Budget 2021: Government focus on revolutionizing corporate tax framework

While fiscal budgets for developing economies are typically growth driven, this time, it would be experiential to see whether the government considers infusing stability alongside in the economy — a base which could catapult the economic activity and growth

One would have hoped that the corporate tax framework would revolutionise with the announcement of the Taxation Laws (Amendment) Act, 2019 and Budget 2020, until we were hit by COVID-19 which left a dampening impact on global economies. Especially for India, where the economy was still under recovery from an overall slowdown, the scars of pandemic to a certain extent negatively impacted production, development, sales/export, earnings, investments and the overall economic situation.

Thus, while fiscal budgets for developing economies are typically growth driven, this time, it would be experiential to see whether the government considers infusing stability alongside in the economy — a base which could catapult the economic activity and growth. To this, it is likely that the government would continue its focus of spending on infrastructure and retail activity which can potentially provide much-needed impetus to sustainable and near-promising economic development.

This government has been focused towards revolutionising the tax framework — from reduced tax rates and manufacturing incentives to digitisation in the compliance framework. Unfortunately, not many of these measures have come to full utilisation due to the pandemic.

Expectation to have a further tax reduction may thus not be correct, and the Budget is expected to be more focused on laying a roadmap towards actual implementation of the measures announced in the past year or two. Even though the 2021 tax budget may eventually turn out to be a revamped version of Budget 2020, it may still be expected to incentivise contributions towards post-COVID-19 recovery forums.

The government may consider extending the R&D incentives under Section 35 of the Income-tax Act, 1961 incentivising R&D in the medical sector towards indigenous vaccine development and mass expansion. A weighted deduction (say at 150-200 percent) may not only provide businesses with additional cash, but also help the economy build indigenous capabilities and self-reliance. Considering that the availability of a vaccine along with uplifting the economy is a focus, the government may consider a transitory model to permit companies opting for reduced tax rates also to benefit from such R&D incentives.