Key takeaways from the Union Budget 2021-22

Union Budget 2021 (Budget) is a dynamic attempt at strengthening an economy that had weakened significantly in 2020. Here, we discuss about the key takeaways from a business and corporate laws perspective.

Prospects for M&A and corporate transactions

  • Increase in FDI limits in Indian insurance companies: The sectoral cap for foreign direct investment (FDI) into Indian insurance companies has been increased. Earlier, up to 49% FDI was permissible under the automatic route, meaning no prior governmental approval would be required. This would now be increased to 74%. Majority stake and shareholder level control is something that strategic investors would certainly be enthused by. However, from a governance perspective, there still are conditions to ensure that control and profits/returns are not entirely offshored. These come in the form of requiring majority of board and key managerial personnel to be Indian residents; at least half the board being independent directors; and maintenance of certain percentage of profits as general reserves. This percentage might become critical, as it could determine how incentivized or dis-incentivized a foreign investor might feel towards investing in the insurance sector. Similarly, temporary lock-in of that percentage (e.g. three years from when profits accrued) would be more encouraging than a permanent bar on automatic repatriability of said percentage amounts. It must also be noted that IRDAI, the insurance regulator, also has regulations around Indian control of insurance company. These would have to be amended to be aligned with the relaxation of the FDI regime for the sector.
  • Infrastructure and healthcare: Other sectors that are slated to see significant government investments are infrastructure and healthcare. Correspondingly, it is expected that these sectors would see opportunities for transactions. While public private partnership in the infra space is a well known model, it could also be seen becoming more prominent in the healthcare space. More so, with the push on technology driven healthcare and nutrition access. These transactions could be through technology partnerships, joint ventures, or substantial commercial contracts. It is expected that there could be more government fund raising activities from the debt market as well.
  • Definition of slump sale: The definition of slump sale is set to become wider to include expressly all types of transfer, and depreciation of goodwill would no longer qualify as a depreciable asset. Both would impact structuring of transactions, potentially increase tax impact and make transactions costlier. Therefore, transacting companies will have to look at the final letter of the revised law to determine the most efficient structuring options for them.

Corporate compliance

  • Decriminalization of certain corporate non-compliances under the LLP Act, 2008 (LLPA): In the past, the prospect of imprisonment, often due to technical non compliances, had raised great apprehension in the promoter and senior management community. Some of this was addressed last year for the Act. This year, a similar exercise is intended for limited liability partnerships as well, although this is expected to be a shorter list since the LLPA is a simpler governance regime. In effect, designated partner liability under the LLPA would stand reduced.
  • Rationalizing all security market laws into a Securities Market Code: The other interesting element is the planned Securities Market Code. Much like the labour laws were consolidated into limited and specific labour codes, the Securities Market Code intends to consolidate legislations like the SEBI Act, 1992; Depositories Act, 1996; Securities Contracts (Regulation) Act, 1956; and the Government Securities Act, 2007. As is the case with any regulatory revamp, the Securities Market Code could create some teething troubles for public companies in particular. Thus, its framing and implementation should be a gradual process - inviting public comments before finalising the code, as well as legislated timeline for adoption and corresponding liability, after it is notified as law.

Direct tax

  • Extension of filing under Vivad se Vishwas Scheme and discontinuation of Income-tax Settlement Commission: The filing under said scheme has been extended up to February 28, 2021. The Budget also proposes to discontinue the ageold Income-tax Settlement Commission (ITSC). It is also proposed to allow taxpayers to withdraw applications pending with the ITSC. In case of such withdrawal, the application shall stand abated and the AO before whom the proceeding was pending prior to the application to the ITSC shall dispose of the matter in accordance with the relevant provisions of the ITA.
  • Formation of the Dispute Resolution Committee for small & medium taxpayers: Under the new scheme, the Central Government shall constitute one or more Dispute Resolution Committee(s) (DRC), which shall resolve disputes of such persons or class, or persons as may be specified by the CBDT. To have the disputes resolved by the DRC shall be at the discretion of the taxpayers. It is proposed to only be applicable to those disputes where the returned income is INR 50 lakh (USD 68,500) or less and the aggregate amount of variation proposed in the assessment order INR 10 lakh (USD 13,695) or less. Further, search/survey/requisition cases would not be eligible to approach for DRC for settlement.
  • No change in Income Tax Slabs: Also, Senior Citizens ages 75 years and above who only have Pension & Interest income, need not file Income Tax Returns.
  • Reduction of time limit for completing assessments: The Budget has proposed to reduce the time limit for completion of assessments under Section 143-144 to 9 months from 21 months from the end of the AY in which the income was first assessable for AY 2021-22 onwards.
  • Reduction of time limit to reopen assessment: Time period of opening of assessment reduced to 3 years from 6 years and serious tax evasion cases, where there is evidence of concealment of income of INR 50 lakh or more in a year, the assessment can be reopened upto 10 years but only in certain cases of search, seizure or requisition and that too after the approval of the Principal Chief Commissioner. This is also likely to favorably impact M&A deals where negotiation of tax indemnities has been a moot point lately.
  • Time limits for income escaping assessment are reformed as below:
    No notice shall be issued under Section 148 of the ITA, in normal cases, if 3 years have lapsed from the period of relevant AY.
    In cases of search, requisition, or survey where the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to INR 50 lakh (USD 68,500), notice can be issued beyond 3 years but not beyond 10 AYs from the end of the relevant AY.
    For the purposes of computing the time-limit under Section 148 of the ITA, the time allowed to the taxpayer in providing opportunity of being heard or periods during which such proceedings are stayed by a court, shall be excluded. Earlier, for re-assessment proceedings under Section 147 to be initiated, the pre-requisite was for the AO to have a 'reason to believe'. However, as per the revamped provisions, the pre-requisite now is for the AO to have 'information which suggests that income chargeable to tax has escaped assessment', which as discussed above, has been clearly defined. The earlier threshold of 'reason to believe' was vague and subjective which led to widespread litigation on the matter. Considering that the newly introduced threshold of 'information which suggests that income chargeable to tax has escaped assessment' has been defined, it is likely to reduce litigation in this regard.
  • Faceless ITAT: From now on Income Tax Appellate Tribunal to become Faceless - Only electronic communication will be done. Constitution of Faceless Dispute Resolution Panel for people with Total Income upto INR 50 lakh and disputed income of INR 10 lakh.
  • Expansion of Scope of Equalisation Levy (EL): Finance Bill has made the following three changes to the EL retroactively, with effect from April 1, 2020:
    Payments which are taxable as royalty or fee for technical services (FTS) are not subjected to EL. It is clarified that if the consideration received or receivable for specified services & for e-commerce supply or services are taxable as royalty or FTS under the ITA, read with the notified tax treaties, then such consideration should not be taxable under the EL provisions.
    Online sale of goods and online provision of services have been defined very widely. The use of the word 'online' before sale of goods or provision of services, in the definition of 'ecommerce supply or services', may lead to unintended consequences wherein the mere fact that a component of sale of goods or provision of services is undertaken online would be enough to bring the entire transaction within the ambit of the EL. The terms 'online sale of goods' or 'online provision of services' to include one or more of the following online activities, namely:
    • Acceptance of offer for sale
    • Placing of purchase order
    • Acceptance of the purchase order
    • Payment of consideration
    • Supply of goods or provision of services, partly or wholly.

