenue implications for the Government and will ease the burden for taxpayers.
Also, ‘goods’ in the context of withholding tax, unless defined, could be a source of dispute. For instance, whether ‘goods’ include shares, securities, money/ foreign currency, actionable claims etc. within its scope is not clear. Under the GST law, these items are specifically excluded from definition of goods. However, the Sale of Goods Act treats stock and shares as goods but exclude actionable claims from its ambit.
The services sector, especially businesses engaged in hospitality, tourism, aviation etc. have been severely impacted due to the pandemic. To provide relief, the Government should consider extending the benefit under section 72A of the Income tax Act, that allows carry forward of loss and accumulated depreciation in case of amalgamation, to all service and trading organisations as also CBDT approved start-ups. This will encourage the affected entities to consolidate their resources to survive. Proper safeguards can be put in place to ensure continuity of business based on headcount of employees pre and post-merger.
The Budget should address the anomaly in tax rates applicable to dividend income of resident individuals and non-resident investors. Currently, after including surcharges and cesses, the highest effective tax rate on dividends for resident individuals is 35.9%, whereas for non-resident shareholders it is 28.5%. Non-resident shareholders can also avail treaty benefit to bring down tax rate to 5% – 15%. The Government should either cap the tax rate on dividends to 20% for residents, allow a standard deduction of 25% from gross dividend income for residents. This will also be in line with global norms.
The Indian start-ups community has gained confidence like never before and needs to be nurtured to foster entrepreneurship and innovation. To attract domestic investments, Government should consider reducing the percentage of long-term capital gains from 20% to 10% and abolish the surcharge on investments made into start-ups by investment vehicles. The benefit of deferral of payment of tax should be extended for ESOPs granted by all employers, rather than restricting it to start-up which is eligible for deduction under section 80-IAC of the Act.
Bring equity in implementing tax laws
The Department has been making consistent efforts towards ensuring a taxpayer-friendly tax administration. In keeping with this spirit, certain measures are needed to further ensure equity in implementation of law.
Currently, it is mandatory for the tax officer to grant stay of demand once the taxpayer pays 20% of the disputed demand, while the appeal is pending before the Commissioner of Income Tax (Appeals). For issues covered in taxpayer’s favour, the assessing officer (AO) is required to seek approval from higher authorities. However, in practice this is seldom followed and recovery of demand is enforced even when the issue is settled in favour of the taxpayer by Tribunal or High Court in earlier years. In such cases, the Government should remove the requirement of payment of demand for grant of stay. The pre-deposit limit for stay of demand at the first appeal stage should be reduced to 10% of the disputed amount for issues which are not covered by earlier years’ orders.
Improve ADRs to minimise disputes
Finance Act 2021 introduced a new dispute resolution scheme to undertake dispute resolution in a faceless manner involving dynamic jurisdiction. However, the constitution of dispute resolution committee and the overall scheme is yet to be notified. Also, the scheme is limited to small taxpayers where the returned income is less than Rs. 50 lakhs and disputed addition is less than Rs. 10 lakhs. The scheme should be notified at the earliest and be extended to cover mid and large-sized taxpayers as well.
Similarly, increasing the team strength for Advance Pricing Agreements and bringing in the appropriate skills, knowledge and subject matter expertise would be useful in reducing the pendency of cases, which currently stands at 760+.
The Government has provided terrific leadership and steered the economy through unprecedently difficult times to the current stage of optimism for growth revival. One hopes that the new COVID variants will not have as devastating an impact as the earlier ones. In the meanwhile, Government should continue its focus on reforms, investments, managing inflation and reviving demand.
Read the current edition of the CII Policy Watch, Focus: Pre Budget Memorandum
The blog has been contributed by Rajiv Memani, Chairman, CII National Committee on Taxation and Chairman and CEO, EY India
Disclaimer- The opinions expressed in this reflect the authors’ personal views and may not represent the views of CII.