Budget 2021: Moving Towards Consolidation!

GENERAL

The country was waiting with bated breath for a budget that could serve as a blueprint for the recovery of the economy. Budget 2021 witnesses a slew of changes focusing on “atmanirbhar Bharat” – Self Reliant India. The Budget intends to stabilize the economy from the aftermath of COVID, and foster India’s growth story. With focus on capitalizing from the “Post Pandemic – New World Order”, thrust areas of the Government hinge on several important sectors such as healthcare, manufacturing and infrastructure. The enhanced focus will continue to be guided by the “Minimum Government and Maximum Governance” approach. 

DIRECT TAX

To boost the economy and domestic demand, the Government has promised a significant ramp-up in capital expenditure. On the direct tax front, reduction of timelines for re-opening assessments from 6 years to 3 years for cases not involving serious evasions will provide peace of mind for businesses and individuals. Further, the Government has put an end to re-opening assessments on frivolous grounds alleging serious tax evasion by requiring permission from Principal Chief Commissioner. This will reduce needless litigations by bringing in subjective discretion of a high-ranking executive officer to re-open tax assessments. Faceless adjudication and hearings through video conference will prove to be effective steps towards India’s digital transformation. It will have to be seen how many forums will successfully adopt this transformation. As the endeavour of the Government is to focus on virtual courts, this initiative must be encouraged in the days to come even after COVID. 

The Government has kept up with its promise of ease of doing business by hiking the exemption limit for mandatory audit. On the other hand, senior citizens will greatly benefit from the exemption on filing of returns. In view of the pandemic, tax holidays for start-ups have been extended till March 31, 2022 giving the necessary boost to start-ups. The moot point, however, remains whether this extension is enough for start-ups to come to the normal growth rate trajectory and whether there will be any further extensions as we move closer to the new deadline. Interestingly, capital gains exemption on investments in start-ups has also been extended till March 31, 2022. This may incentivise investment especially in the promising ventures.

GST AND INDIRECT TAXES

Simplification process continues in the GST regime as well. Government’s focus on artificial intelligence and deep analytics has yielded results. We have witnessed effective crack-down on fake invoice cases and higher revenue generation because of these technologies. With new provisions to block credits, it is hoped that a lesser number of people are taken in judicial custody but not at the cost of revenue protection. As we have been discussing, the country cannot afford the trust deficit between the Government and the taxpayers. While the Government has been relentlessly working to curb tax evasion, a move towards decriminalization of offences would help the economy in the long run. While steps towards decriminalisation have been taken with respect to LLPs, a move in that direction for GST is of utmost importance. An arrest made, in case when provisions merit judicial interpretation, shall trigger unfathomable ramifications for India Inc. 

The Government will review over 400 exemptions after receiving feedback from industries. It is hoped that removal of exemptions does not adversely prejudice the ongoing benefits that were committed against fulfilment of export obligation else this is bound to attract more litigation as has happened in the case of Advance Authorisation scheme. We are also witnessing hike in Customs duties to boost domestic procurement and manufacturing. There have been certain amendments in customs to address issues of differential tax ambiguities such as in the case of denatured ethyl alcohol. The deletion of Entry 107 of Notification No. 50/2017-Cus results in denatured ethyl alcohol being subject to 5% BCD w.e.f. 1 February 2021. However, the issue regarding eligibility of 2.5% concessional BCD rate under Entry 107 of Notification No. 50/2017-Cus remains live for the period from 1 July 2017 till 31 January 2021 and there may be recoveries initiated on this count. Writ petitions will have to be required for deciding the issue for the prior period. Lastly, the Government played it safe by not making any announcements with respect to inclusion of petroleum products under GST. As the scope of GST must stretch to petroleum products at some point of time, the responsibility may be casted on the GST Council to address the issue pragmatically with consensus.  

Budget 2021 proves to be a thoughtful and pragmatic budget that addresses many critical aspects concerning the revival of the economy and makes India an attractive destination for investments. 

LITIGATION

Moving towards popular demands of faceless adjudication and hearings through video conferences will prove to be effective steps towards India’s digital transformation. It remains to be seen how many forums will successfully adopt this transformation. As the endeavour of the Government is to focus on virtual courts, this initiative must be encouraged in the days to come even after COVID", said Abhishek A Rastogi, Partner at Khaitan & Co, who feels that virtual courts would soon be the new normal.

EASE OF DOING BUSINESS

From the perspective of improvement in ease of doing business, the Government has used multiple pronged approach. On the GST front, the mandatory requirements of getting annual accounts audited and the reconciliation statement submitted by specified professionals have been removed. While the self-certification basis will reduce compliance cost, the numerous errors highlighted at the embryonic stage may be missed and lead to inadvertent errors and deliberate frauds.

On the direct tax front, reduction of timelines for re-opening assessments from 6 years to 3 years for cases not involving serious evasions will provide peace of mind. Further, the Government has put an end to re-opening assessments on frivolous grounds alleging serious tax evasion by requiring permission from Principal Chief Commissioner. This will reduce needless litigations by bringing in subjective discretion of a high-ranking executive officer to re-open tax assessments. The Government has kept up with its promise of ease of doing business by hiking the exemption limit for mandatory audit. On the other hand, senior citizens will greatly benefit from the exemption on filing of returns.

From the litigation perspective, faceless assessments and hearings through video conferences will prove to be very effective steps towards India’s digital transformation. It will have to be encouraged as some forums are still stuck with traditional ways to conducting businesses without realizing the importance of technology.

SLUMP EXCHANGE

The budget 2021 proposes to prospectively amend Section 2(42C) of the Income Tax act defining slump sale. This may impact the computation of capital gain in case of slump exchange transactions. Views were taken that there will not be any capital gain no slump exchange. This ambiguity or structuring option has been removed by the proposed amendments. The slump exchange transactions were a regular feature in Holding-subsidiary slump exchange model with a view that capital gains are not applicable. While the announcements provide for prospective amendment, it is mentioned that the initial position was not correct.