Some of the key initiatives were deferral of Insolvency & Bankruptcy Code, 2016 (IBC), announcement of Atmanirbhar package, procedural relaxations. While normalcy is returning slowly, all eyes are now set on the forthcoming Budget on what measures it may take to incentivise investment and propel growth.
Faced with the additional expenditure due to the pandemic and the immediate need to look at mechanisms to raise tax revenue, the Finance Minister should consider not going down the path of levying additional cess, which may later be considered as an incremental tax rate for a longer period.
Today, India is focusing extensively in promoting foreign investments via brownfield and greenfield routes. Thus, it may be imperative to bring in changes that can promote foreign investment flow into India and boost sentiments of foreign investors.
India is projecting itself as an alternate manufacturing destination to China, as businesses now prefer multiple manufacturing locations to hedge supply-chain risks and at the same time be closer to customers. While the government took some major steps and reduced the corporate tax rates significantly through the Taxation Ordinance, the logical next step could be to rationalise the tax rates across different forms of enterprises including limited liability partnerships. Foreign companies proposing to have India presence are also seeking out lower tax rates on branch offices, which continue to be taxed at a significantly higher rate of 43.68 per cent compared with the reduced corporate tax rate of 25.17 per cent.
With an aim to further strengthen the ‘Atmanirbhar’ program, the government may consider bringing back certain incentives in the form of additional depreciation even where concessional tax regime of 15 /22 per cent has been opted by taxpayers.
Further, considering the fast pace of change in technology and the new work-from-home culture, there should be an additional incentive for companies that are looking at upgrading their infrastructure. These measures added with the proposed the production-linked incentives will make India an attractive destination and can take advantage of the moving supply chains.
Any nation that strives to be a leader in manufacturing cannot go without a strong research & development (‘R&D’) program. To give an additional incentive to the ‘Make-in-India’ program, a renewed tax incentive package for indigenous R&D should be introduced. The incentives may be in the form of weighted deduction on expenditure, accelerated depreciation on capital assets, tax holidays etc. Owing to the availability of technically sound manpower at a low cost which is aided by tax incentives, India can become a leading R&D hub.
With many sectors hit severely by the pandemic, there is increased focus on tax loss utilisation for mitigating future tax outflow. Restricting the carry forward of losses in a merger to only industrial undertakings, as are the extant tax provisions, do not fit in with the business realities.
Similarly, Section 79 of the Income-tax Act, 1961 — which restricts loss carry forward in case of a change in shareholding (including intra-group transfers) — requires a serious relook. While exemption from Section 79 of the Act may be claimed in case of takeover of company under IBC, there is a complete lapse in any other case considering IBC provisions are currently suspended. Hence, the buyer loses a significant advantage while trying to turn around a business. With the introduction of general anti-avoidance rules that can curb tax-abusive structures, Section 79 has outlived its term.
To further enhance ease of doing business, the government may consider bringing a tax group system (prevalent in other countries), wherein losses and profits of a single group of entities are aggregated together, thereby improving tax outflow and creating a larger surplus for reinvestment.
Additionally, the government may also consider suspending Section 94B of the Act (i.e. thin capitalisation rules) for a temporary period to ensure that the companies are adequately funded without any impact of any interest claim deductibility.
Another unrelated, but important, aspect is stamp duty which is a significant consideration for all internal and third-party restructuring. At present, each state taxes such transactions as per its own legislation. Thus, there is a requirement to align the stamp duty rates as was done for share issuance and share transfer via Finance Act, 2019.
(Prashant Kapoor is Partner – M&A Tax, and Akshay Srivastava Manager- M&A Tax, at KPMG in India. Views are their own)