Tax and regulatory reforms to accelerate economic recovery

The first half of 2021 has been vibrant for the taxpayers given that the government has taken certain strategic and proactive measures to ensure tax efficacy. The Union Budget 2021-22 focused on tax and related administrative reforms, infrastructure development and divestment. Change in tax treatment of goodwill, broadening the scope of equalisation levy on e-commerce operators, taxation of slump exchange transactions were some of the key highlights of the Union Budget.

The year 2021 is also set to mark a major overhaul in form of changes in the country’s existing labour laws as the government is keen to implement the new labour codes soon. While the impact of these changes will be tested over time, the intent of the government to steer the path of radical changes seems clear.

Some of the major tax and other regulatory changes which have altered the prevailing landscape are summarised hereunder:

Direct tax:

• The Finance Act (FA) 2021 amended the provisions regarding computation of capital gains in case of slump sale transactions by providing that the Fair Market Value (FMV) of assets shall be deemed to be a consideration for the transferor. As per the recently introduced valuation rules, higher of the book value of capital assets transferred or FMV of the non-monetary assets received by the transferor shall be deemed to be consideration of slump sale. As a result of this amendment, even the FMV of assets received by the transferor in lieu of transfer of business (popularly known as slump exchange) shall be deemed to be a consideration and capital gains shall be computed accordingly.
• FA 2021 settled the dust over the depreciation claim on goodwill. As per FA 2021, w.e.f. Financial Year (FY) 2020-21, tax depreciation cannot be claimed on goodwill forming part of block of assets. While it clears the confusion over the claim of depreciation on goodwill for FYs prior to FY 2020-21, however, restricts depreciation for subsequent years.
• The focus of the present government has been on the collection of tax at source by casting an obligation on the payer/payee to withhold/collect the tax, thereby enlarging the tax base and minimise tax avoidance. FA 2021 furthered this approach by introducing the following key changes:
• Deduction of tax at twice the applicable rates in case the payee has not filled income-tax return (ITR) of preceding two years. An obligation on the payer to verify ITR compliance of the recipient seeks to increase tax collection indirectly from the non-compliant payees.
• Obligation to deduct tax at the rate of 0.1% on the purchaser of goods in case the value of purchases exceeds INR 5 million w.e.f. 01 July 2021. In the absence of a definition of goods in the Income-tax law, the taxpayer may have to resort to the definition of ‘goods’ laid down in other regulations. This obligation to deduct TDS may get extended to share purchase transactions if liberal meaning is assigned to ‘goods’.
• The FA 2021 enlarged the scope of equalisation levy on e-commerce operators by including certain essential elements of online transactions within the definition of ‘online sale of goods/ services such as acceptance of an offer, placing/acceptance of purchase order, provision to make online payment, etc. These inclusions drastically expand the scope of equalisation levy on non-resident e-commerce operators. The law also clarified that transactions subject to Indian withholding tax shall not be liable to equalisation levy. It is pertinent to note that the United States Trade Representative (USTR) has considered the imposition of equalisation levy by India as ‘discriminatory’. Amidst such controversy, the approach and stance of the government will be worth noting.

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