The year 2020-2021 saw the Finance Minister announce several far-reaching relief measures as well as an economic stimulus package to support the economy in the wake of the COVID-19 pandemic.
The Union Budget for 2021-22 due to be presented on 1 February 2021 is expected to take this initiative forward and provide India Inc. with a clear path out of the pandemic-induced economic distress, and towards higher economic growth.
KPMG in India conducted a pre-budget survey in January 2021 which has captured expectations of key stakeholders on various tax aspects of the budget. The findings of this survey are summarised below:
Tax Rates and Relief
With the Government facing the prospect of significantly increased expenditure in the coming year (especially in the area of public health), a large majority of respondents believe that the Government’s revenue needs can be met through increased collections fuelled by an economic recovery as well as by improved technology-driven enforcement, rather than through the introduction of new taxes. A smaller number of respondents, however, expect a new Covid-19 cess.
We also asked respondents for their views on what measures the government could adopt to provide relief to the salaried class. Most respondents felt that an enhancement in the standard deduction on salary income from existing limit of INR50,000 should be considered.
The last two years saw the Government take many far-reaching measures to resolve disputes and overhaul the dispute resolution framework in the field of taxation. In addition to the Sabka Vishwas Scheme and the Vivad se Vishwas Scheme to resolve legacy disputes in the field of indirect and direct taxes, the Government also introduced the concept of faceless assessments and appeals.
A small majority of respondents felt that faceless assessments and appeals in both direct and indirect taxes would improve efficiency and lead to a reduction in tax disputes. As to what the Government could do more to help resolve disputes, a whopping 77 per cent of respondents felt that a mediation scheme should be introduced in the Budget to enable negotiated settlements of tax disputes.
Specific measures like the Advance Pricing Agreement (APA) programme to reduce transfer pricing litigation got mixed reviews. Only about 38% of respondents felt that the APA programme had been effective in pre-empting/resolving key transfer pricing controversies. This suggests that measures to strengthen the APA regime would be welcomed by many taxpayers.
About 40% of respondents also felt that the introduction of the General Anti-Avoidance Rules (GAAR) and the implementation of the Multilateral Instrument (MLI) could lead to an increase in tax disputes.
Measures to boost credit
While NBFCs have been seeking exemption from thin capitalization provisions (in line with banking companies) since the time of their introduction, respondents were divided on whether this change would be forthcoming in the present Budget.
Given the financial impact of the COVID-19 pandemic, a majority of respondents expect an increase in the deduction with respect to the provisions made towards Non-Performing Assets (NPA) by Banks and NBFCs. This would provide much required relief to Banks and NBFCs, which are bracing for increased delinquencies on account of the pandemic.
Greater clarity and certainty
The introduction of tax collection at source (TCS) provisions on sale of goods last year raised certain questions about its applicability to transactions in shares, securities and other financial instruments. An exclusion was subsequently provided for listed shares and securities. However, about 43% of respondents felt that a specific carve out for unlisted shares and securities from TCS was also warranted.
On the transfer pricing front, a large majority of respondents expect the Government to issue detailed guidance, similar to that issued by the Organisation for Economic Cooperation and Development (‘OECD’), for dealing with anticipated transfer pricing issues on inter-company transactions. This clearly indicates that taxpayers anticipate challenges in inter-company pricing as a consequence of the pandemic and expect the Government to be proactive and forward looking.
Goods and Services Tax (‘GST’)
We asked respondents if they felt that the GST regime was getting simplified over the last three years. The response was divided with 45.97% believing that it was simplified, and 41.71% believing otherwise. This could be on account of multiple reasons such as various notifications/ circulars being issued on regular basis, number of increased compliances for multiple registrations, stringent provisions for credits availment, etc. which in turn leads to additional cost and time investments for business.
When asked for their feedback on the digital compliance system introduced for GST, nearly two- thirds of respondents were comfortable with the Digital Compliance system introduced for GST. This is largely because the GST portal has developed into a one stop shop for every GST related issue, be it filing monthly / annual returns or claiming refunds, receiving and replying to notices, functionalities enabling following up with vendors in case credit is not reflected and much more.
Further, the introduction of auto–populated figures in payment return, has led to a reduction in manual efforts as well as clerical manual errors.
Customs and Trade
A large percentage of respondents believe that the CBIC should introduce Customs assisted assessment for Micro, Small and Medium Enterprises (‘MSMEs’). Since this sector lacks adequate infrastructural, technological and financial support, introduction of Customs assisted assessments and other trade facilitation measures would be beneficial. About 40% of respondents believed that Authorised Economic Operators (AEO) certified importers should be exempted from Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR, 2020) related enquiries with respect to live shipments. This is in line with the important role played by AEO certified importers in international trade, and a recognition that their Customs procedures are efficient and compliant.
In line with the need to provide a level playing field for Indian companies to access overseas capital markets and facilitate a better valuation for equity shares, we asked respondents if the Government should announce provisions to facilitate a regime for direct overseas listing of Indian companies.
Nearly 70 per cent of the respondents were in favour of such a move.