The Council of EU Chambers of Commerce in India organized a webinar on ‘Union Budget 2021 and its Implications’ on 4th February 2021.

Immediate Past President, Mr. Ashok Barat chaired the meeting welcomed all present and the speakers Mr. Alok Agrawal, Partner, Deloitte India, Mr. Jimit Devani, Deloitte India, Mr. Anoop Kalavath, Deloitte India and Mr. Gautam Nayak, partner CNK & Associates LLP .

Excerpts from the speech of Mr. Barat:

My first few remarks this was a bold budget not from the content part but the message it sent out to the world. India is a very complex country and we have our own challenges be it socio-political, economic, challenges of diversity and at times you have to stand up for what you think you are doing right rather than what is classically right.

You would have seen reactions from rating agencies coming and saying we will downgrade you etc. as that may happen because they are driven by what is classical measurements of it should be. But there comes a moment of time when you have to do what is good for you according to your basic understanding of what is good for the country and this sends out a strong message of character of the nation and that it stands up for what it thinks should be done and I think from time to time other nations will also follow the same path so I believe this budget for its tenure has to be applauded.

Second point is that this tax was not a centerpiece of the narrative, I think over the period of years budget got trivialized into deciding what should be the tax regime and rest of the narratives would often get lost in the last part of Finance Minister’s speech. For some reason that should have not happened, this budget is nothing but presentation of the annual plan for the nation for the next year. I would say respectable position of the budget was trivialized because of whole conversation on tax. This time that has been removed and we have talked about substantive issues  that what makes the budget special to talk about.

There are four issues which I would like to talk about first one being stability of tax rates, it is not anybody’s case whether tax rate should be high, low or could have been higher or lower, the very fact that it has remained stable in board rooms for entrepreneurs, for promoters, multi-national corporations. The instability of tax rates is far more dangerous than whether the tax rate should be high or low. If it is high we need to find a business model to work around it, if it is low than you take advantage of it but the moment it keeps changing from year to year, all planning and particularly industries which require investments for long terms there is a problem and the fact that we have broken that jinx of having to fiddle around the tax rates every year, conceptually I think it is a very good move.

The second one that I am not calling it bad or good, is the issue about respecting a court judgement. I think from time to time we as a nation have failed to uphold the respect that judiciary should have when it pronounces on interpretation of a law. Infact that is the role of judiciary and in this particular case there is a very tricky amendment as I understood it is not retrospective but retroactive so 11 months of the year have gone and suddenly you have confronted with a change that you never anticipated earlier just because there was a judgement in between, I think this sends a very wrong signal and it shows us a poor light of not being respectful of judiciary interpretation so this is second point.

Third one is setting up a conciliation mechanism the fact is that as a nation we have started looking mediation as a major form of dispute resolution. One of the reason why India continues being so low on the list of nations for ease of doing business is because the administration is extremely slow and painstakingly poor not from a quality perspective but from a time and cost perspective. And as you are aware there is a new mediation law which is likely to come in the next 12 to 15 months which will atleast in commercial litigation make it mandatory to go through the process of mediation and settlement rather than going through an elaborate process of court proceedings. The fact that this concept of conciliation or mediation has been introduced in the tax law is to me a very good significant gesture to make sure that when ultimately law comes people will realize it will apply not only to commercial contracts but also to the governments particularly in matters of fiscal rights.

Fourth conceptual point that I would like to talk about is creation of so called bad bank. I sit on the board of a bank and I know what kind of problem this creates in any kind of strategic planning that bank wishes to do so. The point I am trying to make is this is going to work well if it is implemented well so as a concept I have no issue but if it is not implemented well if we take shortcuts and address too many needs of various stakeholders. This good concept will have bad end. So these are the four conceptual things I wanted to talk about which good, bad, indifferent as there are different ways of looking at whether it is hike in the insurance cap, recapitalization of banks, facilities given to one person company, faceless appeals in IT etc.

These are some of my impressions and reactions based on what I felt and discussed with my friends and colleagues, I thought to put them on a table as I thought panelists would take them up in some form or shape when they are talking about individual provisions and individual issues in the budget. So thank you very much and over to you and I am very grateful to EU Chambers for organizing this wonderful webinar

Individual Taxation

Excerpts from the speech of Mr. Alok Agrawal:

The tax slabs under the old regime and new regime remain unchanged after the Finance Act, 2020. It may be noted that the regular surcharge would be applicable based on the income levels.

Mr. Agrawal also threw light on Leave travel concession exemption, stated that leave travel concession exemption is granted to salaried employees to the extent of expenditure incurred in relation to travel within India in a block period. Current block is from 2018-2021.

