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PREFACE

On 30th January, Economic Survey 2020-21 was tabled by India’s Hon’ble Finance Minister (FM), Nirmala Sitharaman. Dedicated to the immortal human spirit of grit and compassion of India’s frontline COVID-19 warriors, the Survey detailed the state of the slowly recovering economy ahead of the Union Budget 2021, which was announced on 01st February 2021.

The Economic Survey stressed on the support provided by the Government of India as well as India’s apex bank – Reserve Bank of India (RBI) to bring about V-shaped recovery across economic indicators. As anticipated, the Survey highlighted the steep contraction in the country’s Gross Domestic Product (GDP) in Q1 due to the nation-wide lockdown and gradual recovery in following quarters.

This Budget’s central theme was developing an ‘AtmaNirbhar Bharat’ i.e. self-reliant India that is equally, a business epicenter of the world. The policies announced focused on realizing this vision of the Government.

While the Finance Minister did not propose any significant changes in the direct and indirect tax laws, emphasis was laid on the need to have a tax system that is transparent, efficient and promotes investment and employment in the country. The tax reforms, particularly around filings, resulted in a dramatic increase in return filers, from 33.1 million in 2014 to 64.8 million in 2020.

Overall, the Budget has received positive reactions and has re-instilled hope in the public of continued economic growth.

INDIA’S ECONOMIC SNAPSHOT

  • Though the projected GDP growth rate for 2020-21 was in the range of 6-6.5%, the once-in-a-century global crisis in 2020 shifted the focus to preservation of human lives. While there was a 23.9% contraction in GDP in Q1, the recovery has been V-shaped. India’s GDP is estimated to contract by 7.7% in Financial Year (FY) 2020-21, composed of a sharp 15.7% decline in first half and a modest 0.1% fall in the second half. Sector-wise, agriculture has remained the silver lining while contact-based services, manufacturing, construction were hit hardest, and have been recovering steadily. Government consumption and net exports have cushioned the growth from diving further down.

  • India remained a preferred investment destination in FY 2020-21. Foreign Direct Investment (FDI) poured in amidst global asset shifts towards equities and prospects of quicker recovery in emerging economies. Surges of Foreign Portfolio Investors (FPI) flows were witnessed June onwards marking a renewed appetite for risky assets and yield, and weakening of US dollar amid global monetary easing and fiscal stimulus packages. Net FPI inflows recorded an all-time monthly high of US$ 9.8 billion in November 2020. During April-December 2020, equities witnessed inflow of at US$ 30.0 billion, five times its previous year value – India was the only country among emerging markets to receive equity FII inflows in 2020. As a result of these inflows, buoyant Sensex and NIFTY resulted in India’s market-capitalization to GDP ratio crossing 100% for the first time since October 2010.

  • Inflation, mainly driven by food prices, remained above 6% for much of the year, given supply disruptions. The softening in December suggests easing of supply-side constraints.

  • Given the trend in imports of both goods and services, it is expected that India will end with an annual current account surplus of at-least 2% of GDP – after a period of 17 years.

  • Fiscal deficit in 2020-21 is pegged at 9.5% of GDP.

KEY STRATEGIC ANNOUNCEMENTS IN UNION BUDGET 2021

 

Education sector 

  • Proposal to introduce legislation for setting up a Higher Education Commission in India. The Commission will be an umbrella body with 4 separate vehicles for standard-setting, accreditation, regulation, and funding.

  • Proposal to create formal city-based umbrella structures for various research institutions, universities and colleges support by the Government of India in the city.

  • Proposal to set up Central University in the newly formed Union Territory of Ladakh.

  • An initiative is underway, in partnership with the United Arab Emirates (UAE), to benchmark skill qualifications, assessment, and certification, accompanied by the deployment of certified workforce. India also have a collaborative Training Inter Training Programme (TITP) with Japan to facilitate transfer of Japanese industrial and vocational skills, technique, and knowledge. The Government plans to take forward these initiatives with many more countries.

Other sectors 

  • Proposal to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49% to 74% in Insurance Companies and allow foreign ownership and control with safeguards. Under the new structure, the majority of Directors on the Board and key management persons would be resident Indians, with at least 50% of Directors being Independent Directors, and specified percentage of profits being retained as general reserve.

