Amidst the COVID-19 pandemic and with an objective to build a self-reliant India, the Hon’ble PM gave a clarion call for an AATMARNIRBHAR BHARAT. Subsequently, the government initiated several measures focusing toward this direction. However, the pandemic imposed restrictions have confined the pace of related reforms. Stakeholders have high expectations from the upcoming Union Budget for introducing measures to foster indigenous businesses. Listed below are some tax proposals which could aid the AATMARNIRBHAR BHARAT initiative.
1. Production/Investment Linked Tax Incentive Schemes
Tax exemptions/ deductions linked to production/investments have previously provided a requisite stimulus to upcoming businesses. Tax incentives help in directing investment into identified sectors. To reduce dependence on imports, late last year the cabinet approved a Production Linked Incentive scheme for 10 labour-intensive sectors. Budget 2021 should consider extending the scheme to other sectors catering to the Indian market.
On the other hand, there is a benefit of a lower corporate tax rate of 15% currently available to newly setup manufacturing units who do not avail tax holidays. Such reduced tax rate should also be extended to activities ancillary to manufacturing, e.g. procurement, warehousing, distribution, etc., thereby providing a conducive environment encouraging indigenous production.
As the current indirect tax regime (GST) cannot co-exist with tax exemptions, the government may have to consider cash refund (partial or otherwise) of the taxes collected from the taxpayers operating in the priority sectors, which can generate mass employment and resource mobilisation.
2. Tax Breaks for Technology Spends
Technology and automation have become essential for the sustainability and growth of any business. With the marketplace going digital, larger businesses have been able to navigate their business models to the new normal. However, smaller and local businesses continue to struggle. A tax break in the form of additional deduction or accelerated depreciation would certainly encourage spends and investments in technology by businesses.
3. Encouraging Domestic Consumption of Local Produce
The key to increasing domestic consumption of local produce is increasing the purchasing power of the consumer. This can be achieved by lowering personal tax rates or providing deductions on certain domestic spends.
The government’s resolve to provide impetus to local manufacturing and align better with international trade laws is reflected in the recent announcement of remission of duties or taxes on the export product and changes in Manufacture and other Operations in Warehouse Regulations (MOOWR). This will need to be supported by modernisation of existing tax laws with clear and transparent procedures, single widow clearances, simplified compliances, Information & Communication Technology (ICT) based documentation to encourage domestic manufacturing.
4. Labour Related Tax Reforms
Pandemic induced lockdowns resulted in mass lay-offs. However, despite being hit by the pandemic, some businesses decided not to retrench staff and continued to pay salaries despite disrupted operations and financial stress. Countries like Australia and Canada have introduced wage subsidies for qualifying spends of eligible employers. Either similar or a tax relief to the extent of salaries paid during lockdown will not only be a due acknowledgement to these businesses but also a great support during these times of economic stress.
An educated and skilled workforce is key to creating a self-reliant India. The government has taken several measures to encourage upskilling of the Indian workforce. In this direction, a weighted deduction (similar to that available for R&D) could be extended to qualifying corporate spend on training or other such upskilling programs or for contribution towards government approved funds/facilities which could be directed to developing a skilled employment ecosystem.
Tax incentive for employers would provide much-needed encouragement to an already burdened labour market. The section 80JJAA of the IT Act provides for an additional tax deduction for employers hiring employees with monthly salary not exceeding INR 25,000 per month. The skilled workforce forms a large part of the salary cost for Indian businesses. The salaries for such skilled employees are likely to be in excess of the said cap. Increasing the salary threshold encourages the employment of the skilled workforce.
Mass migration of labour has resulted in a significant imbalance in labour supply and demand. Contractors and job-workers are helping bridge the balance and create gainful employment. Currently, no tax benefits are available to such job-workers or contractors. A reduced tax rate or tax holiday based on employment generated could incentivise this sector.
The key lies in striking the right balance
Tax holidays and tax reliefs may not be in line with the roadmap to a simplified tax regime agenda of the government, however, the struggling economic environment does call for some out of the ordinary measures. While the taxpayers are looking forward to the Union Budget to provide support and stimulus to the economy impaired by the COVID-19 pandemic, funding such an expectation may be a challenging task. The country hangs at a delicate economic balance, expanding the tax base, encouraging compliance coupled with tax reforms would play an important role in erecting an ATMANIRBHAR BHARAT.