In view of outbreak of COVID pandemic, and resultant disruption of transport and hospitality sector, it is proposed to provide tax exemption to cash allowance in lieu of LTC subject to conditions to be prescribed. It is also proposed to clarify that where exemption in respect of prescribed expenditure is allowed, no further exemption would be allowed on the same expenditure to any other individual. This amendment will take effect from 1 April 2021 and will apply for AY 2021-22 only.

He talked about other amendments include extending due date for filing return of income for Partners of a firm as in the case of a firm which is required to furnish report from an accountant for entering into international transaction or specified domestic transaction, it is proposed that the due date of filing return for partner of such firm be extended to 30 November of the AY and the above amendment will take effect from 1 April 2021 (i.e. AY 2021-22 onwards)

Mismatch in income of non-residents as withdrawal from retirement funds by residents who had opened such fund when they were non-residents could be subject to double taxation (on accrual and receipt basis). In order to address this mismatch, it is proposed to insert a new section specifying the manner of taxation of such income and this amendment will take effect from 1 April 2022 and will accordingly apply to the AY 2022-23 onwards.

He also mentioned relaxation of filing of return of income for senior citizen aged 75 years and above which implies senior citizens aged 75 and above are exempted from filing ROI if they have only pension income and interest income (from same bank in which pension income is credited) and taxes are deducted on such income. This amendment will take effect from 1 April 2021

Extension of date of sanction of loan for affordable residential house property as the outer date of sanction of loan is proposed to be extended from 31 March 2021 to 31 March 2022 for claiming the benefit of deductions under Section 80EEA towards deduction in respect of interest on loan taken for a residential property from a financial institution.

Restriction on exemption of Interest from PF which implies EPF interest proposed to be subject to tax if the contribution in a financial year is more than INR 0.25 Million.This amendment will take effect from 1 April 2022 and shall apply to the assessment year 2022-23 and subsequent assessment years.

Mr. Agrawal spoke on social security segment and informed that the FM in her speech acknowledged the conclusion of long drawn exercise of overhauling existing Labor laws with implementation of Labor Codes. The key points outlined by the FM upon implementation Labor Codes included Social security benefits to be extended to gig and platform workers, minimum wages to apply to all categories of workers and will be covered by the ESIC, women will be allowed to work in all categories, including night shifts with adequate safeguards, compliance burden on employers to be reduced with single registration and licensing and online returns.

Direct Tax

Excerpts from the speech of Mr. Jimit Devani:

Mr. Devani informed that there is no change in tax rates with regard to corporate taxation. Tax incentives given during this budget are the definition of ‘zero coupon bond’ is proposed to be modified to include bonds issued by an infrastructure debt fund. Such bonds have to be notified; Tax holidays for real estate as the deadline for the approval of affordable housing projects for tax holiday proposed to be extended to 31 March 2022.

Tax holiday proposed to be granted to rental housing projects, which have to be notified on or before 31 March 2022, and need to fulfil the notified conditions and to extend tax holiday for eligible start-ups incorporated on or before 31 March 2022; similarly, the outer date of transferring residential property for long-term capital gains tax relief, pursuant to investment in eligible start-ups, is proposed to be extended to 31 March 2022;an employee’s contribution to welfare funds, which is deemed to be an employer’s income, will be tax deductible only if such sum is credited to the relevant fund on or before the prescribed due date per the law. A deduction for such contribution will not be available on a payment basis.

Other key proposals include with effect from 1 April 2020, no TDS on payment of dividends shall apply to income credited or paid by an SPV to a business trust (i.e., InVIT/REIT), to facilitate strategic disinvestment of public sector companies, it is proposed to amend the law to enable M&A transactions of such companies, to amend the law to provide for tax neutral conversion of urban cooperative bank into a banking company, to expand the safe harbour from 10 percent to 20 percent in case of transfer of a residential unit during 12 November 2020 to 30 June 2021 by way of first-time allotment to any person for consideration not exceeding INR 20 million.

Second topic under direct tax covered by Mr. Devani was international taxation. With regard to equalisation levy in-order to provide ‘online sale of goods’ and ‘online provision of services’ to include one or more of the online activities such as acceptance of offer for sale, placement of purchase order, Acceptance of purchase order, payment of consideration, supply of goods or provision of services, partly or wholly and the consideration will include for sale of goods irrespective of whether the e-commerce operator owns the goods; or for provisions of services irrespective of whether the service is provided or facilitated by the e-commerce operator. The consideration liable for equalisation levy shall not include consideration, which is taxable as royalty or fees for technical services in India.

Incentives for IFSC units comprise to relax conditions (to be notified separately) for eligible investment fund and eligible fund manager, if the eligible fund manager is located in an IFSC and commences operations on or before 31 March 2024, to extend the benefit of exemption from transfer of specified capital assets on a recognised stock exchange in an IFSC, to investment division of OBU, subject to conditions, to exempt income of a non-resident as a result of transfer of non-deliverable forward contracts entered into with an OBU of an IFSC, subject to conditions, to exempt royalty income of a non-resident on account of lease of aircraft to an IFSC unit, subject to conditions and to extend the tax holiday for an IFSC unit to income from transfer of aircraft or aircraft engine, which was leased to an Indian airline, subject to conditions.

