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Moving from 2020 - A Year of Challenges to 2021 - A Year of Hope and Revival

“There is a past which is gone forever, but there is a future which is still our own” Fredrick William Robertson

2020 will go down as a challenging year that shaped the economy for years to come. Set against the backdrop of a pandemic that encouraged social distance, the businesses were lead on a difficult path dotted with economic strain and financial troubles. The global economy crawled as the supply chain was interrupted due to the lockdowns. India has also borne the brunt of this pandemic, and while the situation may improve, the after-effects on the economy are still unprecedented. As it is rightly said, “it is the destruction after the storm, which is more difficult to revive than surviving the storm.”

While presenting the previous budget, the government had a vision of turning India into a USD 5 trillion economy. However, the pandemic seems to have made that goal even harder to achieve. All eyes are set on the finance minister as we head towards union budget 2021, which will set the tone for the economic revival for the decade to come. The budget is not just expected to provide new opportunities but also to handhold those who have suffered due to the pandemic.

Even before the pandemic struck us, India’s economy was slowing down, and the government had implemented a few unprecedented changes in the law for the Make in India project and taxing the digital economy. There were also a few key amendments in the GST and Customs law.

We have discussed below some of the major tax changes in 2020:

Changes made in 2020

Direct Tax

Concessional new corporate tax regime:

  • The corporate tax rate for manufacturing company was reduced to 15% whereas for other domestic companies was reduced to 22%;
  • The companies opting for the new regime have to give up on certain deductions/incentives.

This change would have a huge impact on the Make in India campaign as many MNC/Indian corporates would look at setting up a manufacturing facility in India.

Dividend Distribution Tax (DDT) was abolished:

  • DDT on the dividend distributed by domestic companies was abolished, shifting the tax onus on the shareholder;
  • Foreign companies/Non-residents liable to be taxed at 20% or the treaty provision for dividend

This move would help especially foreign promoters/ companies to avail concessional rate for dividend taxation under the Tax Treaty as against the DDT of 20%.

The scope of equalization levy was widened:

  • With effect from 1 April 2020, 2% equalization levy shall be paid by the e-commerce operator on considerations received or receivable by an e-commerce operator from e-commerce supply or services made, provided, or facilitated by it to:
    • An Indian resident
    • A non-resident in specified circumstances; or
    • A person who buys such goods, services, or both via an IP address located in India.

The digital tax was originally introduced to target tech giants operating in India. However, the law has been very widely worded and would cover a large base of taxpayers.

Vivaad se Vishwas Scheme:

  • The Vivaad se Vishwas Scheme was introduced to settle direct tax litigations pending before the Commissioner of Income Tax (Appeals), Income-tax Appellate Tribunal, High Court, or Supreme Court as of 31 January 2020, subject to certain exceptions prescribed for search cases, matters where prosecutions have been initiated, etc.;
  • The scheme allows the taxpayer to pay the amount in dispute without any litigation. The saving on penalty can be significant;
  • In light of the pandemic, the last date for making a declaration under the Vivaad se Vishwas Scheme has been extended to 31 January 2021, whereas the last date for making payment without an additional amount is extended to 31 March 2021.

As per media reports, it is estimated that INR 1 lakh crore disputed tax would be settled under this scheme.

Faceless Assessment

  • In 2020, the government had implemented the faceless assessment, where the revenue audit would be completed without physical hearings and in a faceless manner. The tax authorities in India have developed detailed guidelines for the same;
  • This could be a game-changer as the entire faceless litigation framework would have the potential for eliminating corruption, as special cells would ensure fair revenue audit.

Tax Collected at Source (TCS) on sale of goods:

  • Seller of goods liable to collect TCS at the rate of 0.1% (1% in cases where there is No PAN/Aadhaar), on the consideration received from a buyer in a previous year in excess of INR 5 million;
  • The exemption provided to sellers whose total sales/gross receipts/turnover does not exceed INR 100 million in the financial year immediately preceding the financial year
  • Applicability was deferred and implemented from 1 October 2020.

Withholding tax on e-commerce transaction:

  • Withholding tax of 1% (5% rate applicable in case of no PAN) on e-commerce transaction;
  • Withholding tax to be paid by e-commerce operator – a person who owns, operates or manages digital portal for goods and services facilitated online;
  • Exemption granted to e-commerce participant (being individual or HUF) whose turnover during the year does not exceed INR 5 lakhs and PAN/Aadhaar Number

Indirect Tax

Customs law/Foreign Trade Policy

Introduction of CAROTAR provisions

  • The Customs (Administration of Rules of Origin under Trade Agreement) Rules, 2020 (CAROTAR) were notified vide Notification No. 81/2020- Customs (N.T.) and made effective from 21 September 2020 for importers claiming a preferential rate of duty under any trade agreement;
  • The CAROTAR are in addition to the Rules of Origin, which have been already notified under various PTAs/FTAs, and intend to provide further powers to the Customs officials to inquire into imports where they have a reason to believe that the origin criteria has not been met.

