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India Budget 2021-2022 and potential tax developments

INSIGHT ARTICLE  | 

Following the India government’s release of their budget proposals for fiscal year 2021-2022, RSM India published an overview of important corporate and international tax developments that are of relevance and consideration for companies conducting business in India. The 2021 Union Budget proposal covers a wide range of topics of interest to businesses. Salient points are provided below:

Provisions

Impact for multinationals

Further clarity provided in regards to the scope and applicability of the equalization levy (EL) that is applicable to cross-border digital transaction

Addresses confusion around initial rollout for non-Indian taxpayers

Rationalization of provisions and scope of "slump sale" to include all types of transfers including exchanges.

Clarity in the arena of merger and acquisition transactions. It expands the scope of the definition of a slump sale to include all types of transfers by any means and thus being subject to capital gains tax as opposed to ordinary income taxed at a higher tax rate.

Restrict eligibility to claim tax depreciation on goodwill.

An important consideration from a tax planning perspective when trying to mitigate tax in India

Reforms regarding availability of tax treaty benefits for dividend withholding on payments made to foreign institutional investors pursuant to the provisions of the double taxation avoidance agreement.

Reduces the burden of withholding tax when repatriating returns on investment.

Grant withholding tax exemptions (i.e. no tax is deducted at the source in case of dividend income) for real estate investment trusts and infrastructure investment trusts.

Makes it easier for foreign investors who invest in infrastructure, allowing them to repatriate earnings in tax efficient manner

Reduction of time limit for completing tax audit proceedings, which involves transfer pricing.

Allows taxpayers to gain a level of certainty as to the timing of the proceeding and its conclusion, which can assist the taxpayer in determining its impact for financial statement and tax purposes with lesser subjectivity involved.

No deduction would be allowed to an employer for its employees’ contributions to any provident, superannuation fund or any other relevant fund if the employer does not credit the amounts contributed to such funds before the appropriate due date.

Provides needed clarity and guidance in an area that was previously fraught with uncertainly for an employee related tax deduction that can be significant.

The tax rates (including alternate minimum tax rates) for Indian companies is proposed to remain unchanged.

No change is proposed on tax rates. However, domestic companies continue to have an option to pay tax at a concessional (lower) rate subject to certain specified conditions. The alternative minimum tax provisions shall not be applicable to such companies. Additionally, companies commencing manufacturing/generation of electricity before March 31, 2023, will have an option to pay tax at a lower tax rate of 15%.

Multiple provisions proposed to promote start-ups and innovators by extending the eligibility period to claim tax holiday for start-ups and the eligibility period for claiming capital gains exemption for investment made in the start-ups from March 31, 2021, to March 31, 2022.

The government is trying to boost the level of economic activity by providing incentives to start-ups and its investors including foreign direct investors. Incentives include a tax holiday for new start-up, deduction of new capital expenditure and scientific research, encouraging new investors and the expansion of business by existing investors.

Globally active companies who are considering or are currently doing business in or through India should evaluate the impact proposed in the Union Budget 2021 and should consider their response carefully. If you have specific questions about how any of these rules may affect your business, please contact us today. We are here to help.

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