Indirect Taxes

Excerpts from the speech of Mr. Anoop Kalavath:

With regard to the proposed amendments under Goods and Services Tax (GST) are largely intended towards improving the taxpayer’s compliance behaviour that may also affect working capital.

However, the retrospective amendment in interest-related provision and doing away with the GST audit certification requirement are steps in the right direction.

Certain changes are directed towards use of technology to reduce paperwork and enhance the ease of doing business.

On the other hand, the move towards rationalising customs duty exemptions aims to promote domestic manufacturing.

Also, some stringent penal provisions are introduced to curb unlawful refund claims filed by exporters.

The alignment of the Indian Customs Tariff Act with HSN 2022 is to ensure the classification of goods is done based on the global principles of classification.

Changes made under IGCR rules address long-pending industry demand to further enhance the ease of doing business.

A majority of the changes made under BCD rates do not have any impact, with an equal rate of AIDC levy, on customs duty rates.

Extension of the benefit of the project import scheme to high-speed rail projects is a welcome change.

Increase in customs duty rates on a majority of the products is aimed towards encouraging local manufacturing.

Apart from these rate changes, the government has also temporarily revoked levy of anti-dumping duty/CVD currently applicable on certain items of steel.

Excerpts from the speech of Mr. Gautam Nayak:

Good evening ladies and gentlemen if you look at the backdrop under which this budget was delivered, there were difficult options before the finance minister, you had a steep fall in GDP as well a steep fall in tax revenues so we are looking at a steep deficit. So we had a fall of GDP on current year estimated  7.7% and 15.7% in first half and 0.1% in second half.

The agriculture continued to grow at 3.4%, industry contracted by 9.6% and services contracted by 8.8%. So the estimate that India will bounce back etc. if you look at the estimates by reserve bank, IMF etc. have said India will have 15.4% growth and real GDP growth of 7% so looking at budget estimated at 14.2% growth in the GDP. we have taken a conservative estimate. And fiscal deficit was original estimate was 3.5% according to Fiscal Responsibility Act which government had adopted few years back but actual deficit would be somewhere 9.5% so what this government has budgeted is reduced 6% of deficit in FY 2021-22 and gradually we will reducing it and bring it to 4.6% of GDP around 2025-26. What is important today is inducement of growth.

The other aspect is when you look at this budget what the finance minister has done is clearly avoided populism as no populist measures which we used to see every year which I think is a very good thing. The efforts that you look are to jumpstart the economy by spending on schemes and areas where there is a significant multiplier effect so the idea is long term growth trajectory is to move up so this is a virtuous cycle which can lift the economic cycle and businesses.

How do you raise money for this was the question as you are increasing spending so raising tax would have negated expansionary effect of spending due to inflation as it would have gone up by raising taxes so only option was to keep the fiscal deficit by borrowing to spend.

So as against $ 7,800 billion borrowing from market last year, this year it has anticipated government will borrow in year 21-22 almost 12,000 billion around 54% so again for such a high borrowing there is a risk of having high interest rates in the economy so that is something which we will have to be prepared for.

Now the rising debt levels of the government that I think will be the strain on economy but Finance minister has taken a conscious gamble as let borrowings increase in near term hoping that economic growth will more than compensate for that which will enable easy servicing of the debt. As you see theme of the budget as you see mentioned by the finance minister is Aatma  Nirbhar Bharat and if you look at the whole budget major increase in spending is on infrastructure where you see 35% of expenditure of government as Capex.

Government will have to show it is genuine in privatization of infrastructure projects etc. Other thing is wanting to increase the pace of monetization of public infrastructure assets through infrastructure investments as we have already seen couple of infrastructure investments one is road developer and one is power grid. So these are the ones in which infrastructure investment which have already gone public.

The other thing is government is focusing on transport so they are talking about construction of roads and highways and 50km per day is the target that they are looking at and dedicated trade corridor are expected to start from June 2022 and this bridge will be really affordable even if digital costs have gone up transport sector be more affordable for the industry.

Government has talked about divestment as last year they announced LIC divestment and it is still pending maybe because of pandemic, Air India is on the cards for some time and BPCL is nearing privatization but again one will have to wait and see if it will work.

Overall given the circumstances it is a good budget, hassles are much lower as government has not carried out many changes as far as procedures are concerned the government’s intentions are right and question is about implementation. I am more optimistic than being pessimistic on this. On that note, I think I will conclude. Thank you.

The webinar was concluded by public Q & A session and a vote of thanks by Dr. Renu Shome, Director of The Council of EU Chambers of Commerce in India.