The year 2020 saw unprecedented disruptions to societies and economies across the world, and India was no exception. During the last few months, the Indian government took several steps to provide relief and reform measures to manage the impact of the pandemic on the economy.
India announced three stimulus packages worth ₹24 trillion to support the pandemic-hit economy. Various tax reliefs such as a reduction in TDS rates by 25 per cent, extension in due dates of various compliances under the tax laws etc. were provided. The Reserve Bank of India (RBI) also came up with economic stimulus measures such as moratorium on debt repayments, reduction of liquidity coverage ratios, etc.
Challenges to recovery
Stepping into the new year, India continues to grapple with the pandemic although recent data suggests India may have turned towards the road to recovery. Nevertheless, the path to recovery may have a few challenges — high inflation, job losses, poor wage growth, and low asset values may impact the consumer’s purchasing power.
While the availability of vaccines, reduced infections, and increased mobility will be key to economic and industrial revival, it is becoming obvious that different industries will likely see different rebound paths until the pandemic is over. The role of government policy measures and their effectiveness will, therefore, be important in determining the strength and pace of revival.
Considering this, taxpayers can expect the Budget to be socially inclusive and growth-augmenting. Tax policy will play an important role in strengthening the economy as well as in widening of the tax base. Expected tax policy reforms could be measures such as greater clarity in tax laws, simplification of procedures, inclusive and progressive tax system etc.
Considering large volumes of litigation and pending tax cases, time-bound mediation mechanism and settlement of tax cases would be a welcome step. This will facilitate business transitions which would make doing business easier for the industry. There is a need to maintain contractual sanctity by ensuring that any tax law amendment is done in such a manner that the amended laws honour the existing contracts under execution.
The Budget can help in nurturing business resilience. It could be expected that tax reliefs like reduction in the rate of TDS may continue for one more year. Moreover, removal of disparity of tax rates between companies and partnership firms/ LLPs could help in the reduction of the tax burden on SMEs/ MSMEs.
The Prime Minister announced the ‘Atmanirbhar Bharat’ theme in May 2020. Atmanirbhar Bharat translates to being a bigger and more important part of the global economy. It also means to be self-sustaining and self-generating. As such, taxpayers can expect production linked incentive schemes, tax breaks for creating jobs, promoting exports, fostering technology, innovation and digital adoption. 100 per cent depreciation on tech and digital spend and tax incentives for promoting the digital Indian marketplace could also be on the cards.
Tax break for vaccine drive
India has commenced the vaccination drive for frontline workers and soon guidelines may be rolled out for a mass vaccination as well. A tax break for vaccine distribution infrastructure and logistics service providers may be expected. It would be fair to expect a tax deduction for an employer’s spend on vaccination or an individual’s spend on family vaccination.
The government will have to find ways to manage the fiscal balance. External borrowing, strategic disinvestments and public-private participation could be a few options that the government may explore. The government may also look at implementing tax-friendly initiatives such as simplifying tax compliance, improvement in tax administration etc.
Towards frictionless taxation
Models of highly digitalised tax administrations could be explored to increase the tax base, tax compliance and reduce burdens on taxpayers from more seamless and frictionless taxation. This will go a long way in boosting the confidence of foreign investors and augment FDI in India. There are early signs of private investments returning to India. To sustain this, the government needs to ensure a stable tax regime which could be the tone of the upcoming Budget.
Recently the Finance Minister indicated that the existing situation calls for a Budget like never before. Thus, taxpayers are looking forward to an ambitious and balanced Budget this year that will proactively tackle the prevailing economic uncertainty.
The writer is Partner and Leader — Tax & Regulatory Services, BDO India