February 12, 2021
India releases 2021-22 Union Budget
The Finance Minister of India presented the Union Budget for tax year 2021-22 (the Budget 2021) on 1 February 2021. The Budget 2021 includes proposals to: (i) clarify the scope of the Equalization Levy (EL); (ii) clarify the provisions relating to the exemptions for Sovereign Wealth Funds (SWF) and Pension Funds (PF); (iii) expand the scope of "slump sale"; (iv) restrict eligibility to claim tax depreciation on goodwill, (v) confirm availability of tax treaty benefits for dividend withholding on payments made to Foreign Portfolio Investors (FPI); (vi) grant withholding tax (WHT) exemptions to Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (Invit); and (vii) reduce timelines for completion of audits.
This Alert summarizes the key proposals.
Corporate tax rates
- The tax rates (including Minimum Alternate Tax (MAT) rates) for Indian companies is proposed to remain unchanged.
Key international tax proposals
- The scope of the levy of EL on the consideration received from the online sale of goods or provision of services (including facilitation services) by a nonresident operator of a digital facility or platform (e-com EL) as introduced by the Finance Act 2020 (FA 2020) has been clarified as follows:1
- The Budget 2021 provides that taxation of income as royalty or fee for technical services under the Indian tax laws (ITL) will have priority over EL.
- The scope of "online sale of goods" and "online provision of services" for e-commerce supply or service are further explained to cover cases where even a part of the transaction (such as placement/ acceptance of purchase order, payment, etc.) takes place online.
- Consideration received/receivable for the sale of goods and the provision of services will be included regardless of whether the e-commerce operator owns the goods or provides the service.
- The provisions originally introduced in 2018 to tax foreign companies with a significant economic presence in India (which were deferred by the FA 2020 to 1 April 2021), remain unchanged.2 The provisions will apply from 1 April 2021. The threshold for applicability of the provisions has not yet been prescribed.
- The term "liable to tax" is now proposed to be defined under the ITL as any person with a tax liability under the law of any country and will include a case where, subsequent to the imposition of such tax liability, an exemption has been provided.
- An existing mechanism that allowed nonresidents and residents to obtain private rulings which were binding on both the applicant and the revenue but could be challenged under constitutional remedies (such as writ petition to a High Court), has been discontinued. India will introduce a new scheme to provide greater efficiency, transparency, accountability and to introduce dynamic jurisdiction. The pending cases under the existing mechanism will be transitioned to the new scheme.
Key corporate tax proposals
- The definition of "slump sale" under the ITL for taxable business transfers is proposed to be amended to include all types of transfers, i.e., sale, exchange, relinquishment of assets, etc.
- The definition of "intangible asset" for tax depreciation purposes is proposed to be amended to exclude goodwill and consequently, depreciation on goodwill (whether self-generated or acquired) will not be permitted. With respect to acquired goodwill on which depreciation has been claimed in past years, the written down value and capital gain will be computed in the prescribed manner.
- The Budget 2021 proposes to extend the sunset date of 31 March 2021 for incorporation of start-ups to allow them to be eligible for a tax holiday to 31 March 2022.
- The provisions related to an exemption introduced by the FA 2020 on income derived by a notified SWF and notified PF in the nature of dividends, interest and long-term capital gains from specified investments in India has been amended as follows:
- The definition of "specified person" is amended to permit SWF/PF's to undertake commercial activity in or outside India as long as they do not participate in the day to day operations of the qualifying investee entity.
- The condition for a notified PF is expanded to provide that even if the notified PF is liable to tax in the foreign country of its establishment, its entire income should be exempt from tax in that country.
- A blanket exclusion from exemption is proposed to be introduced if a SWF/PF has loans or borrowings, directly or indirectly, for the purposes of making investments in India (except for loans from the Government of the respective SWF/PF).
- Category I/ II Alternate Investment Funds (AIF) are proposed to be considered as an eligible investee entity if at least 50% of its investment is in a qualifying infrastructure entity (reduced from 100%). AIFs are also proposed to be permitted to invest in Infrastructure Investment Trusts.
