Union Budget 2021 has a distinct flavour. While it offers no new tax cuts or exciting amendments, it certainly rationalizes tax provisions to bring tax certainty, simplicity and transparency in assessment. Some of these amendments will certainly facilitate ease of doing business in India.
One of the most welcomed amendments in this Budget pertains to rationalisation of dividend taxation provisions, which faced teething issues when the government abolished dividend distribution tax and shifted to the classical dividend taxation regime last year. Dividend payments by SPVs to business trusts will no longer be subject to tax withholding. Realising the inherent nature of dividend income, where estimation of income is not practicable by a taxpayer (just like capital gains and lottery income), relief from payment of penal interest has been provided to dividend income in case advance tax is not paid on such income on due dates prior to the income actually materialising.
To the rejoice of FPIs who were earlier subject to a fixed withholding tax of twenty per cent on income (other than capital gains and specified interest), the Budget has now aligned the withholding tax rate with the beneficial tax rate available under the Treaty, if any. This has eliminated cash flow woes for FPIs who earlier would have to file for refund with the tax authorities against such excess tax withheld.
With the intent to reduce tax litigation and bring tax certainty, the time limit for issuance of notice for re-assessment has been reduced from six years to three years. However, where the amount escaping assessment is Rs 5 million or more, notice can now be served up to ten years from the relevant assessment year. This seems like a well calculated move since majority of the tax payers now have reduced risk of tax litigation, and at the same time revenue’s interest remains protected by extending the time limit for re-assessment for the bigger players. The key in the success of such tax provision will like in the discipline with which tax office invokes the higher ten year limitation period.
The Budget emphasizes the government’s conviction in faceless assessments and proceedings. The Finance Bill, 2021 proposes to introduce faceless interface for the proceedings before the Income-tax appellate tribunal on the same lines as assessments, penalty proceedings as well as appellate proceedings before Commissioner of Income-tax (Appeals). A revamp of the extant Authority for advance rulings (“AAR”) has also been envisaged by the Bill, which proposes to substitute the AAR with a new Board for Advance Rulings (“BAR”). Advance rulings rendered by BAR will now be appealable before the High Court, within 60 days of the receipt of the advance ruling. The Bill also proposes to discontinue Income-tax Settlement Commission and to constitute Interim Board of Settlement for pending cases. The government’s effort to rejig the existing appellate framework especially advance rulings which has witnessed practical challenges in the past is noteworthy.
The Bill has also settled two litigated issues surrounding depreciation on goodwill and slump sales, which were often part of tax structuring exercises. Without mincing any words, the Bill clearly resonates the government’s intent of not permitting tax depreciation on goodwill. Going forward, no depreciation on goodwill will be permitted. The cost of any acquired goodwill will however be available as deduction when computing capital gains on its transfer. Similarly, the Bill proposes to clarify that ‘slump exchange’ will be taxable in the same fashion as ‘slump sale’ which was previously held in a few judgements as a non-taxable event.
As far as tax incentives go, the amendments are few and mostly in favour of Indian Financial Services Centres (“IFSC”) which has been heavily promoted by the governments by way of tax holidays and deductions in the past few years. Start-ups also have a reason to rejoice – the tax holiday available to them has been extended by one more year. Liberalization of the conditions that were attached to sovereign wealth fund’s tax exemption on income from specified investments will also go a long way in mobilizing foreign government funds into India
It is true that the Budget does not bring about anything ground breaking, eye catching or sensational. However, taxpayers will surely appreciate the government’s attempt to strengthen the existing framework and move towards a more transparent, simplified and confidence inspiring taxation regime.
This article was originally published in Money9 on 2 February 2021 Co-written by: Gouri Puri, Partner; Nimish Malpani, Associate. Click here for original article
Contributed by: Gouri Puri, Partner; Nimish Malpani, Associate
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