The Finance Minister of India, Nirmala Sitharaman, presented the Annual Union Budget for 2021-22 on the 1st of February, 2021. This Budget is a significant statement of government policy. The Budget this year introduced new non-tariff barriers to protect domestic industry and incentives to attract investments, and relaxed some of the indirect tax provisions which hamper India as an attractive investment destination.
With the effects of the global pandemic on the Indian economy, it is not surprising that there was a contraction in India’s economic growth. However, India is still set to become the fastest growing economy according to data released by the International Monetary Fund. Despite the pandemic induced economic crisis, flow of foreign investment into India has been the highest with inflows of upwards of $45 billion dollars in 2020. The economy is also recovering strongly at the moment and is expected to grow by 15.4% in 2021-22, even with the contraction in the GDP in 2020-21.
With this backdrop in mind, expectations for the budget were to provide incentives to help the aid the recovery of the economy post the pandemic induced crisis, and to reduce the compliance burdens imposed on taxpayers.
Key highlights of the Union Budget 2021-22
Major Reforms under the Companies Act
- A single and rationalized Securities Markets Code to be set up, by consolidating provisions of SEBI Act 1992, Depositories Act 1996, Securities Contracts Regulation 1956 and Govt. Securities Act of 2007: The consolidation of securities laws, existing decriminalisation of offences under the Companies Act and the proposed decriminalisation under the LLP Act marks an important move towards making Indian corporate legal framework, simpler, business friendly and will help in reducing compliance costs. The securities market code introduced is in line with previous discussions on the NFRA. It marks a step towards streamlining the multiple laws, ordinances, guidelines and regulations. If drafted and executed in a proper manner, it will be helpful to market participants and remove any possible conflicts in the regulatory framework and will provide clarity in policy making to investors and stakeholders.
- Decriminalisation of offences under the LLP Act: The proposal for the decriminalisation of offences under the LLP Act is an important step, to protect stakeholders from unnecessary litigation, and will provide level playing field to the form of entity, given the broader benefits otherwise available to LLPs.
- Status of one-person companies: One person company will now be permitted with relaxed conditions, and this will also motivate entrepreneurs to have a corporate structure with limited liability, and will also help start-ups and early-stage ventures. To incentivize incorporation of such companies, they 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.
- Asset Reconstruction Company Ltd. to be set up to consolidate and take over existing stressed debts and manage and dispose of assets for eventual value realization.
- Definition of small companies under Companies Act 2013 to be revised Companies with paid-up capital up to 2 crores and turnover up to 20 crores will fall under small companies, benefiting more than 2 lakh companies in compliance required.
- To set up a system of regulated gold exchanges in the country, SEBI will be notified as to the regulator and Warehousing Dev. and Regulatory Authority will be strengthened.
Disinvestment
- Despite the effects of the COVID-19 pandemic, the government has been working towards creating a strategic disinvestment policy for India. It is announced that nearly 1.75 lakhs crores is expected as the receipt for disinvestment of PSUs.
- In FY 2020-21, it is proposed that the transactions for BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam limited, etc. would be completed. Further, IDBI Bank and two other public sector banks and one general insurance company will also be privatized in FY 2021-22. The Initial Public Offer for Life Insurance India has also been slated for FY 2021-22.
- The Disinvestment Policy has been approved by the Houses of Government. The Policy has the following objectives:
- To minimize the presence of the Central Government in the Public Sector Enterprises and to create new spaces for the private sector.
- To initiate economic growth among PSUs, financial institutions with infusion of private funding, technology, and management practices.
- That the proceeds from the disinvestment will help finance various social sector developments.
- The policy will cover existing Central PSUs, Public Sector Banks and Public Sector Insurance Companies. Certain sectors will be classified as strategic sectors such as atomic energy, space, defence, transport, etc. while certain other sectors will be non-strategic sectors. In these strategic sectors, there will be very minimal presence of PSUs and the Central PSUS in such sectors will be privatized, merged or subsidized.
- In strategic sectors, there will be bare minimum presence of the public sector enterprises. The remaining CPSEs in the strategic sector will be privatized or merged or subsidized with other CPSEs or closed. e) In non-strategic sectors, CPSEs will be privatized, otherwise shall be closed.
