These tax, legal reforms in Budget 2021 may boost Indian economy as tax revenue seen at record low

Novel methods of raising funds to meet high spurt in expenditure will be the key as there is limited fiscal space left to introduce any new taxes. Image: Reuters

By Aravind Srivatsan, Neha Malhotra

Indian Union Budget 2021-22: The pandemic has thrown the global economies into disarray. In addition to serious health implications for the humankind, the unrelenting crisis has left an indelible impact on economies across the world as well. In response, governments worldwide have introduced various fiscal measures. Amidst the high expectation of a pandemic-struck country, the Indian Government is treading a tightrope with tax revenues at an all-time low and surmounting pressure to kickstart the economy. Several tax and legal reforms are expected to shape up India in 2021.

Financing the recovery

Novel methods of raising funds to meet high spurt in expenditure will be the key as there is limited fiscal space left to introduce any new taxes. The government may plan to introduce tax-free bonds with attractive returns to boost infrastructure spending and to take care of unemployment and boost demand.

To finance Government relief measures viz. vaccination distribution or grants to severely affected States and to provide a stimulus to the infrastructure sector, the government might consider issuing “Corona bonds” yielding an attractive return to be subscribed by public at large. Certain benefits such as “exemption of tax on interest on these Bonds up to some limits, say Rs 2.5 lakhs or on any gain arising from transfer of such bonds” could be considered by the government to trigger substantial subscriptions by the masses.

Further, to strengthen infrastructure, there is a need to step up investment in infrastructure. Funding for this could be facilitated by an issue of Listed-Infra Bonds. This should be a long-term bond available to the public, institutions and companies with a floating rate of 1% over the previous quarter’s treasury yield which on redemption would be taxable at a concessional rate of 5%. There could be an additional 1% interest for institutional investors.

Strengthening the business segment

Micro, small, and medium enterprises (MSMEs) have been particularly more susceptible to the pandemic’s economic impact. For encouragement of the growth of suchlike, the Government might consider providing tax exemptions on say 50% of their profits provided that such profits are deposited in a Scheduled Bank Account and reinvested in eligible Plant & Machinery within a stipulated qualifying period. For MSMEs in hospitality sector, the Government could encourage taxpayers who incur expenditure on programs such as MICE events to be eligible for tax credit.

In the spirit of Atmanirbhar Bharat, considering the lucrative benefits which would accrue from developing patents in India, the Government might consider granting deductions in respect of expenditure on in-house research and development. In addition to conventional areas of R&D, there should be a focus on agriculture, low yields and the higher food and nutritional needs of the country. India has made substantial investments in cross-border R&D through M&A over the last two decades. Several policies might be announced by the Government for cross-border M&A to facilitate consolidation of overseas businesses.

To foster investment by large businesses in rural India and enhancement of employment and infrastructure, exemptions from capital gains or book profit tax could be provided subject to stipulated conditions such as requirement of investing these gains over a definite period (e.g. 3 years) for furtherance of the rural economy. Further, the Government could consider expanding the scope of “specified business” under section 35AD that provides investment-linked tax incentives. Investment in proposed 5G technology for “telecommunication sector” to achieve significant internet penetration in rural India should also be classified as a specified business.

A new labour law regime is expected to unfold itself in the upcoming times. Consolidation of twenty-nine Central labour laws into four labour codes would bring along drastic changes. Fixed-term employments will see an important change. The employees engaged for a specified duration will also enjoy tenure-based benefits like permanent workforce. To encourage industries to embrace such model, the deduction under section 80JJAA is expected to be enhanced, resultantly boosting employment, and benefiting businesses.

Connecting India to the Global value chain

With a view to modernise port infrastructure, establish port-based connectivity, and develop coastal communities, Sagarmala project was launched. For coastal SEZs notified under this project, the Government is expected to further notify clusters that would come up in these Coastal SEZs/corridors and permit deduction under section 35AD followed by eligibility requirements to claim 15% corporate tax rate. The Government could also encourage establishment of Global In-house Centres (GICs) around these corridors by proposing 15% tax rate to create substantial employment opportunities. Further, owing to the requirement of substantial investment in land, a policy framework from the Government for leasing industrial land at a nominal rate is required.

Besides, the government should look into creating a policy framework which permits a higher percentage of used Plant & Machinery to be transferred in order to facilitate re-location of supply chains or factories outside India into India. The Government could also notify competitive set of transfer pricing markups which further aid business relocation/expansion and provide certainty to global investors on transfer pricing matters.

(Aravind Srivatsan is Tax Leader & Partner, and Neha Malhotra is Director, Nangia Andersen LLP. Views expressed are authors’ own.)