Key Highlights

• COVID-19 has inevitably played a huge role in making the Indian economy what it is as of date, and it’ll have to be factored in across different aspects while presenting the Union Budget this year.
• While a lot has been announced for the startups, there’s a lot more which remains to be done. Access to global capital deserves more relaxation. It could be in form of easing the existing foreign exchange regulations allowing Indian entities to externalize/flip the holding structure or allowing overseas listing for Indian startups.
• As for healthcare, it has been in dire need of a push, and so has the medical insurance sector given the rising cost of premiums and nationwide job losses creating a clash.
• The Union Budget 2021 should act as a catalyst to start economic recovery via its provisions, but the key remains to be implementation and tactful decision-making from the Government.

How COVID-19 Disrupted The Indian Economy In The Build-Up To Union Budget 2021

The COVID-19 pandemic created a vortex which has been hard to get out of, evidently. However, slowly, but surely, there have been flashes of economic recovery. In the build-up to this year’s budget,it was made evident via the pandemic that our public healthcare system has been on the backfoot for most of the fight against COVID but with the vaccine now being administered, things may have just started to look up (“may have started” because the legitimacy and efficacy of the vaccine is still up for debate).

Now, we know there were job losses and paying bills became difficult. What became even more difficult for the citizens of this country was taking care of their health/medical needs.The constant spiraling costs of medical treatment and the health insurance premiums were always a taxing matter,and the pandemic only made it worse.Insurance premiums went further northwards as the insurance companies had more risks to deal with.Talking about our healthcare infrastructure,it was only a matter of time that it was exposed to reality.

But the amount of unemployment which came as a result of the pandemic did create a dent in the medical insurance sector and our pre-Budget 2021 expectations detail what we expect to be done or what could be done in this segment.

Similarly, there are issues with startups which got flagged off –as a number of startups shutting down operations due to funding or other issues, and our 2021 Budget expectations also cover that.But before we get to it, let’s throw some light on something which has bothered quite a few people. Read on:

The Anomaly Of The COVID Cess And What We Expect From Budget 2021 In This Regard

Now, purely from a tax perspective, there is a perception of the Government being short of funds and there has been plenty of hearsay about a COVID cess which will be implemented, and I don’t feel it’s a good idea, considering the kind of impact it can have across all stakeholders – be it the ones with a higher amount of wealth, or otherwise.

However, even if some kind of COVID cess has to be levied, I feel it must be levied on HNIs (High Net worth Individuals) at a standard rate. I understand that western countries may be increasing their taxes right now, but the dynamics of the Indian economy are a lot more different as compared to the western countries (which are far more developed) – and hence, we can’t blindly follow the same models. And more importantly, there are costs like healthcare, social security, insurance, etc. which individual taxpayers in our country need to account for as compared to developed countries where such aspects are taken care by the government.

And now, we address the elephant in the room, below.

Healthcare And Health Insurance For Individuals: Our Union Budget 2021 Expectations

Given the pandemic, a lot of people incurred healthcare-related costs. Most of them either had no insurance coverage at all or had inadequate coverage to cover all expenses.Major reason for low penetration in this industry is high cost of insurance premiums, but time is ripe to reverse the trend by encouraging the citizens to have adequate health insurance in place.

For starters, the Government should consider the following:

• Increasing the existing deductions available on health insurance premiums, since the existing limits are inadequate to cover the rising costs of medical premiums.
• Gradual reduction of GST rate on health insurance premiums with the eventual target of phasing it out altogether.
• Some exceptional allowances, at least for this year, must be given to taxpayers in order to reimburse the heavy costs incurred owed to COVID.
• Additional incentives should be allowed to taxpayers donating for R&D in healthcare sector.
• Additional incentives should be allowed to entities carrying out R&D activities in healthcare sector.

Union Budget 2021 Expectations For Startups In India

Honestly? Startups deserve a lot more than what has been laid out for them. While it was only recently that an INR 1000 crore seed fund was announced for startups during the Startup India International Summit held earlier this month, I certainly hope the implementation of this move and the ones that follow is a lot more thorough than what it has been in the recent past.