- NITI aayog will be releasing the next list of Central PSUs that can be taken up for strategic disinvestment. A central fund will also be announced for States to incentivize disinvestment of PSUs in different States.
- Further, non-core idle assets such as surplus land lying with ministries, departments and PSUs will be monetized by either direct sale, concession, or other means. To do the same, a special purpose vehicle will be created in the form of a company.
Changes in Direct Tax
Exemption from Filing income tax for senior citizens: Senior Citizens above the age of 75 years who only derive income from pension and interest, will be exempted from filing income tax returns. Such individuals will have to furnish declarations from their bank who will then compute the income for the senior citizens and deduct their income tax accordingly.
Non-resident Indians: Rules will be notified for the taxation of income of NRIs that accrue to the foreign retirement benefit account. This will be done to reduce the problems of double taxation that is currently faced by NRIs.
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 up to 4 years from the relevant assessment year for cases involving INR 1 lakhs, and upto 6 years from relevant assessment year for cases involving amounts greater than INR 1 lakhs.
This time limit 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.
Leave Travel Concession: A tax exemption will be provided to individuals for the amount given to employees in lieu of Leave travel concession. This exemption has been introduced due to the conditions caused by COVID, and is allowed to reduce burdens for individual tax payers.
Relief for Dividends:
- Payment of Advance Tax: In order to provide some relief, the advance tax liability for dividend shall only rise after the declaration or payment of dividend. This measure has been added to insulate tax payers from payment of interest under section 243 of the income tax, in the event that advance tax cannot be accurately determined. Now, the liability shall only arise once the dividends have been declared providing some relief for taxpayers.
- REITs and Investment Trusts: Dividend paid to real estate investments trusts (REITs) or investment trusts will be exempt from having to pay TDS.
- Minimum Alternate Tax: The dividend payment will be exempted from the levy of MAT for foreign companies provided that the applicable tax rate is less than the rate of MAT.
Incentives for Affordable housing: In FY 2020-21, a tax holiday was proposed for affordable housing projects to incentivize such projects in India. The budget announces that this holiday can be availed for one more year till 31st March 2022. Further, a new tax exemption will be notified for Affordable Rental Housing Projects.
Start Ups: A tax holiday had been announced for start-ups, to incentivize setting up more startups in India. Start-ups can continue to avail this tax holiday for one more year till 31st March 2022. To create further investments in start-ups it has also been announced that the eligibility period to claim capital gains exemptions has also been extended by one year till 31st March 2022.
Exemption from Audit Reports: To reduce compliance burdens and incentivize non-cash payments, it has been announced that taxpayers fulfilling the following conditions will be exempt from auditing their accounts:
- If they undertake 95% of their transactions digitally, and
- have turnover or gross receipts less than 10 crores
Tax incentives for Disinvestment of PSUs:
- Carry forward of losses will be permitted for disinvested public sector undertakings in amalgamation.
- Transfer of assets by a public sector undertaking will be considered a tax neutral demerger.
Charitable Trusts:
- 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.
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. These conditions shall now be further relaxed to reduce compliance burdens. The conditions which are proposed to be relaxed include prohibition on loans or borrowings, restriction on commercial activities, direct investment in entity owning infrastructure, etc.
International Financial Service Centres: The following tax incentives have been introduced for IFSCs:
- 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 and
- Tax exemptions to investment division of the foreign banks located in IFSC.
E-Commerce: In FY2020-21, a new equalization levy had been introduced for e-commerce entities. It has been clarified this year that equalization levy shall not be levied on transactions which are already taxable under the Income Tax Act. Foreign entities can also avail further benefits under the double taxation agreements.
Dispute Resolution Related Reforms
- Faceless ITAT: As part of the process of creating a more transparent taxation system the Income Tax Appellate Tribunal shall become faceless and jurisdiction-less. A National Faceless Income Tax Appellate Tribunal Centre will be established and all the communication between the Tribunal and the appellant shall be made electronically.
- Dispute Resolution Committee: To reduce litigation and burdens for small taxpayers, a Dispute Resolution Committee is proposed to be constituted. Taxpayers having taxable incomes of 50 lakhs, and disputed incomes of 10 lakhs will be allowed to approach the committee. The current Settlement Committee will be discontinued from 1st February 2021.
