Tax and policy reforms that can stimulate growth in 2021
December, 30th 2020
Conventional wisdom suggests it takes 10-15 years to develop a vaccine, yet the CoVID vaccine should be available in about a year! Extreme diseases inspire radical cure. This is true even for the economy. The pandemic induced contraction of the global and national economies may also need a cure that deviates from conventional economic prescriptions. It is foregone that the traditional measures of debt to GDP and the FRBMA targets will look dismal. The developed and the developing world has been severely impacted, even if unequally.
It is a big reset – economies, corporates, and citizens must accordingly challenge the traditional. There is re-emphasised relevance on tax policy as a tool to revive the economy.
Demographic dividend and joblessness are two aspects of India’s vast labour and talent pool. The pandemic has aggravated joblessness and accelerated the digitalisation / internet-of-things, and newer technologies have accentuated the need for re-skilling. If history is to be believed, all technological advancements have redefined jobs while creating more opportunities.
The Government is doing some outstanding work under the MSDE’s National Skill Development Mission. The incentive for skill development under section 35CCD of the Income-tax Act, 1961 (IT Act) is presently available only to companies. With the phasing out of incentives, the deduction is now restricted to the expense instead of 1.5 times the previously available cost. The employers best nurture employable skills, and they should be incentivised either with a weighted deduction or a return of the expense incurred as a subsidy. The remit of the eligible taxpayer should include all forms of employers, i.e. Partnership firms, LLP, Sole Proprietorship firms, and not just be restricted to company form of the organisation. It is also suggested that the eligible sectors be defined only by providing a negative list, thereby, including all sectors without any doubt.
To incentivise job-creation, section 80JJAA of the IT Act grants deduction of 30 percent of the additional employment cost incurred by the taxpayer for three tax years starting from the year in which employment is provided. The taxpayer is entitled to deduction subject to the satisfaction of certain conditions which inter-alia provides for a salary limit of INR 25,000 per month.
It is recommended that the salary limit for deduction be increased from Rs 25,000 per month, keeping in mind the increased cost of living in urban and semi-urban centres. To move the employable population from the overcrowding agricultural sector and to incentivise urbanisation into smart cities, an increase in the threshold will also provide a multiplier effect to the demand side.
Research and Development (R&D) activities are central to innovation, capacity building, and talent development in any economy. It is no secret that economies that have invested in and incentivised R&D have reaped the benefit of globalisation. The weighted deduction under section 35(2AB) of the IT Act should be reinstated at 1.5 times the expense. The mission to ‘Make in India’ and ‘Serve from India’ cannot be achieved without incentivising research. India has announced various production linked incentive schemes to attract investments in new capacities of production. For these investments to be sustainable and competitive in the future, expenditure in R&D remains central. Economies that aspire to be knowledge economies can ill-afford to ignore it.
It is crucial to add that these benefits for skill development, employment creation and R&D should be made available even to companies that opt for a lower rate of tax in the case of corporates.
The thrust on infrastructure development reinforces the need to reinstate the exemption similar to that under section 10(23G) of IT Act concerning dividend, interest and long capital gains from investments in infrastructure facilities.
Enterprises have incurred losses during the pandemic. They will need more capital to revive and re-invent. These losses have the risk of being lost when there is a substantial change in shareholding under section 79 of the IT Act.
Furthermore, the losses have a life of 4 to 8 years, depending on their nature. Considering these facts, the rigour of section 79 should be relaxed, and the life of the losses should also be extended or safeguarded. It would also be appropriate to consider loss carrybacks except for the complexity of implementing the same with altered tax rates over the years.
Simplicity is another aspect of tax policy that taxpayers admire. Over time the number of tax rates for either different kinds of income or other taxpayers has increased manifold.
This offers arbitrage opportunities and, in some instances, induces relocation of capital and profits. A comprehensive review of the various tax rates, slabs, surcharges should be undertaken to streamline and simplify their application.
Yet another aspect of tax policy is a certainty. The Government has taken many steps to expedite controversy resolution.
The Vivaad-se-Viswas scheme is the latest in the slew of measures. The AAR and the APA regime has started delivering, while there remains a need to build more capacity and expedite resolution. The unaddressed need remains in the area of Mediation. In the ordinary course, the prolonged dispute resolution pathway calls for a Mediation mechanism to be instituted in the law. Mediation, as a facilitative process for dispute resolution, is best suited for fact-based disputes. It could be invoked at the draft assessment stage, first appeal, or the second appeal stage. Its features should include specific aspects, i.e. binding, final, enforceable, conducted via an autonomous non-governmental expert body, time-bound and confidential. These aspects can be drawn from the best practices in other countries, i.e. UK, US, Australia, Netherlands, Mexico and Belgium.
With the tax revenues shrinking dramatically in the first half of the current fiscal, a roadmap to its revival is imperative. As growth comes back to normalcy, there will have to be a sharper focus on tax buoyancy factors. The question will remain whether the measures will help the economy to bounce back at the speed of the vaccine!