Short-Term Amendments to Tax Policies Can Mitigate Covid-19’s Economic Impact

Blogs · March 24, 2020
Author(s): Vidushi Gupta

Relief to emergency sectors and investment incentives are the need of the hour

The coronavirus pandemic has wreaked havoc on the global economy and substantially disrupted the supply chain. The Indian economy has also felt its impact, with the BSE Sensex witnessing its biggest one-day fall in absolute terms earlier this month.

Millions of Indians across several major cities in the country are under lockdown, bringing most businesses to a complete standstill. While a cash flow blockage is imposing significant challenges across all sectors, it is the small businesses, travel and tourism, and the restaurant industry that have been hit the hardest.

In parallel, the work force involved in the provision of essential services continues to soldier on amidst reports of severe shortage of protective health gear such as masks, body coveralls and sanitizers.

This piece explores the role that tax policies can play in tackling some of these pressing concerns raised by the coronavirus outbreak.

International approach

The governments of several countries have tried to bridge the economic impact of the pandemic through amendments to their tax policies. Tax payment deferrals and relaxation of filing deadlines are popular measures adopted by many countries, including the UK and the US.

In the same vein, some countries including Australia and the UK have established dedicated helplines to address the concerns of taxpayers who have an outstanding tax liability but are facing financial distress owing to Covid-19. Relief offered by these hotlines ranges from waiver of interest and penalty, to deferral of tax payment. The UK, for instance, has waived the levy of property tax on several commercial buildings operating in the retail, hospitality and leisure sectors.

Australia has allowed its population to access a part of their superannuation fund in an attempt to increase the flow of cash in the economy and create liquidity. They have waived the payment of tax on such withdrawals. Countries such as Australia and China have also adopted measures to encourage fresh investment by increasing deductions allowed on new assets.

India’s focus for providing short term relief

The Indian Government has set up a task force to conceive an economic package, aimed at neutralising the impact of the coronavirus outbreak on the economy. Accordingly, the finance minister Nirmala Sitharaman, in a press conference earlier today, introduced a slew of measures relaxing tax compliances.

While these reforms are imperative to give an initial boost to the country’s cash flow situation, they merely scratch the surface. In order to provide relief to the economy in a holistic fashion, future amendments to India’s taxation laws should focus on achieving four primary objectives:

• They must continue to increase cash flow and liquidity. In addition to compliance relaxations, this can be achieved by expediting tax refunds.

• Relief must be provided to emergency sectors by reducing the rate of GST leviable on goods and services identified as imperative in tackling the coronavirus outbreak. It is necessary to design such reductions bearing in mind that they do not impose restrictions on availment of input tax credit or add to taxpayers’ compliance burden. Income tax breaks may also be offered to individuals providing emergency services during these trying times.

• Incentives must be offered with an aim to increase the local production of necessary goods. This may be executed by allowing expedited write-off of depreciation or one-time deduction of a percentage of cost of asset.

• Donations must be encouraged. Businesses supplying identified essential goods such as protective health gear free of cost as gifts must not be burdened with additional costs and compliances in the form of reversal of GST input tax credit.

While amending India’s tax policies, it is imperative that the task force strikes the intricate balance between providing short term relief, without further distorting India’s already convoluted taxation framework in the long-run.

Views are personal.


About Vidushi Gupta:

Vidushi is a Research Fellow with the Tax Law vertical. She is interested in facilitating reforms in India’s tax landscape and focuses on issues relating to goods and services tax, income tax and international tax. At Vidhi, she has assisted the Central Board of Indirect Taxes and Customs, the Department of Revenue, the Finance Commission, and the Goods and Services Tax Network on a range of projects, including simplification of goods and services tax compliance and increasing adoption of digital payments. Vidushi graduated with a B.A.LL.B.(Hons.) from Dr. RML National Law University in 2014. Prior to joining Vidhi, she was working at PwC as an Assistant Manager in the Tax and Regulatory Services division, where she provided indirect tax advisory, litigation and compliance services various multinational clients.