Union Budget 2021: Covid-19 cess to tax breaks, what may be done to aid the reviving economy

By Rajat Mohan

Indian Union Budget 2021-22: Officially, India’s much-awaited annual exercise of presenting its ‘Never Before like Union Budget’ for 2021-22 is scheduled on February 1, 2021. In strict accounting jargon, it is an ‘Annual Financial Statement – AFS’ of the Union Government’s total income earned from taxes levying, directly and indirectly, say income tax, customs duty, cesses, surcharges, etc. and preparation of the roadmap to spent that amount in the particular financial year. Key objectives of the Budget are – reduce poverty and unemployment, efficient allocation of available resources, reduce wealth and income disparity in the society, ensure economic growth, keep a tab on essential commodities prices, change or bring in suitable changes in ‘Tax Rates’, and other economy-related decisions. Due to ‘Never Seen’ economic disruptions caused by pandemic worldwide, India’s economy contracted at a slower 7.5% in the July-September quarter and 23.90% in the April-June quarter. 

Expectations from the Union Budget 2021

The pandemic that has wreaked havoc on the global economy and India is no exception. This year i.e. 2020, the lockdown harshly jammed revenue collections of the central and state governments. Resumption of various economic activities after the lockdown restrictions and hikes in state excise duties on liquor aided the economy’s slow recovery and revenue generation of the economy. After the pandemic, the economy has seen major ups and downs, that is the reason everyone’s expectations from the upcoming union budget are very high, especially the small taxpayers and salaried employees. Some of the few expectations are mentioned as follows:

• COVID-19 cess: The government may likely impose a COVID-19 or other similar cess of 2-4% on big taxpayers in this Budget. During the past year, the economy has seen an immense drop in revenue collections at the start of the pandemic when lockdown has restricted all the operations except the supply of essential goods & services. The obligation of this cess will pull through the amounts incurred on providing economic aid (like covid vaccination, etc.). There is a possibility that this cess could also be imposed only on large business enterprises.
• Reduced rates of Income Tax for MSME, Partnership firms, and Limited Liability Partnerships (currently 30%). This will benefit them for maintaining a higher disposable income for the short run and expansion, thus, creating more flow & supply of income in the economy. This step will bring them at par with corporate entities and will also serve as ‘Oxygen’ since we all are aware of the fact that they are the backbone of the economy.
• Domestic investors are still wary of investing in startups. Few measures should be taken to boost domestic investments in startups to encouraging Indian Enterpreurnship at the grass root levels.
• Offline businesses are hit severely, and every business owner is planning to go online to generate future income and continue their operations. The government must develop E-commerce friendly tax solutions. Capital expense on digital initiatives like set up of ERP, online commerce website etc. could be permitted as a revenue expense in the year of procurement.
• Many of the businesses do not have more than sufficient resources to meet the monotonous compliance requirements like GST or paperwork required for starting an online endeavour. Therefore, the government should offer exemptions to small and medium businesses from certain obligatory tax compliances. Apart from this, there should be some relief for businesses that have borne substantial losses during the lockdown.
• The government should provide direct support to the sectors that are still affected by the pandemic, such as hospitality, tourism, aviation, etc. Travel and tourism seized the worst hit during the lockdown and even after the pandemic. Therefore, the hospitality & tourism sector is eyeing additional support in the form of additional working capital and lower transactional taxes in the upcoming period. 
• One of the most common and important requirements for a developing state like India is employment generation. Unfortunately, millions of people lost their jobs last year due to downsizings in the pandemic period. This year, the economy needs a boost for employment opportunities by boosting major employment-generating sectors such as MSMEs, textiles, hospitality, and Infrastructure.
• The government may propose some better tax breaks/deductions for Individuals/ households in case of expenditure on health insurance policies, life insurance policies, etc.

This has been an exceptional year for businesses as well as for mankind. The focus of the Budget will be to boost employment and outgrowth manufacturing activity through various schemes. Numerous incentives, subsidies, easier credit access, and other benefits must be enshrined in the Budget to handle the loss caused by the pandemic. Everyone is also looking at the banking sector to easy credit policies and allow businesses to thrive. It is also expected that the government would refrain from changing the basic structure of tax rate to give more stability to the entire system.

(Rajat Mohan is a Senior Partner at AMRG & Associates. The views expressed by the author are his own.)