Covid-19: Revival of economy through tax measures

By Bipin Sapra and Raju Kumar

Besides human life which is most important, COVID 19 has had a worst impact on the economic activity, driving substantial part of the industry to a standstill. Due to various measures taken by the Governments to prevent spread of the virus, multiple areas such as supply chain, employee well-being and mobility, working capital and other financial commitments and challenges around cyber security and confidentiality due to working from home are some of the immediate challenges being faced by the businesses. In addition, various financial, regulatory and tax compliances is another area which gets impacted.

The government (GoI) has so far been very supportive and empathetic towards businesses and was quick to respond through delayed application of few amendments introduced in Finance Act 2020 (FA 2020) along with relief measures on various tax and other statutory compliances announced subsequently.

The move to defer tax withholding on ecommerce operators and widening of collection at source provisions to 1 October 2020 is likely to provide sufficient time for gearing up internal systems to comply with these provisions.

Further, additional clarificatory changes to curb duplicated dividend taxation in REIT/InvIT structures and including notified foreign pension funds within exemption provided for sovereign wealth funds, should contribute to infrastructural goal in the long run. At the same time, there was a bit of element of surprise in expansion of equalization levy provisions to include ecommerce supply and services within and the industry may expect deferral of its application to fully gear up their systems to comply with this new levy.

The need to embrace new-age digital technologies is a big learning for business from the lockdown and a need is felt for improving investment in technology particularly in various aspects of business including supply chain and finance. It could range from digital documentation management to task management and undertaking multiple tax compliances.

The GoI has overall been proactive in its counter COVID measures and has adopted a collective approach, including on taxation front by easing the procedural framework. Extension of statutory deadlines (including belated/revised income tax returns and GST annual returns/audit certification) to 30 June 2020 and new GST returns system and e-invoicing to 1 October 2020 is a welcome move and has been well acknowledged, however, next is to address the situation of cash crunch.

Though the penal provisions on delayed payment of taxes (like advance tax, GST) and filing of GST returns have been liberalized, but an experiential approach from other economies, particularly for self-employed and individual taxpayers, providing for flexibility to defer without penal implications is also expected. To further ensure liquidity, government announcement on release of pending income-tax refunds of upto Rs 5 lakhs and GST and customs refund claims worth Rs18,000 crore as may benefit 1 lakh business entities, could also ease the liquidity worries for small taxpayers.

Particularly on the indirect tax front, the GoI has considered an all-inclusive approach by providing temporary cash flow relief to large taxpayers by way of permitting 15 days delay in payment of taxes without interest and thereafter at a reduced rate of 9% (vs. 18% regular interest) till 30 June 2020, and a more eased off relief to business entities with upto Rs 5 crore turnover from payment of any interest for tax periods February, March and April 2020, if paid by 30 June 2020.

This should certainly help in assuaging their cash flow situation. Further, permitting availment of input tax credit on a provisional basis with a cumulative matching for February to August 2020 returns subsequently, speaks of GoI’s current focus of taxpayer centricity and is well acknowledged. Another area which should contribute to ongoing continuance of business if not a spike up, is enabling of 24×7 custom clearances till 30 June 2020.

Eyeing this year as exceptional and taking leads from past economic crisis of 2008, the GoI may consider temporary incentives directly by way of accelerated depreciation on new assets, rebate in headline tax rate and industry-wide GST rates with sector specific incentives/fiscal support (like for tourism and hospitality), and indirectly to reduce employment loss by permitting deferral of employer share to PF/similar contribution or additional credits to businesses for salaries of employees retained.

Leading on from its own experience of the pioneer move of linking contribution to PM Cares Fund to CSR goals as also eligible for 100% deduction, the expectation is for such further measures focused at boosting indigenous manufacturing capabilities particularly for augmenting the consumption in post lockdown era.

Thus, more incentive schemes like the productivity linked incentive scheme announced recently for manufacturing of mobile phones and its parts, is sure to draw attention of the businesses.

Another step up, which is being felt industry-wide, is to provide a conditional clarification on foreign companies not constituting a permanent establishment owing to unplanned presence of their employees in India due to COVID-19. Once brought to shape, the move is certain to ease out the worries of our investment and business relations.

Whilst the measures would certainly impact the government’s treasury, the need of the hour unlike other distress economic situations, is to rather have a more short/medium term focus than longitudinal to contain the economy and to protect its people and their interests who form the helm of an economy sailing through, by cohesively adopting fiscal measures that support trade and industry, ensuring stability of the economic system by compensating for the foregone economic activity and restarting the growth trajectory by increasing purchasing power of citizens.

Bipin Sapra and Raju Kumar at Tax Partners, EY India. Views expressed are their personal.

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