Decoding the impact of changes in rules and regulations
An impact analysis by Nangia Andersen LLP
Encouraging start-ups ISSUES
Start-ups have borne a huge brunt of the economic devastation caused by the pandemic. Further, despite the emphasis on innovation, a large number of start-ups tend to fail due to funding crunch, tax burden, rigid compliances, and technology related reasons, among others.
IMPACT
NRIS are now allowed to incorporate One Person Company (OPC) and grow without any restriction on the paid-up capital and turnover, allowing their conversion into any type of company at any time. This should nudge India upwards on the Ease of Doing Business Index. The measures are envisioned to encourage founders to incorporate a limited liability structure at an early stage. However, start-up’s lifecycle is such that their growth would involve addition shareholders, namely, angel investors, venture capital funds and PE funds, in which case, the idea of OPC may not sustainable.
Though the government has recognised the role of start-ups in revitalising the economy, noteworthy tax benefits that were sought, such as, harmonising tax rate on capital gains and dividend income earned by resident investors from investments in start-ups, are missing in the announcements
Attracting investment ISSUES
Even though India jumped several points up the ease of doing business ranking, businesses in India still face impediments in conducting their operations due to tedious procedural compliances and requirements. Consequently, India attracts a smaller share of Foreign Direct Investment (FDI) as compared to other growing economies.
IMPACT
Board of Advance Rulings replacing Authority for Advance Ruling (AAR) consists of two commissioners. If we have a board for advance rulings manned by commissioners, then foreign investor would have inhibitions applying for advance ruling because they would fear that the decision is going to be against them from the beginning. Furthermore, the orders passed by Board of Advance Ruling would not be binding on the taxpayer and the revenue department. This means a foreign investor would not have surety on their tax cost of doing business in India. Uncertainty on tax cost may act as deterrent for foreign investors.
Simplification of dispute resolution ISSUES
Faceless Income Tax Appellate Tribunal (ITAT) is another step of the government aiming to bring efficiency and transparency in tax administration.
IMPACT
The government ought to have waited for the successful implementation of faceless assessment and faceless appeal before hastily introducing faceless ITAT.
ITAT is the last fact-finding authority for the taxpayer, and virtually exercises a judicial function. Taxpayer reaches ITAT to argue and counter argue their tax position in light of differentiating facts. Personal hearing is the essence of natural justice and conducting all this electronically may make the whole litigation process infructuous. Further, the taxpayers would find it difficult to explain complex business transactions by way of written submissions made online. Personal interface is fundamental to argue and explain a position taken.
Amending the Companies Act
ISSUES
The de-criminalising of the procedural and technical compoundable offences now being extended to LLPS (Limited Liability Partnerships). LLPS do not enjoy the same status as that of individuals, and accordingly do not enjoy slab benefits either.
IMPACT
LLP is a legal entity form commonly used by small and medium enterprises for doing business in India. Decriminalising offences, which do not involve substantial violations shall incentivise compliance, de-clog the criminal justice system and promote congenial business climate for LLP. Though LLPS are regulated the same way as companies in respect to conduction of audit, maintaining books of accounts, etc. they do not enjoy the benefit of lower tax rate accorded to companies. Moreover, it has now been clarified that LLPS cannot opt for presumptive taxation (which is available to partnerships). LLPS hang in between with extensive regulatory requirements but no favourable tax regime.
Incentivising employment
“The Budget was expected to provide a road map on the administrative tax reforms which would have reduced compliance burden & give certainty on tax positions to investors, especially those who provide growth capital to the economy”
ARAVIND SRIVATSAN, tax leader & partner, Nangia Andersen LLP
ISSUES
Creating jobs is the keystone of any economic recovery program. Expectations were rife that the government would focus on incentives to generate employment. Further, late deposit of employee contribution led to unjust enrichment of the employers.
IMPACT
Extending Social Security Benefits to gig and platform workers is a first of its kind globally, and brings many more employees under the umbrella of socially secured sector. However, its implementation would be a challenge in view of the vast workforce in this category. Further, to avoid mis-utilisation of amount deducted by employers from employee’s salary towards
Provident and Superannuation Funds, it has been provided that late deposition of employees' contribution shall not to be allowed as deduction to the employer if they fail to deposit the same in a timely manner. However, it is imperative to note that this would be harsh on genuine short delays owing to administrative reasons.
Flattening the IBC curve ISSUES
The NCLT, which is assigned cases n of company and corporate matters, has a weak administrative machinery, which often leads to frivolous litigation. Additionally, with insolvency matters piling up, it has been facing challenges in terms of infrastructure. Further, the pandemic has also slowed down the operation procedure of the Tribunal.
IMPACT
The Budget proposes to strengthen the NCLT framework with e-courts system. Alternate methods of debt resolution and special framework for MSMES are also in the offing. But what is crucial is the need for a better data management framework for handling of cases and to spruce up the administrative framework to pave way for faster resolution of insolvency matters. Insolvency cases are expected to rise post the end of the suspension period (March 2021). Further, it shall be pertinent for the government to chart out transitional measures, such as special window for out of court settlements, hybrid frameworks, cross-border insolvency, etc. to smoothen IBC regime to kick-start the economy.