1. Tax-Specific Relaxations For Startups Expected Via Union Budget 2021

• Tax Holiday u/s 80 IAC:

  Extending the sunset clause for claiming tax holiday u/s 80-IAC. Furthermore, startups incorporated as partnership firms are currently not eligible for tax holiday under this section. Therefore, the tax holiday benefit should also be extended to them. Tax holiday period should be increased to at least 5 consecutive years from the existing 3 consecutive years.

• Capital Gains exemption to investors u/s 54GB:

  Currently, the individuals/HUFs deriving capital gains from transfer of residential property are exempt to pay capital gains tax if the gains are invested in equity shares of a startup company within the prescribed period. It is suggested to expand the scope of this section to cover other than residential property as well. Furthermore, exemption should also be granted for investment in other than equity shares of startups. Say, investment in convertible notes should also be eligible.

• Section 56 (Angel Tax):

  Currently, there are very stringent laws and conditions to obtain angel tax exemption under Section 56 of the Income Tax Act and those conditions deserve to be relaxed. One of the restrictions is that a startup cannot invest in specified assets for 7 years (from the date of latest financial year in which shares are issued at premium). Specified assets have a specific definition, which, inter alia, include capital contribution in any entity, which effectively means a startup cannot have a holding-subsidiary structure in place to run its operations or, for that matter, it cannot even enter into any joint venture with any other startup entity. This is something, which I feel, must definitely be changed. There is no reason to have such restriction as long as the startups have commercial rationale to substantiate its holding structure.

• Section 115BBF (Income from patents registered in India):

  Currently, patents registered in India are taxable at special rate of 10%. This rate should be lowered to 5% for startups to encourage startups to keep their intangibles in India.

• GST:

  Currently, there are no specific relaxations for startups, but it is pertinent to address certain practical challenges faced by startups like inverted tax structure. This could be dealt with either by reducing the GST rate on inputs or having a dedicated fast-track refund mechanism for startups to enable effective utilization of the working capital for startups.

• Standardized definition:

  It is suggested to have a uniform definition for eligible startups across various benefits available under the tax laws including angel tax exemptions under section 56, tax holiday under section 80-IAC, capital gains exemption to investors under section 54GB, etc.

2. Externalization/Flipping The Structure And Overseas Listing

Furthermore, easing out foreign exchange regulations to enable the startups to access global capital more easily, is the need of the hour. Externalization/Flipping of the holding structure is one such reform which is expected to be allowed, at least, until the Indian entities are allowed to list themselves overseas. Talks of overseas listing has also been doing rounds for quite some while now but there are numerous ifs and buts (w.r.t. tax and regulatory aspects) to address before it is implemented. Having said that, I am eagerly waiting to have something concrete (much more than just the declaration of intent) on this aspect in this budget.

Lastly,looking at it overall, the right intention has certainly been there, but the implementation needs serious consideration and, hopefully, this time the intention and implementation strike the right chord to achieve the desired objective.

What Could An Economic Recovery Even Look Like For India?

The Government has been quite aggressive in terms of divestment. It’s secondary to debate whether it’s a good idea or not. While central government-owned companies are one aspect, I feel that the badly performing state-owned entities should be seriously considered for divestment. Secondly, austerity measures are there to preserve the resources of the country and the money should be spent wisely – however, the Government recently chose to spend over INR 970 crore to build a new Parliament building and that’s a decision which hasn’t gone down well with the people.

This is debatable whether it’s even necessary but according to me, there are more important things to focus on, right now, when it comes to economic recovery and this new parliament building could have certainly waited.

While I wanted to keep my focus on healthcare and startups as I’ve detailed, there are plenty of areas – ranging from manufacturing, banking, aviation, etc. which require attention from the Government to ensure that the downward graph catches an upward trajectory. Job creation, easy access to funds, tax measures, etc. – the wishes and wants across the nation know no bounds. And again, it sounds great on paper to hear ambitious targets and provisions. What we’ll wait for to see is how the Government implements them.

Please note: Views presented in the article are of the author and not of the firm.