  • Production-linked incentive schemes to support growth of India’s manufacturing sector and for the sector to become an integral part of global supply chains, possess core competence and cutting-edge technology.

  • Mega Investment Textiles Parks (MITRA) to be launched to enable the textile industry to become globally competitive, attract large investments and boost employment generation. 7 Textile Parks with world class infrastructure to be established over 3 years.

  • Government to support development of a world-class FinTech hub in India’s first International Financial Services Centre (IFSC) – Gujarat International Finance Tec-City (GIFT). 
  • Proposal to make suitable amendments in the relevant legislations to enable debt financing of Infrastructure Investment Trusts (InVITs) and Real Estate Investment Trusts (REITs) by Foreign Portfolio Investors, thus augmenting funds for infrastructure and real estate sectors.

  • Proposal to set up Development Financial Institution to act as a provider, enabler and catalyst for infrastructure financing.

  • Proposals for monetization of public infrastructure assets including roads, power and railways.

  • Proposal to launch a Hydrogen Energy Mission in 2021-22 for generating hydrogen from green power sources.

  • In addition to the existing National Health Mission, new centrally sponsored health systems scheme announced to develop capacities of primary, secondary and tertiary care health systems, strengthen existing national institutions, and create new institutions, to cater to detection and cure of new and emerging diseases.

  • A new scheme to be launched to support augmentation of public bus transport services. The scheme will facilitate deployment of innovative PPP models to enable private sector players to finance, acquire, operate and maintain over 20,000 buses. The scheme will boost the automobile sector, provide fillip to economic growth, create employment opportunities for our youth and enhance ease of mobility for urban residents.

  • Two new technologies – ‘MetroLite’ and ‘MetroNeo’ to be deployed to provide metro rail systems at much lesser cost with same experience, convenience and safety in Tier-2 cities and peripheral areas of Tier-1 cities.

Other announcements 

  • Proposal to consolidate the provisions of Securities Exchange Board of India Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalized single Securities Markets Code.

  • Following the decriminalization of the procedural and technical compoundable offences under the Companies Act, 2013, Government to now take steps to decriminalize offences under Limited Liability Partnership Act, 2008.

  • Non-Resident Indian can now incorporate One-Person Company (OPC) in India. Removal of restrictions on paid-up capital, turnover, residency limit on OPCs.

  • To ensure faster resolution of corporate cases, the framework of National Company Law Tribunal (NCLT), a quasi-judicial body in India that adjudicates issues relating to Indian companies, to be strengthened.  E-Courts system to be implemented and alternate methods of debt resolution and special framework for Micro, Small and Medium Enterprises (MSMEs) to be introduced.

  • In FY 2021-22, the Ministry of Corporate Affairs (MCA) plans to launch data analytics, artificial intelligence, machine learning driven company law portal (MCA21 Version 3.0.). This Version 3.0 will have additional modules for e-scrutiny, e-Adjudication, e-Consultation and Compliance Management.

  • Proposals for universal coverage of water supply, waste management and air pollution control.

  • Proposal to provide financial incentive to promote digital modes of payment.

KEY TAX PROPOSALS

The proposals announced in the Budget were aimed at simplifying tax administration, ease compliances and reduce litigation. The key tax proposals announced by the Finance Minister are as under:

A. Corporates

  • Turnover threshold for tax audit increased from 50 million (~$684,000) to 100 million (~$1,368,000) for businesses carrying out less than 5% business transactions in cash, applicable from FY 2020-21 onwards.

  • Time limit for conclusion of general assessment reduced to 9 months from existing 12 months for assessments related to FY 2020-21 and later.

  • The time-limit for re-opening of assessment is proposed to be reduced to 3 years from the existing 6 years from the end of the relevant assessment year.

  • Re-opening up to 10 years is proposed to be allowed only if there is evidence of undisclosed income of 5 million (~$68,500) or more for a year. Further, in order to remove discretion in re-opening, specific cases have been proposed where assessment can be re-opened with prior permission of Principal Commissioner of Income Tax. An opportunity of being heard will be given to taxpayer before reopening of assessment.

  • Tax returns now cannot be filed or revised after 31st December following the financial year.

  • In order to provide relief to taxpayers, advance-tax liability on dividend income shall arise only after the declaration/payment of dividend.

