The tax measures outlined in the Budget 2021 had the stated objective of providing greater clarity and making India’s tax regime transparent and efficient.

“Doing the right things at the right time is the rope which binds the wealth, making it boundless.” India’s Economic Survey 2020-21 quoted Chapter 49, verse 482 of the Thirukkural—a noted classic Indian text from Tamil Nadu—as the preface to its survey findings. India’s Finance Minister, Nirmala Sitharaman seems to have taken a cue when she announced the Budget for the financial year April 2021 to March 2022. The Budget was widely anticipated as an opportunity to reset the economy to its earlier growth trajectory. The Finance Minister did not disappoint!

The Finance Minister ushered in a slew of reformative measures; however, she exercised restraint when it came to increasing tax rates. Instead, measures such as disinvestment and land monetisation have been banked upon to narrow the staggering fiscal deficit gap of 9.5%.

On the tax front, amendments introduced are largely towards the government’s stated objective of providing greater clarity and making India’s tax regime transparent and efficient, with a view to promoting investment and employment.

An exemption under Section 10 (23FE) was introduced in last year’s Budget in order to encourage Sovereign Wealth Funds and Pension Funds to make investments in the infrastructure sector of India. In order to address the difficulties faced by the industry while availing exemptions, the Budget has provided certain relaxations in the conditions for availing 100% tax exemption (such as prohibition on loans or borrowings, restriction on commercial activities, direct investment in entity owning infrastructure, etc). These conditions shall serve as relief to the investment funds by reducing practical difficulties, and thereby provide an overall push to the infrastructure sector.

In order to make the International Financial Services Centre (IFSC) more attractive, the government has provided for tax incentives for units located in the IFSC. Considering that the IFSC was established in the recent past, to make the establishment more attractive, additional incentives have been provided in Budget 2021. To be eligible for the incentive, the unit has to commence operations before March 31, 2024.

The income arising to such units shall be exempted to the investment division of offshore banking units to the extent attributable to the unit established in IFSC. The law also exempts the income of a non-resident by way of royalty, on account of aircraft leasing paid by such unit. Further, the law also exempts any income of the nature of capital gains arising or received by the non-resident, which is on account of share of a company resident in India by the resultant fund and such shares were transferred from the original fund to the resultant fund in relocation (only if the tax was not chargeable even before relocations).

Further tax holidays and exemptions on capital gains pertaining to startups have been extended by another year.

The world over, digital tax has been a hotly debated topic. India had significantly expanded the scope of its equalisation levy in the previous fiscal year. In the current Budget, the government has sought to provide clarity on the levy by restricting its scope on income streams already categorised as royalties or fees for technical services and adds certain clarifications with respect to the nature of activities. Simultaneously its scope has been expanded to cover various online activities such as: (i) acceptance of offer for sale, or (ii) placing of purchase order, or (iii) acceptance of the purchase order, or (iv) payment of consideration, or (v) supply of goods or provision of services, partly or wholly.

To bring tax certainty in respect of payments made to FIIs, tax required to be deducted at source is proposed to be restricted to the lower of 20% or the rate prescribed in the treaty. Such clarification is in line with the Supreme Court judgment issued last year.

Advance Rulings allow non-resident taxpayers to minimise the risk of attracting penalties by ascertaining their taxability. This is especially useful in terms of technical advancements which may cause some ambiguity with regard to older laws. Of late, however, the Authority for Advance Rulings (AARs) had drawn severe criticism on account of a lack of timely decisions and contradictory rulings. The AAR is now proposed to be replaced by a Board of Advance Rulings, signifying an overhaul of the process. The decisions of this body are not binding, and a right to appeal to the relevant High Court has been provided. The income-tax department will also be able to appeal these decisions in specified circumstances. This has the potential to encourage taxpayers to approach the AAR for timely pre-disposal of possible disputes, unclogging dispute resolution.

Further to the government’s commitment to ease compliance, reduce litigation and simplify the tax regime, several proposals have been tabled. Notably, the invoking of re-assessment provisions has been reduced from six years to three years, and the first audit after filing of tax returns is expected to be completed within nine months from the end of the assessment year. Taxpayers will also be provided returns with pre-filled incomes from capital gains, such as dividends from listed entities and interest.

In the last fiscal, India launched its faceless audit and appeals scheme with a view to making the process seamless and objective. In further continuance, Sitharaman announced extending the scheme to Income Tax Appellate Tribunals as well. Like in the earlier scheme, a provision for video conferencing has been proposed on a need basis. Given the Tribunal is the ultimate fact finding body in the Indian judiciary mechanism, it will be interesting to see how the tax world reacts to this.

The exemptions provided and changes made this year can go a long way in encouraging not only easier compliance, but also speedy disposal of disputes. These align well with India’s stated goal of being at the forefront of foreign investment and becoming a $5 trillion economy by 2025.