Restarting the economy: Govt should look at incentivising R&D and providing sops to companies


The government had introduced a low 15% tax rate for new manufacturing companies set up after October 1, 2019.

By Naveen Aggarwal

India Inc eagerly awaits Budget to help provide a shot in the arm for the recovering economy. With the economy estimated to contract by 7.7% in FY21, the FM has an arduous task of creating a growth spurt needed to steer towards the $5-trillion-dollar vision. It would be critical to get the fundamentals right to steer growth, spur investment, enable job creation and prioritise expenditure, requiring an intense focus on ease of doing business and make in India.

Here are some of the policy and tax reforms expectations from the upcoming budget:

Make in India and value creation: Atmanirbhar Bharat will bank heavily on ‘making in India’ and focusing on value creation with the Budget providing an opportune platform for the much-needed sector-focused incentives and tax reforms.

The government made a laudable step by expanding the PLI scheme to boost India’s manufacturing capabilities and enhance exports for 10 sectors. While the contours of the scheme are likely to be announced outside of the Budget, this is a significant watch out area for the sector players. Further, Budget may likely announce an increase in custom rates for certain items in the telecom, pharma and electronics sectors for promoting domestic manufacturing.

The government had introduced a low 15% tax rate for new manufacturing companies set up after October 1, 2019. The benefit should be extended for cases of significant expansion of existing manufacturing outfits and also cover ancillary businesses such as trading, maintenance services, etc.

R&D is the harbinger of value creation. It should look at incentivising R&D and providing sops to companies such as reinstating the weighted deduction on R&D expenditure.

A few measures that would be helpful to improve the tax ecosystem for a conducive business environment are

Rationalise tax rates: While the corporate tax rates were rationalised in October 2020 for domestic companies at 22%, foreign companies/branches of foreign banks continue to be taxed at a high rate of 40%. This inconsistency may be bridged by lowering the tax rates for the non-residents.

Clarity and certainty: While the OECD is deliberating to achieve a global consensus to tax digital economies, India launched a unilateral tax measure, ie, equalisation levy in 2020 at 2% to tax non-residents for e-commerce sales and services to India. This law has been criticised for being broad-based, ambiguous and anomalous. It would augur well to issue the necessary clarifications and iron out the ambiguities.

Similarly, clarity should be provided on the withholding tax imposed in 2020 on e-commerce operators, including non-residents, which currently suffer from ambiguities. The significant economic presence (SEP) provisions for taxing non-residents undertaking transactions exceeding certain thresholds, should be deferred till the OECD achieves a global consensus on digital economy taxation.

Transparency: The government launched a landmark faceless assessment and appeal scheme to subject taxpayers to an unbiased and anonymous audit and appeal process under a randomly selected team-based approach. If implemented fairly and seamlessly, this scheme could lay a strong foundation to reduce the scope of litigation significantly.

Effective dispute resolution: The government should look at mandating specific time limits for disposal of appeals. The administrative inefficiencies in the Indian Authority for Advance Rulings’ functioning should be addressed immediately, and a specific timeline for disposal of cases should be imposed under this process. Another industry ask is to have a mediation mechanism for an early consensus between taxpayers and the tax department.

In summary, these investment augmenting measures can go a long way to reinvigorate economic recovery and promote large scale investment. To draw a cricketing analogy, Team India’s recent test series victory in Australia reinforces the promise that strategic proposals followed by sincere and effective implementation will ultimately claw back the Indian economy to victory and success!

The author is Partner, Tax, KPMG, India. Views are personal

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