With the Indian economy gradually reverting to pre-pandemic levels and the consistent rise in tax collection, taxpayers are keenly looking forward to increased tax certainty, clarity, and incentives in the upcoming budget. It is hoped that the budget will further push India’s recovery from the economic storms caused due to Covid lockdowns and restrictions. Let us look at five key areas where taxpayers expect the government to bring more clarity and relief:

Need for simplification and easing compliance burden: A major concern for taxpayers (especially foreign investors) has been the increasing tax compliance burden in the form of provisions relating to tax deduction / collection at source, obtaining tax registrations, filing requirements, etc. The scope of the newly introduced TDS and TCS requirements in transactions in “goods” is wide and casts an additional compliance burden in case of transactions which may already be covered under other reporting and compliance provisions. While it was clarified that the new TDS provision is not applicable to non-resident buyers (not having a permanent establishment in India), no such clarification has been provided in relation to the applicability of the new TCS provision with respect to non-residents. Some of these aspects need clarity and simplification so that the transactions are smooth and compliance burden is eased. Another area which needs focus is the alignment of old provisions with the new. For instance, companies and LLPs have significantly different tax regimes now and one could not have factored or foreseen the tax costs while setting up these structures. Similarly, in case of transactions in securities, the tax rates vary depending on whether the securities are listed or unlisted and the mode of exit. The tax exemption for long term gains on listed shares was rolled back but the securities transaction tax continues to apply to stock market deals. Another area of inconsistency is with respect to taxation of shareholders in case of dividends and buy-back of shares - distribution tax on dividends was withdrawn but the distribution tax on buy-back continues to apply to the company leading to different basis of taxation for dividends and buy-back proceeds received by shareholders. These measures need a re-look and realignment.

Carry forward of losses of stressed industries: With multiple lockdowns, travel restrictions, curfews, and the extension of the pandemic due to the ongoing third wave of Covid, consumer facing sectors such as the aviation, tourism, hospitality, food & beverages, etc., have been piling up losses. Under the income-tax law, business losses can be carried forward and set off only for 8 years. Thus, extension of the 8-year window for carry forward of business losses in the stressed sectors would be welcome.

Start-ups: Currently the income-tax law provides certain tax benefits to “eligible start-ups” in the form of tax holiday for up to 100% of business profits, tax deferral on exercise of ESOPs for 4 years, etc. However, these benefits are available to only those start-ups which were incorporated on or after 1 April 2016 but before 1 April 2022. One expects this deadline of 1 April 2022 to be extended so that new businesses continue to benefit from the tax concessions targeted at the start-up community which continues to attract capital and talent. Moreover, the rollover benefit which is currently available in case of capital gains earned from sale of residential properties, if invested in an eligible start-up, should be expanded to include more categories of capital gains so as to encourage the investment of capital in start-ups.

Electric Vehicles: To incentivise swifter EV adoption in the country, the government may consider providing a higher rate of depreciation on EVs purchased up to a certain date. Notably, a similar mechanism to boost the motor vehicles industry was also introduced in the year 2019, wherein a higher rate of depreciation was provided on motor vehicles purchased on or after 23 August 2019 but before 1 April 2020. On the supply side, to incentivise increasing the production of EVs, the government may consider introducing profit or investment linked deduction schemes for manufacturers.

Clarity on taxation of cryptocurrencies: Since the onset of the Covid-19 pandemic, India has seen a sharp increase in retail and venture capital participation in the cryptocurrency space. However, as of yet, there is no official guidance in relation to tax implications of cryptocurrencies. To keep up with the pace at which the crypto space is growing, it is expected that more clarity and tax certainty is brought in with respect to nuances such as cryptocurrency mining, treatment of losses incurred in crypto transactions, the head of income under which income should be reported and offered to tax, disclosure of crypto holdings, uniform method for determining valuation, etc.

All in all, it would be interesting to see how the government walks this tight rope of maintaining the balance between its fiscal deficit and taking adequate measures to support and give a fillip to the economic recovery.