While the year 2020 was hard on the global and Indian economy, it has pushed India to introduce measures to ease doing business, and reduce compliance burdens placed on corporate players. India has been committed to easing business compliances for years now, and according to the ‘Doing Business in 2020’ World Bank Report, India placed 63rd out of 190 countries in the ease of doing business rankings. This placement is a jump of nearly 79 positions in a matter of 6 years from 142nd in 2014.
Several measures have been introduced to make doing business in India more attractive to foreign investors. These measures have comprised from abolishing the dividend distribution tax, decriminalizing various civil offenses, and introducing new tax exemptions and incentives. India also has one of the lowest corporate tax rates in Asia and ASEAN with a base corporate tax rate of 22% (15% for specific manufacturing companies). The Union Budget of 2021-22 has also introduced several key measures to liberalize doing business in 2021.
The following measures have been introduced to reduce compliance burdens and increase ease of doing business for foreign investors:
Corporate Measures:
1. Relaxation of incorporation of One Person Company: The compliance requirements for incorporation of one person companies have been significantly reduced. One person companies will be permitted to set-up with relaxed conditions. The residential status required for directors of one person companies has also been relaxed from 182 days to 128, and non-resident Indians will also be allowed to incorporate one person companies.
To incentivize incorporation of one-person companies, such companies will be allowed to grow without any restriction on paid-up capital or turnover and to convert into any other type of company at any time.
2. Compliance Burden Portal: India has also launched a new regulatory compliance burden portal that aims at reducing compliance burdens for corporate players and individuals. The portal will act as an online database for state and central compliance regulations, and will provide status updates on compliance requests. The move will help reduce compliance costs, reduce burden and incentivize the use of online interfaces.
3. Incentives for Start-ups: India has announced a 1000 crore start-up seed fund that will be distributed across a period of five years to over 3000 entrepreneurs in early stage start-ups. Further, several tax measures have also been announced. Start-ups can continue to avail a tax holiday, and a tax exemption for capital gains for one more year till March 2022.
4. Liberalisation of OSP Regulation: New guideline shave been introduced in 2020 to reduce compliance requirements in setting up BPOs/KPOs and ITeS in India to incentivize growth in the IT industry. Application services providing tele-marketing, tele-banking, tele-medicine, etc. are considered ‘other service providers’ (OSP) in India. Now, setting up such centres no longer requires registration with the Department of Telecommunication. Requirements of bank guarantees, rules on working from home, and the ambit of OSP regulation have all been reduced or done away with, to encourage growth in the industry.
5. Covid-Related Reforms: Several have been undertaken by India to reduce further burdens that may have been compounded by the Covid pandemic.
- Companies: Measures such as relaxations in requirements of holding board meetings, filing of compliance documents, and residential status of directors were introduced in 2020.
- Banking & Finance: Moratoriums on all term loans and working capital facilities was extended to all commercial banks, co-operative societies, all-India financial institutions, and NBFCs.
- Special Economic Zones (SEZs): SEZs provide various benefits to resident businesses such as tax incentives, duty free exports, and different tax exemptions. Due to the pandemic, several relaxations were allowed in filing of compliance reports such as Quarterly Progress Reports, SOFTEX forms, and Annual Performance Reports.
Tax Measures:
1. Abolishing Dividend Distribution Tax: The DDT has been abolished bringing relief to investors and tax paying companies alike. Replacing the dividend distribution tax is a dividend withholding tax, which will be at the rate of 10% for dividends declared to resident shareholders, and at 20% for dividends declared to foreign shareholders.
This is advantageous to foreign investors and companies as they may avail the benefits provided under the double taxation agreements. Further, foreign investors and companies may avail a lower withholding tax under the DTAs. The DDT is no longer payable for dividends declared after 31st March 2020, and the withholding tax came into effect on 1st April 2020.
2. Corporate tax rates reduced to the lowest in Asia: Since 2019, India has been committed to reducing the tax burden on corporate players. A new scheme had been announced which brings in reduced tax rates for different types of companies, if they meet specified conditions.
The tax rates found in India continue to be the lowest in Asia, as other countries have higher slab rates: Hong Kong (16.5%), Singapore (15%), Thailand (20%), Vietnam (20%), Malaysia (24%), Indonesia (25%), China (25%), South Korea (25%) and Japan (30.62%).
The corporate tax rate for domestic companies have been reduced to 22% from the erstwhile 30%, however lesser rates are also applicable for companies meeting certain conditions.
Corporates in India are taxed in the following ways:
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Type
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Tax Rates
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Domestic Companies involved in manufacturing
(Incorporated after 1st October 2019)
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Corporate Tax @15%
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Domestic Companies not claiming any specified deductions or exemptions
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Corporate Tax @ 22%
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Domestic Companies claiming specified deductions/exemptions with a turnover up to INR 400 crores
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Corporate Tax @ 25%
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Domestic Companies claiming specified deductions/exemptions with a turnover exceeding INR 400 crores
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Corporate Tax @ 30%
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A concessional rate of 15% for corporate tax will also be available for domestic companies engaged in the business of generation of electricity, subject to certain conditions. These slab rates have not been changed in 2021, and companies can continue to avail these benefits.
