Budget 2021: Taxpayers eye relief in income tax, slash in TDS, increase in 80C limit, among other reforms

By Amit Singhania

Indian Union Budget 2021-22: In the midst of an economic slowdown induced by the ongoing pandemic, the Hon’ble Finance Minister must grapple with the challenging task of encouraging consumption for economic revival against our peaking fiscal deficit in the upcoming Union Budget, 2021. Tax proposals will play a key role in this balancing act.

To begin with, the Government is likely to focus on the basics, for giving relief on the personal income tax front. For instance, the Government may consider continuing the reduced TDS rates by 25% for another fiscal year to ensure extra liquidity. Additional relief in the form of special deductions for COVID related health expenses would be a welcome step too. Other measures, such as increasing the basic exemption limit or increasing the threshold of section 80C deductions under the Income-tax Act, could also encourage saving and ensure more spending money in the hands of individual and HUF taxpayers.  

READ BUdget 2021 Income Tax Live Updates

A fillip is also required for the pharmaceutical and health sector that has been working relentlessly in the pandemic. Weighted deductions for expenditure incurred on research and development activities for developing a viable and effective vaccine may make a comeback. Deductions for capital expenditure incurred towards developing infrastructure and supply chain for storage, dissemination, and application of vaccines and other essential medical products will be welcome. The current deduction for capital expenditure incurred towards building and operating a hospital with at least 100 beds should also be allowed to smaller facilities to build medical infrastructure. Likewise, to encourage spending on training and hiring of skilled healthcare professionals, the current deductions for hiring new employees under section 80JJA could be increased from 30% to 50%. This could be coupled with raising the threshold of total emoluments of such additional employees. Such measures will help build capacity and address the growing rate of unemployment due to loss of jobs during the economic slowdown. 

Also Read: Union Budget 2021 Live Updates

The Government could consider allowing deductions on CSR spends, making COVID vaccines available to employees and related causes. They could also consider permitting tax deductions to encourage corporate spending on health related charitable and philanthropic causes.  

Besides the incumbent need to reign in COVID related amendments, a slew of rationalizing measures in the corporate tax space are also recommended by industry stakeholders. Headline tax rates for LLPs should be brought at par with most companies now enjoying an effective tax rate of 25.6% sans deductions. Similarly, alternate minimum tax provisions should be done away with, for such LLPs. Further, extending the presumptive taxation regime under section 44AD to LLPs could help bring them at par with resident companies and partnerships. 

Relaxing of restrictions such as turnover thresholds for tax neutral conversion of a company to an LLP will also be welcome. In the same spirit, conversion of sole proprietorship and partnership firms to company, and conversion of company to LLP which are considered tax neutral from a capital gains standpoint should be included as exceptions to Section 56(2)(x). As an additional measure, allowing losses to be set-off for an additional period beyond 8 years could help in reviving businesses, especially SMEs reeling with losses and business disruptions due to the pandemic.  

Additionally, the Government could consider reducing the holding period from 36 months to 24 months for affording favorable long-term capital gains treatment on transfer of real estate assets to encourage real estate activity. Similarly, holding period for ReIT units listed on Indian stock exchange should be reduced from 36 months to 12 months in line with listed equity shares to incentivize investment. Some tax sops in the start-up space would also help induce growth.     

It would also be expedient for the Government to introduce measures to increase tax collections while easing compliance for taxpayers. In this direction, Vivad se Vishwas Scheme, 2020 has already seen a tax collection of over INR 75 thousand crores. Extending the scheme beyond the current January 31, 2020 deadline will only aid further tax collections while reducing the pending litigation at various forums. 

As an additional measure, with faceless appeals to be implemented soon, the Government could consider introducing a reasonable limitation period on the adjudication of cases at the first appellate stage, where appeals remain pending for long periods of time. 

Needless to say, a lot rides on Union Budget 2021 as it will set the tone for India Inc.’s trajectory for the next decade.        

(Amit Singhania is Partner & Suyash Sinha, Senior Associate at Shardul Amarchand Mangaldas & Co. Views expressed are the author’s own.)tax