Budget 2021 Wishlist: Focus on corporate taxation

Budget 2021 Wishlist: Focus on corporate taxation

It is pertinent to note that the service sector was still in its initial phase when Section 72A was introduced but has evolved significantly over the years

By Dr Suresh Surana, Founder

With the promise of the Hon'ble Finance Minister to a provide a budget like ‘Never Before’, the Union Budget 2021 is one of the most awaited budgets which would be presented on 1 February 2021. As the nation is emerging from the pandemic and its economic aftermath, it is expected that the primary focus of the 2021 Budget would be on reviving growth and employment and laying down the roadmap for restoring the fiscal discipline in a phased manner. 

The following are some of the expectations of the corporate sector from Budget 2021:

Extension of Benefit of Carrying forward of losses during Amalgamation to Covid Impacted Service Sector - 72A

Section 72A of the IT Act provides for the accumulated tax loss and the unabsorbed tax depreciation of the amalgamating companies to be deemed to be the loss/allowance of the amalgamated company for the previous year in which the amalgamation was effected or taken place subject to satisfaction of certain conditions. Thus, the losses and unabsorbed depreciation of the amalgamating company can be carried forward for the purpose of set-off against profits, if any, of the amalgamated company. However, the benefit of this provision is merely restricted to amalgamating companies owning an ‘industrial undertaking’. The definition of such industrial undertaking includes units of manufacturing, power, telecom, mining and construction of ship, aircraft and rails. Apart from such industrial undertaking, the benefit is extended to banking companies and those public sector companies engaged in the business of operation of aircraft. Thus, such definition keeps the service sector undertakings outside its purview.

It is pertinent to note that the service sector was still in its initial phase when Section 72A was introduced but has evolved significantly over the years and certain sectors such as aviation, hotels, tourism has been severely impacted and may not revive soon. 

In view of the above expansion of the service industry in India and the need for restructuring of Covid impacted sectors, the definition of industrial undertaking u/s. 72A could be amended to include certain service sectors specified above thus extending the benefit of carrying forward of losses and unabsorbed depreciation during the course of amalgamation to the said sectors.

Scope of Safe Harbour Rules to be expanded to include more Industries

In order to reduce the litigation with respect of international transactions between Associated Enterprises, the Safe Harbour rules (SHRs) were introduced in the Income Tax law to provide a benchmark for the determination of Arm’s Length Price. However, such SHRs have been made applicable only to certain sectors such as IT & ITeS, contract research in generic pharmaceuticals, core and non-core automobile components, etc. 

It is necessary that the scope of SHRs be extended to other sectors or industries as well in order to reduce litigation on international transactions between group entities as well as to attract foreign investment. 

Rationalisation of Lapse of Losses in case of a change in Management – Section 79

Section 79 of the IT Act provides for carrying forward and set off of losses of companies in which public are not substantially interested in the satisfaction of the condition that there is no substantial change (51%) in the beneficial ownership. The said section is an anti-abuse provision and intent behind the section was to curb the profit-making companies from exploiting the provisions by way of acquiring loss-making entities for the purpose of claiming the set-off benefits.

However, many companies have witnessed losses in the past year due to pandemic and in order to survive may need to undergo restructuring or even adopt the restructuring route through the Insolvency Bankruptcy Code (IBC) or NCLT route. This may cause a substantial change in their beneficial holding or ownership, as a result of which Section 79 may get triggered.

Thus, the Budget 2021 may either provide relaxation in Section 79 for change in the shareholding resulting from the restructuring of the business particularly when it is approved by NCLT or regulators for the sector. 

Reduction in the Tax rate for Partnership Firms and LLPs

The tax rate for most of the Corporates has been gradually reduced over the period of time with the introduction of concessional tax regimes. Thus, as a result, the majority of the companies pay tax at the ranging from 15% to 22% (plus the applicable surcharge and cess). 

However, there has been no reduction in the tax rate as applicable to the Partnership Firms and LLPs, which stands at 30% (plus surcharge and cess). In view of the above, the income tax rate applicable to the Partnerships and LLPs should be reduced to 25% (plus surcharge and cess).

(The author is Founder at RSM India)