With an expected fiscal deficit of 7.5%-8% of GDP for 2020-21, Finance Minister Nirmala Sitharaman has promised a "never before"-like Union Budget in light of the Covid-19 pandemic that has profoundly changed the global economic landscape. Given that India is likely to play an important role in global economic revival, ensuring stability and impetus for growth would be key in this Budget. As a leading driver of economic growth, fiscal measures for the technology sector are keenly awaited.
To start with, putting the services sector on a par with manufacturing is key. The optional 15% tax regime for new domestic manufacturing companies has been well received and should be made available to service sector corporates and non-corporates. Further, all service sector companies should be allowed to carry forward of loss/unabsorbed depreciation on amalgamations.
Last year, the profit-linked holiday for eligible startups was changed to three out of 10 years from the year of incorporation (instead of from seven years earlier). This should be increased to five out of 10 years and they should be exempted from MAT (minimum alternate tax), in order to better benefit them. The taxation for employee stock options granted by eligible startups was also revised last year. However, the amendment did not fully alleviate difficulties and it is urged that tax should be levied only at the time of sale of the shares. Further, this benefit should be extended to employees of all startups.
The recent tax withholding requirement on sale of goods or provision of services facilitated by an e-commerce operator is fraught with difficulties and should be streamlined, if not removed. One of the major areas for clarifications is regarding applicability of the equalisation levy brought in last year. With no parliamentary documents available for the extremely broadly worded provisions, non-residents engaged in various types of business have been left struggling with ascertaining the applicability of the levy to their transactions. The government should urgently clarify the intended taxpayer base and assuage the concerns of the rest, many of whom may not have been envisioned to be within the scope of the levy.
A burning issue since several years has been the taxability of income from software-related transactions. It would be extremely helpful for the government to take a firm stand that receipts by non-residents from sale of software do not qualify as royalty. This stance would greatly lessen past and probable disputes. Other expectations that remain unaddressed since earlier include exempting listed companies from buyback tax, mentioning data centre equipment/servers/AV equipment as eligible for 40% depreciation, making clear that Section 56(2)(x) should not apply to allotments of shares, etc.
It is also essential that transfer pricing provisions for related party transactions are applied differently till the effects of the pandemic on businesses subside. For instance, safe harbour margins should be lowered, calculations of arm’s length ranges rationalised, additional/increased costs due to the pandemic should be treated as extraordinary for computing operating margins, multiple year comparable data made optional, etc.
Another major hope is that the government reconsiders some recently introduced measures relating to non-residents. The concept of ‘significant economic presence’ as a business nexus may be kept on hold, at least until there is international consensus on the manner of taxing digital businesses. Even otherwise, the provisions need to be amended so as to unambiguously apply to digital economy transactions only. The recent tax withholding requirement on sale of goods or provision of services facilitated by an e-commerce operator is fraught with difficulties and should be streamlined, if not removed. One of the major areas for clarifications is regarding applicability of the equalisation levy brought in last year. With no parliamentary documents available for the extremely broadly worded provisions, non-residents engaged in various types of business have been left struggling with ascertaining the applicability of the levy to their transactions. The government should urgently clarify the intended taxpayer base and assuage the concerns of the rest, many of whom may not have been envisioned to be within the scope of the levy.
As a closing, the recent steps of the government towards digitalisation and transparency in proceedings before income-tax authorities need a mention. While such fundamental changes may take some time to implement without hitches, they certainly pave the way to a better future for tax administration and dispute resolution. One hopes to see more such remarkable initiatives in a post-pandemic world.
Views are personal. Mahajan is partner, Ernst & Young LLP; Patel is senior manager, Ernst & Young LLP.