  • Government has clarified that late deposit of employees’ contribution to social welfare funds by the employer shall not be allowed as deduction to the employer.
  • No depreciation available on Goodwill going forward.

B. Equalization Levy 

The Government has finally given much awaited clarification on Equalization Levy (EL).

  • EL not applicable if a particular transaction is taxable as Royalty or Fees for Technical Services.

  • Online supply of goods / provision of services to include instances of the following:

  • Acceptance of offer for sale; or

  • Placing or acceptance of purchase order; or

  • Payment of consideration; or

  • Supply of goods or provision of services, partly or wholly.

  • Consideration to include value of goods or services, regardless of ownership or facilitation by e-commerce operator.

C. Withholding Tax / Tax Collected at Source

  • Tax withholding @ 0.1% (5% in absence of Permanent Account Number) to be done by specified buyers on purchase of goods from resident sellers on payment exceeding 5 million (~$68,500) in a financial year. 

  • Special provisions introduced for higher TDS/TCS for non-filers of income tax return subject to certain exclusions – Twice the applicable rate or 5% whichever is higher.

D. Not-for-profit Organizations

  • In order to avoid claim of corpus donations as exempt income and also at the same time as application of income by the tax-exempt entities, it has been proposed that corpus should be invested or deposited in one or more forms as specified under the Income tax law.

E. Individual Tax

  • Benefit of one-time deduction of interest on loan available to buyers of affordable houses extended to 31st March 2022.

  • Interest accrued on EPF contribution of employees in excess of 250,000 (~$3,425) in a year, to be taxable. Tax rate yet to be notified.

  • ULIPs having premium in excess of 250,000 (~$3,425) to be considered as capital asset and taxable as capital gai on redemption. 

  • Exemption for LTC Cash Scheme in lieu of LTC now notified –

  • Towards expense by self/prescribed family on purchase of goods/services liable to minimum GST of 12% between 12 October 2020 to March 2021;

  • Exemption limited lower of 36,000 (~$490) per person or one-third of expense. 

F. Other key income tax proposals

  • Authority for Advance Ruling (AAR) to be discontinued and a new Board for Advance Ruling to be formed. The order of the Board will be appealable to High Court and will not be binding on any party.

  • Dispute Resolution Committee is proposed to be constituted for small taxpayers (i.e., taxpayer having taxable income up to 5 million (~$68,500) and disputed income up to ₹1 million (~$13,700)).

  • Faceless Income Tax Appellate Tribunal scheme to be introduced on the same lines as Faceless Appeal Scheme.

  • Income Tax Settlement Commission to be replaced with an interim board.

  • Powers granted to Assessing Officer for provisional attachment of taxpayer’s property during pendency of penalty proceedings or fake entries/invoices if penalty likely to exceed 20 million (~$274,000).

  • Tax deduction extended to eligible start-ups incorporated before 1st April, 2022. Further, time limit for investment of net consideration from transfer of house property in start-ups extended from 31st March, 2021 to 31st March, 2022.

  • The term ‘liable to tax’ has been defined to mean that there is a liability of tax on a person under any law in any country and includes cases where exemptions are granted subsequent to imposition of such tax.

G. Goods and Service Tax

  • Requirement to get the accounts audited by a Chartered Accountant or a Cost Accountant has been done away with. Effective date to be notified.

  • Additional requirement of furnishing self-certified reconciliation statement along with Annual Return has been casted on the taxpayers.

  • Section 16 of CGST Act amended to provide that input tax credit shall be available to the recipient once the tax invoice or debit note has been reported and reflected on the GSTN portal by the supplier.

CLOSING

The policy announcements in this budget aimed to support and reset the country’s economy. Overall, the budget has received positive reactions from the public. Recording sharpest-ever budget rally, the Sensex surged over 2,000 points showing the positive reaction of the market to this year’s budget.

We expected the Finance Minister to bring more clarity on applicability of Equalization Levy, particularly on educational courses that are online as a stop-gap due to COVID-19 related travel issues. It was also expected that the Government would propose a new cohesive framework for non-profit sector so that the knowledge, experience and expertise of the sector can be leveraged to support proposals to bring about economic recovery. We expect the Government to take up these topics in coming months. It was a relief to learn that the much talked about ‘COVID cess’ was not a part of the Budget.