- Advance Ruling Board: The Authority for Advanced Rulings will be replaced by the Board for Advanced Rulings to ensure faster disposal of cases. The appeal from such orders will lie with the respective High Courts.
Indirect Tax Reforms
Customs Duty:
- Several provisions are being amended in the Customs Act, 1962 to reduce compliance burdens, increase tax compliance, and to reduce dwell time and increase trade facilitation. Several duty rates and tariff changes have also been announced.
- With a focus on improving local manufacturing, several outdated exemption from the Customs Act have been removed in 2020. In FY 2021-22, it is proposed that over 400 exemptions will be reviewed, and a new customs duty structure will be introduced later this year. The revised duty structure shall be streamlined and up to date, to reduce any additional compliance burdens.
- Several customs duty revisions have been announced to boost the MSMEs, which have been badly hit by the pandemic.
Goods and Service Tax: The following changes have been announced in relation to the goods and service tax:
- 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.
- Several measures for improving compliance have been announced such as: availing of input tax credit only when the details have been furnished by the supplier in the statement of outward supplies, validity of provisional attachment for a period, etc.
- Certain other changes related to search and seizure to be notified.
While the Union Budget for FY 2021-22 has not been as explosive for tax proposals as compared to FY 2020-21; it has introduced measures to reduce compliance burdens for both individual and corporate tax payers. The new announcements also safeguard the interests of foreign investors. With the extension of tax exemptions for investment in infrastructure and other important sectors and the revision of sectoral FDI caps, India will continue to be a favored destination for foreign investment in 2021-22.
FDI in insurance:
FDI in insurance from 49% to 74% is a key change, and this will help bring in more investments to scale up business in India. Prior to this change, insurance companies had to be Indian owned and controlled, and with the change foreign ownership and control will now be permitted with safeguards. There is also a proposal to have sufficient number of independent directors, given the sensitivity of the sector. Will help boost the sector particularly given the pandemic and the likely inclination for more insurance cover. FDI in insurance intermediaries has already been permitted upto 100%, so this was an expected next step to provide an effective stimulus for the sector.
Health Care:
- The Indian Government has allocated Rs. 35,000 crore for the Covid vaccine as a separate line item.
- A new centrally sponsored scheme 'PM Aatmanirbhar Swastha Bharat Yojana' will be launched with an outlay of Rs 64,180 Crores over 6 years.
- Urban Jal Jeevan Mission (for AMRUT cities) outlay: INR 2.87 lakh crores.
Banking and Finance:
- For investor protection, Investor Charter as a right of all financial investors across all financial products to be introduced.
- A permanent institutional framework to set up, to instil confidence in corporate bond market participants during times of stress and enhance secondary market liquidity.
- Minimum loan size eligible for debt recovery under SARFAESI Act 2002, to be reduced from 50 lakh to 20 lakh, for NBFCs with minimum asset size of 100 crore.
- Deposit Insurance Cover for bank customers to be increased from 1 lakh to 5 lakh, provision to be streamlined to enable depositors to get access to funds within insurance cover limit
Infrastructure:
- The budget has given a strong signal for infrastructure development focusing on actualizing the ambitious national infrastructure pipeline targeting an investment of Rs.111 lakh crores over 5 years. The signal comes from the announced budgetary allocations and decisions with announcement to tap into budgetary resources of PSUs and wide-ranging InvITs monetising assets in highways, power transmission, gas pipelines, dedicated freight corridors, airport.
- Government aims to complete 11,000 km of National Highway Infrastructure this year.
- 3800 km of Highway constructed under Bharat Mala. Another 8500 km is expected to be constructed by March 2022. Total 11,000 km National Highway targeted under Bharat mala, 1,18,000 crore allotted to MORTH.
- A record sum of 1,10,055 crore for Indian Railways, of which 1,07,100 is for capital expenditure only
Piped Natural Gas (PNG): Independent Gas Transport System Operator to be set up, for facilitation and coordination of booking of common gas carrier capacity, in all-natural gas pipelines, on non-discriminatory and open access basis.
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Ujjwala scheme to cover 1 crore more beneficiaries
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100 more districts under city gas distribution network
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Independent gas transport system operator to be set up
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Bill to set up a DFI will be introduced
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