FEBRUARY 18, 2021

By Ashesh R Safi, Partner & Jigar Shah, Senior Manager & Suraj Nair, Manager, Deloitte Haskins and Sells LLP

THE year 2021 began with a new ray of hope, that humankind would survive the most unprecedented crisis in recent times. Many countries, including India, commenced the vaccination drive to combat COVID-19. As vaccination is essential to eradicate the pandemic, appropriate fiscal stimulus is indispensable to retrieve the economic growth.

Since the year began, everyone was keenly looking forward to India's Union Budget 2021 in anticipation of a policy framework and adequate tax relief to boost the economy flagged by the pandemic.

As the day arrived, the Budget proposals have been unveiled with a view to give an impetus to the economy and enhance spending across sectors. One of the encouraging aspects of Budget is the government's proposal is to increase expenditure by increasing borrowings or monetising the assets, and not by increasing taxes. This is a welcome step which shall go a long way in building a US$ 5 trillion economy. Let us explore some key proposals laid down by the Finance Minister (FM):

a) AtmaNirbhar Bharat (self-reliant India)

As India was reeling through the lockdown restrictions during the better half of 2020, the government had announced a mega economic stimulus package of INR 20 trillion (US$ 260 billion) termed as the 'AtmaNirbhar Bharat' (Self-reliant India) programme. The package was announced to boost the 'Make-in-India' scheme which was announced in 2014.

The focus of Union Budget 2021 is also to expand the horizon of AtmaNirbhar Bharat programme as India, like many other countries, has an ambitious plan of being self-reliant for most of the products, if not all. A glimpse of key proposals as part of the AtmaNirbhar Bharat vision are as under-

i) A scheme of Mega Investment Textiles Parks (MITRA) will be launched to enhance the textile industry in order to achieve global competitiveness. The focus is to create world class infrastructure to create global champions in exports. As part of the scheme, seven Textile Parks shall be established over the next three years.

ii) The National Infrastructure Pipeline (NIP) was announced in 2019 and it has now expanded the project pipeline to 7,400 projects. The FM has laid down the plan to further boost the NIP by creating institutional structure and enhanced funding by augmenting the share of capital expenditure in Central and State budgets.

iii) Government intends to monetise operating infrastructure assets which could then be utilized for new projects. A "National Monetization Pipeline" of potential brownfield infrastructure assets will be launched. To begin with, five operational roads with enterprise value of INR 50 billion shall be transferred to the NHAI InvIT and transmission assets with a value of INR 70 billion will be transferred to PGCIL InvIT. Similarly, Railways will monetise the Dedicated Freight Corridor assets for operation and maintenance.

iv) Setting up a Development Financial Institution (DFI) to cater to the needs of long-term debt financing for infrastructure projects. Also, suitable amendments shall be carried out in the relevant legislations to enable debt financing of InVITs and REITs by Foreign Portfolio Investors. This will further ease access of finance to InVITS and REITs.

v) Huge increase in the planned capital expenditure - over INR 5 trillion - to enhance infrastructure development.

vi) Planned spending on roads and highways across the country to establish economic corridors.

vii) Large investments to upgrade railway infrastructure - like the National Rail Plan 2030 to create future ready railway system in India by 2030.

viii) Similar spending on power, ports, shipping and waterways to enhance the infrastructure landscape of the country to have it future ready.

b) Direct Tax policies

While the focus on fiscal stimulus is the need of the hour, fitting tax policy framework is essential to provide impetus to the wobbling economy. Union Budget 2021 focuses more on reducing compliance burden on the taxpayers and clarifying certain anomalies in the existing provisions of the Income-tax Act, 1961 while providing certain relief to taxpayers -

i) Under the existing provisions, 100% of the profits earned on developing affordable housing projects are allowed as deduction, upon satisfying certain conditions. One of conditions is that the project should be approved by the competent authority on or before 31 March 2021. This outer time limit is now extended to 31 March 2022.

A similar deduction shall also be allowed in case of affordable rental housing, a scheme for which shall be notified by the Central Government.

ii) The provisions of the Income-tax Act and Rules shall be amended to enable the Infrastructure Debt Funds to issue zero coupon bonds.

iii) The Income-tax Act provides for tax exemption in respect of dividend, interest or long-term capital gains from investments made in India by Sovereign Wealth Funds (SWF) and Pension Funds (PF), subject to certain conditions. The provisions are now rationalized to remove difficulty in satisfying certain conditions which were prescribed with an objective to enhance foreign investments in India.

iv) With an intent to reduce litigation and provide a robust tax administration structure to taxpayers, the time limit for re-opening of assessment proceedings has been reduced to three years from the existing six years. The time limit of 10 years shall apply only to specific cases.

(v) A Dispute Resolution Committee shall be set up in order to reduce litigation for small taxpayers.

(vi) The dividend paid to REIT/InvIT shall now be exempt from TDS provisions. Also, advance tax liability on dividend income shall arise only after declaration of dividend.

Although the debate shall continue on whether the Government of India has done enough to provide necessary stimulus to the economy, the Union Budget 2021 seems to focus on the crucial aspects of economic growth which is essential as India pulls itself out of the COVID-19 crisis.

[The views expressed are strictly personal.]