    EL has to be paid on a gross basis henceforth and not on a net basis, which was possible earlier.

    Definition of 'consideration received or receivable from ecommerce supply or services' to include the below:
    • Consideration for sale of goods irrespective of whether the e-commerce operator owns the goods.
    • Consideration for provision of services irrespective of whether service is provided or facilitated by the ecommerce operator.

    These proposed amendments however does not provide any clarity regarding various issues. For example, it is unclear whether the EL will be applicable on provision of services by not-for-profit organizations including but not limited to education institutions providing online education, healthcare services etc.
  • New computation mechanism proposed to calculate capital gains on distributions by firm/APO/BOI: The new provisions envisage taxability in two scenarios where a partner or member receives a capital asset at the time of dissolution or reconstitution of the entity:
    • Where the capital asset represents the balance in the capital account of the person in the books of the entity (without considering increase due to revaluation of assets or self-generated assets)
    • Where the money or other asset is in excess of the balance in the capital account of the individual in the books of the entity

    However, the proposed provisions still do not address the issue as to whether a distribution of a share in the value of goodwill, a self-generated asset, to a retiring partner constitutes a transfer as per Section 2(47) of the ITA.
  • Relaxation to NRIs: Double Taxation Tax Audit Limit to be increased to INR 10 crores from INR 5 crores for those having less than 5% cash transactions.
  • Dividend tax: The Budget proposes to make dividend payment to REIT/InvIT exempt from TDS. For Foreign Portfolio Investors, the Budget proposes deduction of tax on dividend income at lower treaty rate. The Budget provides that advanced tax liability on dividend income shall arise only after the declaration or payment of dividend.
  • Tax treaty rate: As the rate of TDS being 20% is already specifically set out under the section, a more beneficial tax rate provided under the relevant tax treaty cannot be applied. The Budget proposes to add a proviso to Section 196 which provides that tax treaty rate of deduction will be applicable if the FPI furnishes the tax residency certificate required under Section 90(4) or 90A(4) of the ITA.
  • Goodwill to become a non-depreciable asset: The proposed budget seeks to exclude goodwill from the definition of 'block of assets' with effect from April 1, 2022, and in the interim i.e., with effect from April 1, 2021, make provision for the issuance, by the CBDT, of specific rules for the computation of capital gains arising from the transfer of a block of assets that includes goodwill.
  • Introduction of Board of Advance Ruling (BAR): It is proposed that the AAR shall cease to operate from a date notified by the Central Government. Procedural provisions which applied to AAR to now apply to BAR. To cater to the backlog of cases at the AAR, a new Section 245P has been proposed under which all pending applications where
    • No admission order of the AAR has been passed or
    • No final order has been passed, will be transferred from the AAR to the BAR (once constituted).

      Further, an appeal from a ruling of the BAR is available to the taxpayer to the High Court, within 60 days of date of communication of the ruling. It is proposed that a scheme by notification by the Central Government may also be made for the purposes of filing of appeal by the tax officer against the ruling of the BAR.
  • Tax holidays: Tax Holiday for Capital Gains for Aircraft Leasing Companies and Tax Exemption to Lease paid to Foreign Persons.
  • Pre-filling of Returns: Details of Capital Gains, Dividend Income & Interest income will be pre-filled in the Returns.
  • Relief to trusts: Charitable trusts running Hospitals & Educational Institutions relief increased from INR 1 crore to INR 5 crore.

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