Roll out of Faceless Assessment by Custom Authorities

  • CBIC rolled out the faceless assessment under Customs law, which allows assessing officer who is physically located in a particular jurisdiction to assess a Bill of Entry pertaining to imports made at a different Customs station, whenever such a Bill of Entry has been assigned to him in the Customs Automated System.

RoDTEP scheme to be made applicable on shipping bills filed from 1 January 2021

  • CBIC recently issued a press note announcing the implementation of the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme on the export of goods, which will replace the existing Merchandise Exports from India Scheme (MEIS);
  • Although the government is yet to notify the incentive rates under RoDTEP, exporters will be eligible for benefits in respect of shipping bills filed on or after 1 January 2021.

Goods and Services Tax

Interest on delayed payment of tax payable only on net cash liability

  • The government in August 2020 notified the much awaited amendment to Section 50 of CGST Act, whereby interest shall be payable only on the tax liability paid in cash, i.e., the net tax liability after adjusting input tax credit (ITC) available with the taxpayer;
  • It was further clarified that the amendment was made prospectively only in view of technical limitations, and no recoveries would be made for the past period to ensure retrospective relief as decided by the GST Council.

Introduction of e-invoicing under GST

  • E-invoicing was made applicable to all businesses whose annual aggregate turnover exceeds INR 500 crore from 1 October 2020 [subject to certain exclusions]. Now, with effect from 1 January 2021, it has extended to businesses whose annual aggregate turnover exceeds INR 100 crore.

Shelving of new GST return filing mechanism

  • The government initially deferred the implementation of the new return filing system and has now turned its attention to instead transition towards an advanced version of the existing returns. This includes the introduction of GSTR- 2B, and auto-population of outward supplies data as per GSTR-1 into GSTR-3B. This is expected to meet the dual objectives of the simplicity of returns for taxpayers as well as the elimination of fake invoicing and excess claims of the input tax credit.

Introduction of Quarterly Return Monthly Payment (QRMP) for small taxpayers

  • The QRMP scheme shall be applicable to taxpayers having an aggregate turnover of up to INR 50 million, with effect from 1 January 2021;
  • Under the QRMP scheme, the taxpayer is required to make a monthly payment before the 25th of the succeeding month for the first two months of the quarter through PMT-06. The taxpayers should select ‘Monthly payment for the quarterly taxpayer’ as the reason for generating the payment challan. There are two methods for making the monthly payment of tax during the first two months – Fixed Sum Method and Self Assessment Method;
  • The taxpayers are required to pay monthly GST liability via GST payment challan, and file both GSTR-1 and GSTR-3B on a quarterly basis;

Compulsory payment of at least 1% of outward tax liability in cash

  • With effect from 1 January 2021, Rule 86B has been inserted to restrict the utilization of ITC to the extent of 99% of tax liability for the relevant period for specified taxpayers having taxable supply (other than exempt supply and zero-rated supply) in a month exceeding INR 5 million.

Tightening of restrictions on availing ITC by taxpayers

  • Now, the claim of ITC cannot exceed 105% of the eligible ITC available in respect of invoices furnished by the vendors in their GSTR-1 [earlier this limit was 110%];
  • Also, now only the invoices ‘furnished’ by the vendors would be eligible to calculate the revised limit of 105%, i.e., if the invoices have been ‘uploaded’ by the vendors but the GSTR-1 is not filed, then such invoices cannot be considered for determination of the ITC limit under Rule 36(4).

Expectations in 2021

The taxpayers are expecting the government to pull the country out of the pandemic’s clutches and revive the economy. The government may consider certain amendments to the law or introduce certain provisions that could provide relief to the taxpayers. We have captured certain expectations that may help stabilize the economy and help the nation recover from the current economic situation.

Direct Tax

Tax incentives for the Healthcare sector:

  • Given that budget is said to have been focused on the Healthcare sector, we expect the introduction of certain incentives may be in the form or a lower tax rate or higher deduction of expenses for the pharma companies.

Tax cut for individuals:

  • To boost liquidity in the hands of the salaried class of the society, we expect that there may be a reduction in the tax burden on the employees;
  • It may be by increasing the income not chargeable to tax or slashing down the tax rate;
  • The center may also look at increasing the standard deduction.

