Corporate Tax

Finances 2021 want checklist: concentrate on corporate taxation

From Dr. Suresh Surana, founder

With the Hon’ble finance minister’s promise to provide a budget like never before, the 2021 Union budget is one of the most anticipated budgets to be presented on February 1, 2021. As the nation emerges from the pandemic and due to the economic consequences, the 2021 budget is expected to focus on revitalizing growth and jobs, as well as gradually setting the roadmap for the gradual restoration of budgetary discipline.

The following are some of the corporate sector’s expectations for the 2021 budget:

Extending the benefits of carrying over losses during the merger to the Covid-affected service sector – 72A

Section 72A of the IT Act provides that the accumulated tax loss and the unabsorbed tax depreciation of the merging companies apply as a loss / impairment of the merged company for the previous year in which the merger was carried out or subject to the satisfaction of certain conditions. Thus, the losses and unabsorbed depreciation of the Merging Company may be carried forward to offset against any profits of the Merged Company. However, the usefulness of this provision is limited to the amalgamation of companies that own an “industrial company”. The definition of such an industrial enterprise includes units for manufacturing, energy, telecommunications, mining, and the construction of ships, planes, and rails. Apart from such an industrial enterprise, the benefit is extended to banking and public sector enterprises involved in the operation of aircraft. Such a definition thus keeps service companies out of their jurisdiction.

It should be noted that the service sector was still in its early stages when Section 72A was introduced, but has developed significantly over the years and certain sectors such as aviation, hotels and tourism have been severely impacted and may not be revived anytime soon.

Given the above expansion of the service sector in India and the need to restructure the sectors affected by Covid, the definition of industrial company is used. 72A could be amended to include certain of the above service sectors, thereby extending the benefit of transferring losses and unabsorbed depreciation to those sectors as the merger takes place.

The scope of the Safe Harbor rules is to be expanded to include additional industries

In order to reduce litigation regarding international transactions between associates, the Safe Harbor Rules (SHR) were incorporated into the Income Tax Act to provide a benchmark for determining market price. However, such SHRs have only been made applicable to certain sectors such as IT & ITeS, contract research for generics, core and non-core automotive components, etc.

It is necessary to extend the scope of SHRs to other sectors or industries in order to reduce litigation over international transactions between group companies and to attract foreign investment.

Rationalization of loss of loss in the event of a change in management – ยง 79

Section 79 of the IT Act provides that losses are carried forward and offset by companies in which the public is not significantly interested in meeting the condition that beneficial ownership does not change significantly (51%). This section is an anti-abuse policy. The aim of the section was to prevent profit-making companies from using the provisions by acquiring loss-making companies for the purpose of using the netting services.

However, many companies have posted pandemic losses over the past year. To survive, they may need to be restructured or even take the restructuring path through the Bankruptcy Bankruptcy Code (IBC) or the NCLT path. This can lead to a significant change in their beneficial interest or ownership, which can trigger Section 79.

Therefore, the 2021 budget may either allow for a relaxation in Section 79 for changes in ownership resulting from the business reorganization, especially if approved by NCLT or the sector regulators.

Lowering the tax rate for partner companies and LLPs

The tax rate for most companies has gradually decreased over time with the introduction of tax breaks. As a result, the majority of businesses pay taxes ranging from 15% to 22% (plus the applicable surcharge and tax).

However, there was no reduction in the tax rate for the partnership companies and LLPs, which is 30% (plus surcharge and levy). In view of the foregoing, the income tax rate applicable to the partnerships and LLPs should be reduced to 25% (plus surcharge and levy).

(The author is founder at RSM India)

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