FIRST PAPERLESS BUDGET BASED ON PILLARS OF GROWTH
Based on the six pillars for the growth of economy i.e. (1) Health and Well Being, (2) Infrastructure, (3) Inclusive Development, (4) Human Capital, (5) Innovation and R&D and (6) Maximum governance and minimum government, the Finance Minister presented the first ever paperless budget on 1 February 2021. The budget was presented on the back of an unprecedented year which saw the Indian economy contract by 7.7%. Though the taxpayers were aware of the fiscal situation, the expectations among taxpayers were high in terms of a reduction in tax rates or enhancement of exemptions/deductions atleast on account of medical expenses, but no such change has been announced. While the tax rates have been kept the same, a trend of reversing High Court/supreme Court judgments which are favourable to the taxpayer which hitherto was common but was discontinued by the present government since many years has seen a revival. This is a very disturbing feature of this budget.
On the personal tax front, there are only a few positive changes- giving legislative recognition to exemption for LTC Cash Scheme, extending deduction of interest on loan for first time home buyers for one more year and relaxation to senior citizens in respect of filing of return of income subject to certain conditions. Additional tax liability by way of restricting the tax-free income is proposed to be imposed on the individuals who pay premium of more than Rs 250,000 in a year for a ULIP or contribute towards provident fund in excess ofrs 250,000 in a year.
Last year, faceless assessments and appeals were introduced, this year’s Budget introduces provisions for a faceless Income Tax Appellate Tribunal to simplify the appellate procedure. All hearings (if granted) before the ITAT are now proposed to take place over video conferencing. The ITAT, being the final fact-finding authority and entrusted with a quasi-judicial function cannot work faceless. The principal of natural justice also requires a proper hearing to be given to the parties. By making the ITAT faceless the importance of this great institution is being undermined. In fact, it would be better the position of the CIT(A) is merged with the
ITAT as one single appellate authority. Why should the taxpayer be made to go through two stages of faceless appellate authorities?
Further, to limit prolonged uncertainty of disputes, there are various measures proposed including constitution of Board for Advance rulings, constitution of Dispute Resolution Committee. With the massive technological upgrade in the Department where the processes under the Act are moving towards becoming faceless and jurisdiction less, the time taken to complete such processes has greatly reduced and therefore the timelines for filing belated return, revised return and for completion of assessment have been reduced by three months and for reopening tax assessments the limit has been reduced to three years and in exceptional cases to 10 years.
In an attempt toim-provecompliance, the Budget has also proposed higher tax rates for non-filers of income tax returns. This responsibility has been thrust upon the tax deductor as he has to now find out whether the deductee has filed his return of income for the past two years or not. If such a return has not been filed, then the deductor would have to deduct tax at a higher rate. The scope of TDS has been further enlarged and has now been extended to even purchase of goods. Last year a levy by way of TCS was introduced on sale of goods. A specified buyer is now mandated to deduct tax @ 0.1% from the consideration paid for purchase of goods where the payment exceeds Rs 50 lakhs. This particular amendment will increase the compliance burden of the taxpayers. Collection of tax by way of TDS seems to be the simplest form of collection by the Government as responsibility is cast on the taxpayer and in case of noncompliance the taxpayer is saddled with interest and penalty, so he has no choice but to comply.
The Budget has unsettled the settled position for many years and that too in many aspects by amending the law to override judgements of the High Courts and the Apex Court. One such amendment is to deny depreciation on goodwill which is bitter pill to swallow for corporates. The Supreme Court had held that goodwill arising on amalgamation is eligible for depreciation. This amendment would impact the M&A activity in the country and is a retrograde step. Also, at the same time, it has created more ambiguity regarding depreciation on other intangibles like distribution network, customer list etc. If this was intended to be a budget for promoting investments, then this proposed amendment is contrary to the intent of the budget. Another aspect worth mentioning is the proposed change in the procedure for re-opening assessments. Here again the position of law which is settled in terms of interpretation has been completely altered. By unsettling the settled position more litigation will happen. The Hon’ble Supreme Court along with many other High Courts had held that employee contribution of PF and ESI even if deposited after the due date as mentioned in the respective Acts but before the filing of the return of income, would be allowed as a deduction. This interpretation has also been sidelined by amending the law to provide that even if there is a delay of one day in deposit of the employee contribution then the deduction shall not be allowed to the employer.
Finance Act, 2020 had expanded the scope of the Equalisation Levy (EL) to cover non-resident e-commerce operators making supplies of goods/services in India. The provisions created a lot of confusion and disconnect with existing provisions in the Act. Budget 2021 has proposed various clarifications to clear the ambiguity such as excluding the income that is already taxed as royalty or fees from technical services from the purview of the EL. However, the proposed clarification as to thedefinition of ‘online sale of goods’ and ‘online provision of services’, makes the ambit of the EL much wider. With utmost humility, this is neither efficient nor will it enable investments as was expounded by the Hon’ble FM in her speech that the tax proposals will achieve the aforesaid objectives. On the contrary, it will put the Country on the backfoot.
In the GST Act as well an Apex Court ruling has been negated by amending the ‘scope of supply’ retrospectively from 1st July 2017, The Apex Court had held that services provided by a club to its members are nothing but services to self and outside the levy of tax. However, the proposed amendment seeks to override the said decision. Another extremely important amendment is proposed in the GST regime. It is proposed to amend the law to provide that input credit cannot be availed till the time the vendor/supplier has not uploaded the invoices by filing the return of outward supplies in GSTR-1 or using the Invoice Furnishing Facility (IFF) even though the entity might have paid the GST to its vendor/ supplier.
Besides being paperless this budget is also unique in there being hardly any positive tax proposals in the budget. Few aspects worth mentioning are that the Budget seeks to increase the threshold for tax-audit, increases the safe harbour limit in respect of sale of immovable properties, expand the incentives for IFSC in the GIFT cityand also does away with the requirement of a GST audit.
(The authors Parul Jolly and Sachin Vasudeva are partners at SCV & Co. LLP, Chartered Accountants)