Tax incentive for corporate:

  • To encourage the Indian corporates to support the government with their contribution to society in the current situation of COVID-19, the government may look at allowing deduction of COVID-19 related CSR expenditure.

Employment generation incentives:

  • Given that the unemployment rate has increased, the government may look at incentivizing the companies for creating job opportunities;
  • This may be done by extending the benefit of Section 80JJAA to the employee group earning more than INR 25,000 as compared to the current limit of up to INR 25,000.

Revised threshold for deductions:

  • Employees are entitled to claim certain monthly deductions as well as special exemptions under the head ‘Income from Salaries’ (e.g., children's education/hostel allowance, value of gift, perquisite for lunch, etc.). Citing that some of the thresholds for allowable deductions or exemptions have not been revised since the last two decades

Apart from the budget changes, we can expect the Supreme Court’s judgment on software payments. The taxability of software has been a matter of debate, which has affected many corporations, especially multinationals. The debate is surrounding the characterization of revenue received from the supply of software as ‘royalty’ or ‘business income.

Transfer Pricing

Safe Harbour Rules

After the revision in 2017, which was applicable till FY 2018-19, the Central Board of Direct Taxes (CBDT) further notified that the safe harbour provisions for a single year, i.e., FY 2019-20. In the coming budget, it is expected that the said provisions are notified for a longer period, considering the current situation and the impact of COVID-19 on the businesses and the economy. Further, it would be a welcoming step if the safe harbour applications can be made online instead of manual filings.

Guidelines from the government for assessing the economic impact of COVID-19 on transfer pricing arrangements

Guidance should be provided on how the taxpayers should approach transfer pricing arrangements entered into during FY 2019-2020 and FY 2020-2021. This can be more specific pertaining to:

  • Usage of weighted average financial data points of the comparable companies for the latest three FYs against the weighted average result of the taxpayer for three FYs;
  • Usage of single year financial data of the comparable companies for the current year against the result of the taxpayer for the current year;
  • Guidance on how economic adjustments, albeit downturn adjustments in COVID-19 scenario (e.g., capacity utilization, working capital, overall industry movement, etc.) should be made on the comparable companies;
  • How to treat the outlier comparable companies in the comparability analysis, especially high loss-making companies, to even out the impact of COVID-19;
  • The inter-quartile range should be broadened to 25th to 75th percentile. This will be in line with the internationally prescribed range, which would provide better results and eliminate the outliers.
  • Guidance on how a situation would be dealt with where APA is breached due to COVID-19 /the taxpayer is significantly affected by COVID-19.

It will be helpful if the said guidelines are in line with the recent guidance issued by the OECD on the transfer pricing implications of the COVID-19 pandemic.

Cascading effect of Secondary adjustment

The secondary adjustment is made in the books of account of the assessee and its associate enterprise (AE) to reflect that the actual allocation of profits between the assessee and its AE are consistent with the transfer price determined as a result of the primary adjustment. If the secondary adjustment amount is not repatriated to India within 90 days, a notional interest is levied and offered to tax. However, the provisions have not yet clarified the application of interest on interest levied, which may lead to a cascading effect. A suitable clarification is expected in the upcoming budget.

Introduction of Simplified Transfer Pricing Documentation (STPD)

The introduction of STPD is expected for taxpayers following safe harbour provisions or undertaking similar arrangements with related parties year on year as it will reduce the cost of compliance burden. STPD will also benefit the tax authorities in better managing risks associated with international relatedparty dealings by directing resources to transactions and activities that are deemed high risk.

Indirect Tax

Announcement of incentive rates under RoDTEP

  • The much awaited RoDTEP scheme has been introduced with effect from 1 January 2021. However, the government is yet to release crucial details such as the incentive rates and clarity on the applicability to various exporters and the goods exported. We expect the government to provide these details in the Union Budget 2021.

Exemption in the Customs duty rate on import of COVID-19 vaccine

  • Levy of Customs duty on import of COVID-19 vaccine (currently around 16.50%) would result in an increase in the cost of vaccines and, in turn, contradict the measures being taken by the government to prevent the widespread of the pandemic. It is expected that the government would announce an exemption/reduction in rate to ensure the vaccines are affordable for the public at large.

Concluding Remarks

In addition to the above mentioned tax measures, the government would look at various other measures to improve the fiscal situation, including looking at disinvestment of public sector undertaking, currency monitoring, etc. It would be important to see if we get a bold and path-breaking budget to address the challenges faced by the economy and taxpayers at large.