The JSBF Report
Covid-19 and Tax: How it has shaped the Indian economy
By – Shreya Malhotra
Source: East West Bank
Covid-19 has made a significant negative impact in most sectors of the Indian economy. According to the Ministry of Statistics and Program Implementation, the Indian economy shrunk by 7.3% in the second quarter of the current year 2021, which is the most severe drop observed. GST collections fell by 33% in the previous year 2020. The shutdown in the Indian economy led to an increase in unemployment significantly. India's exports also fell by around 24% by September 2020. In a desperation to help the economy recover from the economic losses, business closures, and job losses, the government took various initiatives. This article will mainly talk about some of the changes in tax policies taken by the government and how it has shaped the Indian economy.
Given the salary cuts that took place, the government, in order to support the employees, came up with the much-needed reasonable policy to provide income tax exemption to employees on the amount that they receive from their employers for covid-19 treatment from the financial year 2019-20 onwards. In the Union Budget 2021, it was announced that senior citizens over 75 years old who only have pension and interest as sources of income would not be required to file their income tax returns. However, they will be exempt from paying tax if the interest income is deposited in the same bank as the pension. The government will also notify a couple of banks that account holders would be eligible for the tax exemption and will be required to provide a statement to the bank. The specified bank would then have to calculate the profits of such senior citizens using the deductions allowed by Chapter VI-A and the rebate allowed by Section 87A of the Act. For this assessment year, such senior citizens would not be required to file a tax return.
The effects of the pandemic have affected various sectors, and these have made it clear that both the consumer and business environment has undergone a change. While some industries have been hit hard, others have shown tremendous growth. The Union Budget 2021 proposes various changes in the taxation structure to boost the country's declining economy. Because technology, pharmaceuticals, and health care have been performing exceptionally well during the pandemic, the government may encourage investment in these areas by extending some tax benefits to R&D activities, such as a 100 per cent deduction or giving R&D credits. These industries should assist in balancing out the stressed budget deficit position if they do successfully.
The government must carefully consider a support package to support the sectors that were hit by the pandemic. To support these industries, it may also consider introducing a tax holiday for businesses that invest over a threshold in labour-intensive sectors such as automotive and textiles. Another step the government can take by providing accelerated depreciation for assets deployed in pandemic-affected industries; this will help them preserve resources so they can make the required business changes to adapt. GST rates for goods and services related to these industries may also be lowered to boost demand.
Despite the tax rates being constant, the demand for higher investment limits and medical expenses has not been resolved completely. Taxpayers may shy away from those investment opportunities. The government has taken up steps for this by announcing positive initiatives that might encourage the common person, such as lowering stamp duty based on taxes, simplifying travel leave concessions, and exempting return filings in some cases.
While the government adopted an equalization levy to target non-resident e-commerce businesses at the outset of the pandemic, there is a need for confidence and clarity on the terms to allow for efficient execution and tax collection. Similarly, the scope of TCS (tax collected at source) on goods sales and TDS (tax deducted at source) on e-commerce operators should be clarified and regulated, such that if such deductions or collections result in needless cash traps with the government, they should be reversed. As a result, more specific and more explicit provisions are required.
The government also announced other policy changes and reliefs during the pandemic, which made a significant difference and helped taxpayers. It has been announced that any generous payments received by family members of a person, from their employer or another person on the individual's death on account of Covid-19 will be exempt from income tax. A taxpayer's financial help for Covid treatment will be completely tax-free. Additional financial support provided by an employer in the event of an employee's death due to Covid is also completely tax-free, and aid received from others is tax-free up to a total of ten lakh rupees.
Thus, it can be concluded that the tax reliefs and policy measures taken up by the government in response to the pandemic were adequate, although there can be a few changes as discussed above. For example, the scope of TCS and TDS can be explained and clarified to help individual taxpayers. The government can also announce a special package to support those sectors that were hit and affected more by the pandemic and encourage investment in industries that had performed well during the pandemic by providing tax relief/deductions. But overall, I can conclude that the policies formulated and implemented have indeed helped boost back the economy to a certain extent. According to Economic Times, these covid-driven tax reliefs have also cost the government 2-3% of GDP. Now that the immediate crisis has almost passed, policymakers must start setting the framework for businesses to rapidly recover and sow the seeds that will allow them to prosper in the future.
Shreya Malhotra is a second-year B.Com (Hons.) student at JSBF. You can check her profile on LinkedIn.