3. Reduction in Time Limit for Re-opening Assessments: According to section 148 of the Income Tax Act, assessing officers are allowed to re-open or re-assess previously filed tax returns of taxpayers if there is reason to believe that incomes have been concealed or not assessed. The time limit to open such cases was up to 4-6 years, and has now been reduced to 3 years immediately preceding the relevant assessment year. This time limit can only be extended in specific cases of serious tax fraud where the income escaping assessment is more than INR 50 lakhs, but the period is not more than ten years preceding the relevant assessment year. This will provide some certainty to investors and taxpayers, especially in light of the disputes surrounding the retrospective application of Indian tax laws.
4. REITs and Investment Trusts: In a move to incentivize investment in infrastructure and real estate, dividend paid to real estate investments trusts (REITs) or investment trusts will be exempt from having to pay TDS.
5. International Financial Service Centres: Various tax incentives have been announced for units located in IFSCs in a bid to incentivize investment and operations in the new IFSCs of India.
- A tax holiday for capital gains income for capital gains incomes of aircraft leasing company.
- Tax exemptions for aircraft lease rental paid to foreign lessor.
- Tax incentive for re-location of foreign funds in IFSC.
- Tax exemption for income accrued, arisen, or received by non-residents from transfer of non-deliverable forwards entered with offshore banking units.
- Tax exemption for capital gains arising from transfer of shares of a resident Indian company, if such transfer was from the original fund to the resulting fund in relocation.
6. Exemption from Audit Reports: An exemption from having to get audit reports was allowed for persons engaging in 95% digital transactions with gross receipts less than 5 crores in 2020. To reduce compliance burdens and incentivize non-cash payments, this exemption has been extended to cover persons with gross receipt of up to 10 crores, if:
- Aggregate of all receipts in cash during the previous year does not exceed five per cent of such receipt; and
- Aggregate of all payments in cash during the previous year does not exceed five per cent of such payment.
This move will significantly ease doing business for small business or business with less than 10 crore receipts.
7. Incentives for Affordable Housing: With intent to develop and incentivize the affordable housing industry in India, a tax holiday for affordable housing projects has been announced. This can be availed till March 2022. Similarly, a tax exemption for rental affordable housing projects will be notified.
8. Sovereign Wealth Funds and Pension Wealth Funds: In FY 2020-21, a 100% tax exemption was introduced for SWFs and PFs for investments in infrastructure in India. Such SWFs and PFs could be notified for such exemptions based on certain conditions.
Such conditions have also been further relaxed in 2021. An amendment has been brought in to allow limited commercial activities of the investees, allowing loans or borrowings by SWFs, and investments in AIFs, holding companies, etc.
9. Charitable Trusts: Some new measures have been introduced to reduce the problem of double deduction and inconsistency with taxation of the corpus amounts of charitable trusts. Mainly:
- Small charitable trusts running education trusts and hospitals with annual receipts less than 5 crores will be exempt from certain compliances such as obtaining approvals, etc.
- Charitable trusts will not be allowed to claim carry forward losses but the loan repayment and replenishment of corpus shall be allowed as application of income.
- It is proposed that the corpus donation should be exempted from taxation if the income is deposited or invested in one of the forms specified in the Income Tax Act. Further, application of income from such invested corpus would not be considered as taxable application of income under the Income Tax Act.
10. More Transparent Tax Litigation System: India has been committed to streamlining the tax litigation system to create a more transparent, robust, and fair system of redressal. Several measures to accomplish this have been recently announced:
- A new Dispute Resolution Committee has been announced to address matters for tax payers having taxable income of 50 lakhs and disputed incomes of 10 lakhs.
- The Authority for Advance Rulings has been notorious for long waiting periods and creating increased burdens for assesses. It has been announced that he Authority for Advance Rulings will be replaced by the Board for Advance Rulings to ensure faster disposal of cases. The appeal from such orders will lie with the respective High Courts. This move will help address the backlogged matters waiting rulings with the AAR now, and create a faster system for assesses especially for addressing issues of transfer pricing and advance purchase agreements.
- Faceless proceedings will be introduced at the Income Tax Appellate Tribunals. This measure will allow proceedings to be done electronically, and will ensure a faster redressal system.
11. Revised Custom Duties and Rules to Reduce Burden for Importers: To promote trade and ease compliance costs for traders, several relaxations and reforms have been announced in regards to customs duty. Mandated filing of electronic bill of entry will be allowed so that clearance of imports will be process faster. Custom duties have been revised specifically to reduce costs and incentivize trade. A new customs duty structure for duties and exemptions will be introduced in 2021 after reviewing outdated exemptions and duties.
12. Reduction in Compliance Requirements under the Goods and Service Tax: India has announced few measures such as removing the mandatory requirement of getting annual accounts audited and reconciliation statement, filing of the annual return on self-certification basis and charging interest on net cash liability with effect from the 1st July, 2017, etc. intending to reduce heavy compliance requirements that have been imposed under the erstwhile GST law.
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