What to Expect from the Budget 2021- Tax Implications?

Ashish M. Shaji

29 Jan, 2021

With the Covid-19 pandemic raging through 2020 and considering the challenges and hardships caused due to the Covid-19 pandemic on the overall economy, the budget 2021 has become the most eagerly awaited annual policy announcements from the government.  With just a few days left, every individual is hoping for a budget, which leaves more money at their disposal.  In this article, we shall look at the expectations of the budget 2021.

Encouraging green field investments and easing liquidity in Budget 2021

• With a change in geo-political stand against China gives an excellent opportunity to India to attract overseas investments. The government should provide long term visibility in tax and regulatory frameworks to capitalize on overseas investments. With a view to increase the flow of investment, the government can consider introducing industry specific incentives, revisit SEZ benefits and provide concessional tax withholding rate for project funding in priority sectors.
•   As the country reeled with the pandemic last year, TDS (Tax deducted at Source) and TCS (Tax Collected at Source) rates were reduced by 25% from May 14, 2020, till March 31, 2021. These reductions in rates of TDS and TCS should continue for another year, i.e., until March 31, 2022 in order to provide enhanced liquidity. Another factor that can help in easing the cash flow burden of taxpayers could be a simple yet quick process of issuing refunds. 

Improved Utilization of Information and Technology

• In the digital scenario, we are in, the tax department requires accessing data from various sources like GST, customs, Bank, Global Transfer Pricing Database, and various other statutory portals. Rather than issuing a general questionnaire during tax assessments, there is a need for a more industry specific approach that can bring a lot more efficiency for revenue authorities and taxpayers.
• There is a need for more clear rules and regulations to be framed that can help in avoiding roving and exhausting questionnaires during the faceless assessment proceedings. While uploading the tax return, an option can also be provided of uploading appropriate notes to avert additional queries during the proceedings.
• During 2020, faceless tax assessments and faceless appeals were brought in. It may be a good move, but certain complex cases could need verbal explanations. Taxpayers should be given the option of uploading either audio or video explanations under the faceless assessments and appeals. It should be without any separate process of approval.

Furthering ease of doing business measures

• There is a need for reassessment guidelines to be streamlined as many cases get relitigated due to opinion change of the tax officers or due to internal audit queries. This can help mitigate unnecessary proceedings that create hardships to honest taxpayers. 
• There should be guidelines for unit tax officers that approach foreign jurisdictions for the exchange of information. An opportunity should be provided to taxpayers for providing clarification based on information from overseas jurisdiction prior to commencing any proceedings. This can help in reducing taxpayer’s apprehension.
• The period of MAT credit set off was extended to 15 assessment years vide 2017 budget, but there was no extension in case of tax loss. In Budget 2021, the government should consider extending time limits for set off of tax losses.
• The ambit of TCS provisions were widened from FY 2020-21 in order to include all sale transactions beyond 50 lakhs rupees within India. considering the challenges, the government should increase the threshold for TCS provisions applicability to aggregate transaction value of beyond 2 crore rupees.  

Realignment of income slabs/tax rates in Budget 2021

• In case of individual taxpayers below the age of 60 years, the income tax exemption limit is 2.5 lakhs rupees per annum. The limit has been unchanged from the last few years. Budget 2020 provided some relief to taxpayers by permitting them to choose among existing tax regime and an alternative optional new tax regime.
• The new tax regime had lower rates, but the benefit to taxpayer was the deductions/exemptions otherwise he or she was eligible to. Therefore to simplify it further and to enhance the net disposable income, it can be considered if the basic exemption limit under the existing tax regime can be raised to 5 lakh rupees itself. It would be required to assess the potential number of taxpayers who could fall out of the mandatory tax return filing requirement. 

Housing Tax Breaks

• With a view to reigniting the momentum in the real estate sector, the government can consider enhancing the standard deduction of 30% of net annual value to 50% and or enhance the present limit of deduction for interest payable on housing loan on self occupied properties to 4 lakh rupees per annum.

Personal Taxation

• On the lines of personal taxation, the government can consider providing special deduction for Covid-19 medical treatment in budget 2021, also increase the standard deduction, section 80-C deduction and also revisit the tax slab.
• Presently there are a few deductions under Chapter VI-A of the Income Tax Act 1961^[1] for medical treatment of self or dependent suffering from disability or severe disability, medical treatment of prescribed diseases and ailments.

Conclusion

The government, through budget 2021, should take some proactive steps by providing certainty and visibility to taxpayers by clearing the air on ambiguous provisions, which can help in boosting the confidence of taxpayers and also reduce litigation, which is a major roadblock for timely revenue collection.

Read our article:Income Tax Changes to be expected in Budget 2020-2021