- Qualifying investee company eligibility is expanded to include: (i) specified domestic companies having a minimum of 75% investments in one or more qualifying infrastructure entities; (ii) Non-Banking Financial Companies registered as an Infrastructure Finance Company or specified Infrastructure Debt Fund, having a minimum 90% lending to qualifying infrastructure entities.
- A WHT exemption is proposed for dividends paid to REITs and InviTs.
- Under the existing provisions of the ITL, payments to FPIs (other than interest on Rupee Denominated Bonds and Government Securities) are subject to WHT at a flat rate of 20% without any automatic tax treaty benefits resulting in FPIs being required to file refund claims under the ITL. Under the Budget 2021, it is proposed that FPIs will be eligible to claim tax treaty benefits to lower the WHT, if applicable, subject to the FPI furnishing a Tax Residency Certificate to the payer.
- The definition of "zero coupon bond" is now proposed to include bonds issued by infrastructure debt funds, and payment of interest on maturity does not require any WHT.
- New WHT provisions proposed to be introduced at the rate of 0.1% with respect to the purchase of goods subject to certain conditions.
- New penal provisions proposed to be introduced whereby taxes will be required to be withheld/collected at double the existing tax rates or 5%, whichever is higher, in order to contend with taxpayers who have not filed a tax return in the past two years, subject to certain conditions.
- The turnover threshold for tax audit selection is proposed to be increased to INR100 million (US$1.5 million) from INR 50m (US$0.7 million) for taxpayers carrying on a business, provided that cash transactions comprise less than 5% of turnover.
- The time available for the filing of revised and overdue returns is proposed to be reduced by three months before the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.
- The delayed remittance of employee contributions to employee welfare funds has been clarified to result in a permanent disallowance of a tax deduction for such contribution.
- The Government has now proposed to develop an "e-appeal" process for the resolution of tax appeals at the second appellate court stage to increase efficiency, transparency and accountability in appellate process.
- The time limit for the completion of tax audits proceedings is proposed to be reduced to 9 months (as compared to the current 12 months) from the end of the relevant assessment year in which income the income was first assessable (i.e., 21 months from the end of the tax year).
- The time limit for conducting a tax re-audit proceeding is reduced to 3 years from the end of the relevant assessment year (i.e., 4 years from the end of relevant tax year). However, if the tax authority possesses evidence which demonstrates that unassessed income exceeds INR 50 lacs (US$70K), the time limit is 10 years from the end of relevant assessment year (i.e., 11 years from the end of the relevant tax year).
- Levy of interest for shortfalls arising in respect of advance tax installments payable prior to the distribution of dividend income has been waived, provided that subsequent installments of advance tax with respect to dividend income are fully paid.
Key transfer pricing proposals
- Rationalization of the MAT provisions has been proposed to recompute past years' book profits to reflect additional income on account of a secondary adjustment or Advance Pricing Agreement entered by the taxpayer.
- The time limit for the completion of a tax audit proceedings involving transfer pricing is proposed to be reduced to 21 months (as compared to the current 24 months) from the end of the relevant assessment year in which the income was first assessable (i.e., 33 months from the end of the tax year).
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), National Leader — International Tax and Transaction Services, Mumbai
Ernst & Young LLP (India), National Leader — International Corporate Tax Advisory, Bangalore
Ernst & Young LLP (United States), Indian Tax Desk, New York
Ernst & Young LLP (United States), Indian Tax Desk, San Jose
Ernst & Young Solutions, Indian Tax Desk, Singapore
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
1 See Global Tax Alert, India's Finance Bill 2021 clarifies scope of e-commerce Equalization Levy, dated 9 February 2021.
2 Under this provision, a nonresident could have a taxable presence by way of business connection in India based on value of transactions undertaken in India or by systematically engaging with prescribed number of users in India through digital means.