Union Budget 2021: Corporate India seeks clarity on taxes for digital businesses;

Representational image. Reuters

Addressing the recent CII Partnership Summit 2020, Finance Minister Nirmala Sitharaman called for inputs and the wishlist for 2021 Union Budget. Highlighting that the Budget is in the unprecedented backdrop of the COVID-19 pandemic and that India has potential as an engine of global growth, she stated that India will be a significant contributor to global economic revival.

While the government is likely to focus on significant public spending to incentivise each sector, support is particularly needed to those hit hardest by the pandemic and others that will fuel the economy’s recovery.

Technology has been at the sectoral forefront in driving India’s growth and is likely to play a major role in achieving stability after the pandemic. A few expectations from the sector are summarised below:

While the government brought in a sunset for commencing operations in a special economic zone (SEZ) to avail the tax holiday under Section 10AA of the Income-Tax Act, 1961 (‘the Act’),a clarification is required for those taxpayers who continue to claim the tax incentive that employees working from home would not affect the tax holiday claim.

Presently, the option for a concessional tax rate of 15 percent is only provided to new domestic manufacturing companies and one wishes to see this become available to a wider range of taxpayers by including new non-corporate entities and new players in the services sector.

The pandemic has affected employment and it will be helpful if the additional deduction available for salary paid to new workforce under section 80JJAA of the Act is liberalised by increasing the threshold of Rs 25,000 for monthly emoluments to Rs 50,000 or more, particularly in view of the skilled nature of workforce in this sector.

Another ask is that the tax holiday for eligible startups be increased to five out of 10 years and that they should be exempted from minimum alternate tax (MAT) to truly benefit them.

Further, the present scheme of tax for stock options granted to their employees can result in cash flow difficulties and possible notional tax. Accordingly, the tax should be payable only upon transfer of the shares by the employee. This hardship is not faced by employees of eligible startups alone and hence the change should be brought in for employee stock options in general.

A relaxation is awaited for buyback tax to be removed in case of listed companies. Further, even for others, rationalisation is needed for the cost base used to compute the buyback tax in various situations.

Coming to New Age businesses, the industry hopes to see a further deferral of the ‘significant economic presence’ in view of ongoing discussions at international levels.

Similarly, the requirement for e-commerce operators to deduct tax on payments to sellers/service providers needs to be reconsidered or the provisions at least rationalised. Various ambiguities such as the inclusion of handling/packing/delivery charges, indirect taxes and revenues that pertain to returned goods need to be cleared. In any case, the requirement should only apply beyond a threshold of Rs 40 lakhs per annum.

For non-residents, one of the major areas for clarifications is regarding the applicability of equalisation levy provisions to a broad spectrum of online transactions. The government’s intention to march forward with the levy is indicated in its response to the US Trade Representative’s objection, where the government has strongly defended the fairness of levy and asserted right to tax digital operations. However, the amendment was brought in last year without any prior public consultation and there are no documents available on the legislative intent.

Digital businesses are often very complex and resort to techno-commercial expertise in the absence of clarity from the government. Where the Indian Revenue takes a view contrary to that of a taxpayer between the applicability of the levy and Income Tax on a transaction, there may be an incremental cash outflow until finality is attained through litigation. At the very least, credit for one tax should be specifically permitted against the other.

One hopes that the various representations made to the government will yield clear responses on exactly which businesses are sought to be taxed, with penalties not levied in debatable cases. India Inc hopes the government will provide clarity and relaxations (if only temporary) to lessen hardship faced by taxpayers during these trying times.

The author is Tax Partner, EY. Khushroo Patel, Senior Tax Professional with EY also contributed to the article.