With COVID-19 vaccine in the market and a strong plan to boost the economy, India is set for a great start to the upcoming fiscal year.

The proposals announced in the Union Budget shall be enacted once the same are passed by both the Houses of Parliament followed by the approval of the President of India.

VIEWS ON UNION BUDGET 2021

“No negative, being taken as a big positive, that is Budget 2021. Government’s acknowledgment of the sector wide hardships and resultant challenges is evident. With no new taxes/cess on Corporates, industry is relieved that no additional burden by way of new levies has been imposed during this pandemic induced economic crisis. The government’s focus centres around growth, demand creation through aggressive investments, monetization, FDI mediation to promote growth rather than maintaining fiscal discipline. The liberation of fiscal deficit is the hope that India currently needed. Further, for strengthening businesses and to be a competitive differentiator, the shift towards digitalization and transformation under innovation and R&D (one of the pillars of Budget focus) is reassuring. Overall, the budget has adopted ‘whole of India’ approach to boost nation-wide progress not only for next financial year but for years to come.” Kapil Dua, Co-Founder &  Managing Director APAC, Sannam S4

“While we all laud the “Get Well Soon’ theme of the budget we miss the inclusion of one of the important player in the public health domain, the Non-Governmental Organizations, also known as the third sector. As per the data available with The Central Statistical Institute of India published in 2009, India has 3.3 Million registered NGOs. This sector, apart from doing the last mile service delivery and presenting scalable models of the behavioral change, generates significant amount of employment for the nation every year. The category of the employment is both, permanent and seasonal in nature. The budget largely missed the ease of doing business for NGOs in its framework. It was expected that ease of doing business and regulations are separate domains and needed handling separately. We feel India needs a similar regulatory framework for Non-Governmental Organizations that USA adopts and is referred to as 501(c)(3) in the 26th code of the USC, wherein an Organization is free to operate as a Not for profit Organization and at the same time allowed to generate business income after paying the applicable taxes. The cited provisions largely address the sustainability and reduces dependency on external/foreign resources.”  Ritesh Koshik, Director of Finance and Operations, John Snow India (subsidiary of John Snow, Inc.)

“The announcements made regarding Higher Education in the 2021 Union Budget are a continuation of the policy updates made in the new National Education Policy released in 2020. We have seen a number of budget revisions for key government schemes that will expand the internationalization agenda for India HE, including the increased budget for world-class institutions (Institutions of Eminence), the set-up of the ‘Champion Services Sector Scheme’ to support the internationalization of Indian institutions and the increased allotment of funds for the Academic Bank of Credits. The Finance Minister also clarified that legislation to set up the new Higher Education Commission of India will be introduced this year. Finally, we see a welcome nod towards TNE with the mention of setting up a regulatory mechanism to permit dual degrees, joint degrees, twinning arrangements, and other such mechanisms to promote enhanced academic collaboration with foreign higher educational institutions.”Lakshmi Iyer, Executive Director and Head of Education, Sannam S4 

“A very significant budget, given the challenging year we have had. The Minister lived up to her claim that this budget would be one like never before. The thought behind it can be summed up by the Minister’s statement that the The Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) will undergo necessary amendments. That is a clear signal of intent that this is a budget focused on growth, infra development, job creation and the atmanirbharta mantra. The thrust on highways, railways and dedicated freight corridors will boost employment opportunities, and strengthen supply chains besides knock on effects through linkages. The announcement of a fresh infusion of capital to the tune of INR 20,000 crores in Public Sector Banks is also notable. While the farm cess on petrol and diesel have been introduced, they are balanced by a reduction on excise rates so as to not put any additional burden on the consumer. Capping of the limit on reopening tax assessments at 3 years instead of 6 is a welcome step. The prefilling of ITR forms to include details of capital gains, dividend income and interest income is a positive step towards further easing the process of filing returns for individual taxpayers.”Akhauri P Sinha, Managing Director, Framestore India

