At a time when economic activities have come to a standstill on account of the lockdown imposed by the government to tackle the Covid-19 pandemic, some leeway in tax laws will provide much needed relief to taxpayers. Many countries, including India, have announced various economic relief measures, ranging from financial aid and provision of free/ subsidised food and water to debt repayment deferrals. The idea essentially is to help people cope with the substantial reduction in their cash flows to meet their daily and business needs, especially for businesses with permanent employees whose rights may be protected legally, meeting their working capital requirements for maintaining the supply-chain, transporting goods, meeting their other contractual commitments, including those related to debt and so on. Businessmen have no control over tax payouts since the amount or percentage to be paid is fixed by the government, unless governments provide tax relief to ease cash flows.
In this context, the Organisation for Economic Co-operation and Development (“OECD”) has sprung into action to make a compilation of: (i) measures contemplated by tax administrations; (ii) constraints pertaining to those measures; (iii) recommendations to deal with the impact under tax treaties due to travel restrictions and ensuing possible tax exposures, which arise unintentionally and temporarily; and (iv) some recommendations on ‘good to have’ practices by businesses for their business continuity. The stated purpose of the compilation and these guidelines is to assist tax administrations and businesses in formulating their own possible measures. The compilations and guidelines are not recommendations with regard to any particular measures and they recognise that circumstances and considerations will vary for every country.
The OECD has broadly basketed the relief measures under the following categories:
- Additional time for dealing with tax affairs, such as the following:
a. Extension of timelines for filing of tax forms and making tax payment
For many countries, the COVID-19 outbreak happened at a time when income tax returns are typically filed and payments are due. The OECD has suggested pushing these timelines by several weeks or months, to provide individuals and businesses impacted by COVID-19 with additional time to file their tax returns and related forms as well as to make tax payments.
In this context, the Indian Government has promulgated the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (“Ordinance”), to ease some practical issues being faced by taxpayers due to the COVID-19 pandemic and to reduce the cash flow burden. The Ordinance has provided for extension of due dates for the payment of certain taxes to June 30, 2020. Time limits for (i) completion of proceedings, passing an order, issuing a notice by an authority, etc.; and (ii) filing of any appeal, response or application or furnishing documents, filing returns, etc., have also been extended to June 30, 2020.
The Indian tax laws also provide certain special deductions for taxpayers when they initiate manufacturing activities, make investments, construct house property, etc., within the prescribed timelines. Taxpayers may not be in a position to meet the deadlines due to restricted cash flow, therefore, these time limits have been extended to June 30, 2020. The Ordinance empowers the Government to extend these timelines to a later date, if required.
The dates for filing of tax returns for the financial year, which ended on March 31, 2020, are farther away, the last of such date being November 30, 2020 (in case of certain companies) and the earliest being July 31, 2020 (salaried individuals). These may be extended at a later time, depending on how the Pandemic pans out in India.
b. Remitting penalties and interests
Tax administrations may consider where appropriate to suspend penalties or interest, particularly where extensions of deadlines are granted. The OECD also suggests considering deferral of penalties and interests, which have been imposed but are yet to be paid.
The Indian Government will apply a marginally reduced interest for late payments, as provided under the abovementioned Ordinance provided tax is paid before June 30, 2020. Interest in that case would be payable for the period of delay i.e. period between the original due date and date of actual payment. Further, taxpayers will not be subject to any penalty or prosecution for delay in such payments.
c. Deferral of tax payments e.g. withholding taxes, installments
The OECD has recognised the fact that the COVID-19 outbreak has had an unprecedented impact on the cash-flow situation of many individuals and businesses. Such cashflow issues can cause the failure of not only one business, but also of connected businesses through a domino effect. OECD has recommended tax administrations to consider assisting taxpayers and easing their cashflow burdens by deferring tax payments that are due, accept tax payments in instalments (for example: quarterly or six monthly) or by downward adjustments to advance tax payments (or even suspension of such payments) even where profits are expected for the fiscal year.
India has provided some tax payment deferral, including on payment of advance tax, though the deferral is subject to interest at a reduced rate.
d. Easier access to debt payment plans and extension of plan duration
In some countries, taxpayers have the option of entering into ‘debt payment plans’, which may be subject to some conditions. Such debt payment plans could either be through an automatic process or through discussions with tax administrations. In such cases, OECD has suggested tax administrations to consider giving easier access to both payment plans, and to extend the plan duration, including giving an interest free period, particularly where there is a risk of hardship or significant cashflow concerns.
There is no such scheme in India. However, it is pertinent to note that this is one of the measures that the government can consider for easing the cashflow pains, if it is not in a position to reduce tax rates. Some announcements along these lines in the stimulus package would be useful.
e. Suspension of debt recovery (Tax recovery proceedings)
The OECD has suggested tax administrations to consider suspension of debt recovery, including suspending the garnishing of wages or bank accounts and asset seizures and sales as these have severe impact on taxpayers especially in the current circumstances.
No such suspension of recovery proceedings has been announced by the Central Board of Direct Taxes (“CBDT”) as of now. However, easing some burden on withholding tax obligations, the Indian tax department has suo moto extended the validity of all lower/ nil withholding tax certificates, which were issued for the financial year ended March 31, 2020, till June 30, 2020, in cases where applications are either pending with the department or not filed due to the COVID-19 situation.
- Quicker refunds to taxpayers
In order to resolve potential cash flow issues, which may be faced by taxpayers, OECD suggests that processes for refunds due to taxpayers may be prioritised to ensure that money is paid out quickly, and also relaxing the risk checks done before issuing refunds to enable quicker processing.
The Indian Government announced that it will issue all pending income-tax refunds of up to INR five hundred thousand immediately. Reportedly, many refunds have already been issued. This move is expected to ease the cash flow burden of small businesses.
- Temporary changes in audit policy and ways to provide quicker tax certainty
OECD has highlighted that tax audits (i.e. scrutiny of tax returns, etc.) can be a highly resource intensive process for taxpayers as well as tax administrations and can also involve transmission risks for tax administration staff and taxpayers. It suggests a temporary change in auditing policy, particularly for large taxpayers requiring larger resources and time. Amongst others, OECD has suggested achieving this either through adoption of a blanket policy or through changes in risk parameters.
The Indian Government has not announced any measures along these lines. However, given the nationwide lockdown that is in force till May 3, and the Government offices that are operating at reduced capacity, one needs to see the approach that the Government adopts to complete assessment proceedings and administrative functions, such as carrying out scrutiny assessment deadlines.
- Enhanced taxpayer services and communication initiatives
In order to deal with the current pandemic, the OECD has asked global tax authorities to reduce physical contact and increase digital communication. Some of the suggested measures include putting in place dedicated web pages, media strategies, hotlines, mobile applications, etc. It is also suggested that alternative means of communication such as telephone, fax, etc., be deployed to communicate with digitally challenged taxpayers.
The Indian Government has already started moving towards ‘faceless assessments’ over the last few years, which involve undertaking assessment proceedings over an email. This has been undertaken with a view to reduce personal interface. Additional efforts may be required to ensure that taxpayers who are not tech-savvy and are not in a position to take help from intermediaries as advisors may approach the tax department to understand their benefits. The tax department can set up a cell for this purpose and make this known to general public.
In addition to the above, the OECD has also highlighted certain key issues, which should be carefully considered by tax administrations around the world while selecting measures to be introduced to ease the pain of cash flow and compliance burden of the taxpayers. We will discuss these issues in the next blog.