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India’s 2021 budget promises to reduce tax litigation

Finance Minister Nirmala Sitharaman

Indian Finance Minister Nirmala Sitharaman announced in her 2021 budget that the Income Tax Appellate Tribunal will become faceless and the Authority for Advance Rulings will be replaced to expedite tax cases.

Sitharaman promised on February 1 to simplify tax administration, ease compliance, and reduce litigation over the coming year.

“It has been the resolve of this government to reduce litigation, which mars the present taxation system,” she said while presenting her budget proposals to Parliament on February 1.

After introducing faceless assessments and appeals, Sitharaman said the next step is to do the same with the Income Tax Appellate Tribunal.

“We shall establish a National Faceless Income Tax Appellate Tribunal Centre,” she said. “All communication between the tribunal and the appellant shall be electronic. Where personal hearing is needed, it shall be done through video-conferencing.”

Rakesh Nangia, chairman at Nangia Andersen, said a “faceless ITAT” could extensively speed up the rate at which disputes are resolved. “Apart from saving time and costs, this measure would bring in more transparency and reliability in the Indian taxation system,” Nangia said. However, much like the administrative strain of faceless assessment, Nangia points out that “appellants may find it difficult to justify claims, argue and counter argue their cases merely by way of written submissions made electronically.”

In addition, the Authority for Advance Rulings will be replaced and an interim “Board for Advance Rulings” will be established to deal with pending cases. The finance minister said this will “ensure” a “faster disposal of cases”. The move will also allow taxpayers to appeal against orders issued by the Board to the High Court.

In another welcome change for many international businesses, Sitharaman has proposed changes to the minimum alternate tax (MAT) provisions.

Taxpayers whose MAT liability had arisen in the year of repatriation because of an advanced pricing agreement (APAs) or secondary adjustment, will be able to gain relief by aligning the MAT liability with the taxable year of such income. To achieve this, the taxpayer will need to make an application to the assessing officer, but the process of doing this is yet to be provided.

To offer tax certainty to taxpayers, the finance minister also proposed reducing the time period to re-open an income tax assessment from six years to three years. For serious tax fraud cases, where tax evasion of INR 5 million ($68,400) or more in a year is suspected, the timeframe remains at 10 years, but can only be reopened after approval of the Principal Chief Commissioner, the highest level of the Income Tax Department.

In addition, to further incentivise digital transactions and reduce the compliance burden, the finance minister has proposed increasing the limit at which accounts have to be audited from a turnover exceeding INR 0.5 million to INR 1 million.

Meanwhile, for small businesses with a taxable income up to INR 5 million and disputed income up to INR 10 million, a dispute resolution committee will be established to take advantage of faceless dispute settlements. This builds on the vivad se vishwas scheme, which Sitharaman said has been used by more than 10,000 taxpayers to settle tax disputes worth more than INR 850 billion.

Other proposals to the direct tax regime for companies included:

  • Dividend payments to real estate investment trusts and infrastructure investment trusts will be exempt from tax deduction at source (TDS) rules. Further, the advance tax liability on dividend income will arise only after the declaration/payment of dividends, while foreign portfolio investors will now be able to benefit from the lower dividend tax rates in double tax treaties;

  • To make India's first international financial services centre (IFSC) a global financial hub, companies operating in the Gujarat International Finance Tec-City (GIFT) will receive a tax holiday for capital gains for aircraft leasing companies, tax exemptions for aircraft lease rentals paid to foreign lessors, a tax incentive for relocating foreign funds in the IFSC, and a tax exemption for the investment division of foreign banks located in IFSC; and

  • Conditions allowing foreign investments in the infrastructure sector to benefit from a 100% tax exemption will be relaxed.

Audit changes to GST regime announced

Many changes were anticipated to India’s goods and services tax (GST) regime, but there were fewer proposals than expected.

Most notably, in line with recommendations made by the GST Council, the mandatory requirement of getting annual accounts audited and submitting a reconciliation statement will be removed.

On the equalisation levy, the government intends to clarify that transactions taxable under income tax are not liable for equalisation levy. There will also be more clarity on whether the equalisation levy applies to the physical/offline supply of goods and services. This will be a relief to foreign e-commerce operators supplying digital services to Indian consumers that were unclear whether transactions fell under the scope of “online sale of goods” or “online provision of services” under changes introduced in 2020.

The bigger indirect tax proposals came in the form of changes to customs duties and measures to support manufacturing and trade. This is in line with the government’s mission to facilitate easy access to raw materials and exports of value added products.

Towards this goal, more than 400 old exemptions will be reviewed this year to determine if they should remain or not. In addition, numerous customs duties will be reduced or cut to help manufacturing businesses, such as telecommunications, iron and steel, chemicals, gold and silver, and textiles.

“We will conduct this through extensive consultations, and from October 1 2021, we will put in place a revised customs duty structure, free of distortions,” said Sitharaman. “I also propose that any new customs duty exemption henceforth will have validity up to March 31 following two years from the date of its issue.”

There was almost no mention of pro-environmental measures, except a pledge to build up domestic capacity for renewable energy. A phased manufacturing plan for solar cells and solar panels will be published. Until then, to encourage domestic production, the duty on solar investors will rise from 5% to 20%, and on solar lanterns from 5% to 15%.

The business tax measures seemed surprisingly optimistic for a post-pandemic budget statement, although most measures were focused on domestic businesses.

However, the country’s fiscal deficit in 2020-21 is pegged at 9.5% of GDP. The governments intends to reduce this to a fiscal deficit level below 4.5% of GDP by 2025-2026. This will likely mean a tougher stance on tax, although the finance minister only alluded to this prospect, saying the government will increase “the buoyancy of tax revenue through improved compliance” and the “monetisation of assets”.

For now, companies will have to take solace in knowing the government it keen to rid itself of its litigious reputation.

Photo copyright: Press Information Bureau

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