“India is at the centre of the global race to sustainable competitiveness.  Overall, the budget for 2021-22 is pro-growth. In terms of a sustainable energy transition, The issue of power distribution reforms and bringing competition in the power distribution sector was brought up in the budget for fiscal allocations, and future legislations by the government on reform implementation are awaited. Both of the above announcements are positive for the cleantech sector. In line with the government’s ‘self reliant India’ strategy, import duties duties on several finished products have been increased in this budget. Higher import duties on solar panels were proposed in the last budget but have not yet been instituted. This budget indicated that a roadmap for duties on solar cells and panels is on the cards. However, the budget increased duty on solar inverters from 5% to 20% with effect from 2 Feb 2021. No duty changes have been enacted on import of electric vehicles, where the duty is already very high. Our paper published last week on India’s corporate renewable PPA market shows a positive outlook for clean energy procurement in India – https://www.wbcsd.org/Programs/Climate-and-Energy/Energy/REscale/News/Positive-outlook-for-corporate-renewable-PPAs-in-IndiaJoe Phelan, Director, WBCSD India 

“Budget 2021 marks major shifts in the government’s approach towards public finance. The focus of the budget is on boosting growth. Towards this end, there is a push for increasing capital expenditure – a reversal of the recent years’ trend towards increasing revenue expenditure. While there was a marginal increase in capital expenditure in 2020-21, the increase budgeted for 2021-22 is quite larger. Government has also used the crisis to bring off-budget expenditure to the budget, thus restoring integrity and transparency to the budget. Further, the Finance Minister announced several reforms in the speech. On the negative side, there is a continuation of the trend to centralise fiscal resources, as the actual share of states in Centre’s tax collection is expected to fall further in 2021-22. Overall, the budget has many positives and only a few negatives.”Suyash Rai, Fellow, Carnegie India

“Today’s budget announcement contained several bold initiatives that set the tone for an accelerated post-pandemic economic recovery and new opportunities for India’s social development. While USIBC is still studying the details, we believe many of these measures will enhance confidence in India as a long-term destination for foreign investment and boost capital inflows. Substantial commitments to increase public spending on healthcare, infrastructure and defence should promote inclusive growth and job creation and enhance national security, helping to sustain India’s impressive economic resurgence. Plans to set up a new infrastructure development bank and sell brownfield infrastructure assets should create opportunities for US asset managers and pension funds to enhance sectors like logistics, transportation, energy and water, supporting India’s drive to become more productive, connected and sustainable. Raising the cap on FDI in the insurance sector lays the ground work for American insurance companies to enhance financial inclusion in India and provide Indians with more tools to protect themselves against risks to their lives and livelihoods. USIBC is also eager to learn more about many of these proposed reforms to fully understand their impact. For foreign investment to flow into the insurance sector, the management and control safeguards need to strike the right balance. The plan to set up a bad bank for distressed assets could have a major impact on credit growth, the lifeblood of the economy. We’re also closely examining the tax and customs proposals to determine how they will affect India’s ability to integrate into global value chains—a critical requirement to enhance competitiveness and ensure its long-term prosperity. Finally, it’s worth highlighting that there is also prudence backing this budget: Combined with a commitment to spend this year, Finance Minister Sitharaman identified a five-year plan to reduce the fiscal deficit to pre-pandemic levels. USIBC stands ready to work with the Government of India in the next few weeks to maximize the positive economic and social impact of today’s announcements in the year ahead.”US-India Business Council

“This was not a budget that offered up lots from an international investor perspective.  However, important for any global investor at this point is seeing a government focused on getting their economy back on its feet given that it appears to have weathered the worst of the Covid-19 storm.  That has to be a good thing.  Three areas that caught the eye were:

1) After a long journey of liberalisation, the insurance sector has yet again been the beneficiary of loosening of FDI norms, now allowing foreign investment of up to 74% by foreign investors.

2) Infrastructure and healthcare appear to be two major beneficiaries of the budget, with material increases specified for both.

3) With bad debt being one sizable potential Achilles heel for the economy, the creation of a company to manage (and isolate) bad debt feels like a positive development.”Ed Dixon, Executive Director, UK, Sannam S4 

“Liberalization of India’s insurance sector and significant public spending commitments in the areas of infrastructure, healthcare and defence will create much needed jobs and significant opportunities for foreign investors to participate in what we all hope is a V shaped recovery off the back of the pandemic.  The social sector, which has also been following the recent amendment to the CSR law last week, is well positioned to support India’s recovery and pursuit of sustainable growth, particularly in the areas of education and focus on better health outcomes for India’s 1.3 billion citizens.” Michael Green, Director – Government Relations and Strategic Development, Sannam S4

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