Union Budget 2021: Hope Nirmala Sitharaman is able to reverse economic downturn caused by COVID-19

The economy appears to be recovering from the financial turmoil caused by the COVID-19 pandemic. While there is no certainty on how things will eventually pan out over the next few months, the finance minister’s promise of a ‘never before’ like Budget has fuelled expectations towards significant reforms aimed at reviving the economy.

From a direct tax perspective, the general trend of Budget reforms over the past few years has been to rationalise tax rates, accompanied by phasing out of exemptions. The advent of the unprecedented pandemic may, however, force policymakers to rethink this strategy. This may present an interesting dichotomy – whether the government should continue with the same line of thinking of phasing out exemptions, or whether some key tax incentives be brought back or broadened, with a view to giving the economy a much-needed fillip.

Prime Minister Narendra Modi’s vision of Aatmanirbhar Bharat (self-reliant India) for combating the pandemic
through a series of policy measures coupled with income tax reforms has garnered significant attention.

One of the key expectations is that the upcoming Budget will bolster this initiative and stimulate growth.

At the minimum, the government is expected to focus on stepping up spending in priority sectors such as infrastructure, healthcare, etc. It may also be necessary for the government to mull over direct tax exemptions that have the potential to provide an impetus to the industry, some of which are as follows:

  1. Investment-linked deduction for installation of new plant and machinery to incentivise capacity
    building in the manufacturing sector
  2. Broadening the scope of deduction in respect of employment of new workforce (currently this
    deduction is available only in respect of employees whose salary is up to Rs 25,000 per month)
  3. Weighted deduction for expenditure incurred on research and development to promote the
    development of indigenous technology
  4. Tax holiday and incentives that will boost investment in sectors such as infrastructure,
    automotive, real estate, travel and hospitality, etc. that were heavily impacted by the pandemic
  5. Tax holiday for exporters located in Special Economic Zones (SEZs) in order to encourage export
    of domestically manufactured products

Another area that has generated significant traction in recent times is the Gujarat International Finance
Tec-City (GIFT City), India’s first smart city and international financial services centre (IFSC). With the
setting up of the IFSC Authority, regulations have been introduced over the past couple of months for
global in-house centres, banking and bullion exchange and draft regulations have been circulated in
respect of aircraft leasing.

The top asks include extending the period of tax holiday from the existing 10 years and exempting tax in the hands of shareholders in respect of dividends distributed by units located in GIFT city.

In a bid to incentivise household spending and stimulate demand, the Budget could introduce innovative tax incentives linked to consumption. For instance, the recent ‘LTC Cash Voucher Scheme’ permits employees to claim tax exemption in lieu of leave travel allowance by purchasing qualifying goods and services carrying GST rate of at least 12 percent, subject to conditions.

Tax benefits on these lines would clearly be in line with the ‘never before’ theme of the upcoming Budget.

There is also high expectation amongst taxpayers for rationalisation of the personal taxation regime, in order to enable the common man to mitigate the financial burden pursuant to the pandemic. In this respect, a deduction for COVID-19 related medical expenses may be a welcome move.

Another viable option may be to increase the amount of standard deduction to cover medical as well as work-from-
home-related expenses such as internet charges, furniture, etc.

On the digital taxation front, a much-awaited clarity is needed on equalisation levy on the online supply of goods or services by non-resident e-commerce operators, in relation to the scope of the provisions, potential double taxation, etc.

To conclude, the upcoming Budget is geared to be a pivotal moment in determining the future of the Indian economy. The government will hopefully be successful in its endeavour to reverse the economic downturn induced by the pandemic and enable India to continue its journey as one of the fastest-growing economies of the world.

The author is Partner, Deloitte Haskins and Sells LLP. Rukhshana Patwa, Manager, Deloitte Haskins and Sells LLP also contributed to this article

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