Budget 2022 Highlights: Key Direct Tax Takeaways
While Budget 2022 could spur growth, a lot of tax issues remain unaddressed as taxpayers were expecting clarity on various matters
Budget 2022 can be said to be a balanced one that would bolster growth. The increase in capital expenditure outlay and extension of the tax incentive regime for manufacturing companies would help boost the ‘Atmanirbhar Bharat’ initiative.
Some of the standout proposals from Budget 2022 include a reduction in timelines for winding up of companies, cross-border insolvency resolution process, a review of the Special Economic Zones Law, the introduction of a Digital Rupee, a new regulatory regime for private equity and venture capital, etc. These measures would really help in the ease of doing business aspects and show the intent of the Government of India to make the country a business-friendly destination.
On the direct tax front as well, there few changes discussed below which would have an impact on corporates and individuals.
Extension Of Concessional Tax Regime For New Manufacturing Companies And Startups
In 2019, corporate tax was reduced and a special tax rate of 15% was introduced for newly set-up manufacturing companies to promote new manufacturing investment in India. One of the key conditions to claim the benefit was to commence manufacturing on or before March 31, 2023. Given the fact the entire world was struggling with the Covid-19 pandemic, the economic activity had slowed down in the last couple of years; many corporates who intended to make additional investments had to defer their plans. There was a widespread demand that this date be extended. In line with this, the budget has proposed an extension of one year for newly set-up manufacturing companies to commence manufacturing on or before March 31, 2024, instead of March 31, 2023.
On the same lines, the date of incorporation for an eligible startup for exemption is also proposed to be extended to March 31, 2023.
Discontinuance Of Beneficial Tax Rate Of 15% On Dividends Received From Foreign Subsidiaries
Till now, dividend received by Indian corporates from their overseas subsidiaries (where they hold 26% shares) was taxed at a concessional rate of 15%. With the change in the Indian dividend regime from April 2020 where the taxation is hands of the shareholder based on their own tax rate, the government now proposes that such dividends from overseas subsidiaries should also be taxed at the corporate tax rate and not at concessional rate of 15%. This would be effective from April 1, 2022.
This would discourage Indian multi-national corporations from repatriating profits earned abroad, and it is not clear if that is the intention of the government.
However, there is a small window available till March 31, 2022, for companies intended to repatriate profits earned abroad to do so at the concessional tax rate of 15%.
Education Cess Not Allowable As A Deduction, Clarified
Indian tax laws do not allow a deduction for taxes paid while computing the taxable income of a taxpayer. The current language of the law covered any tax paid or surcharge and hence many corporates had adopted a position that the Education Cess has not been directly covered under the definition of taxes and since the intention of the Cess was to finance the provision of basic education and health. This view was supported by Delhi High Court and Bombay High Court decisions. However, recently, Kolkata Tribunal decision had distinguished both the High Court decisions and held that education cess is nothing but an additional tax and hence should never be allowed as a deduction.
The amendment is with retrospective effect from FY 2004-05. This would affect many corporates that have claimed the education cess as the deduction for the past years and they will have to evaluate such a claim considering the proposed amendment.
Taxation On Digital Assets
On expected lines, taxation on digital assets has been introduced in Budget 2022. Digital assets have been defined widely to include any kind of crypto-assets, non-fungible tokens, etc. The tax regime for digital assets appears to be harsh as it provides for taxing gains from digital assets at 30% without allowing any deduction or set-off of losses except for the cost of acquisition. Also, no losses in respect of digital assets are allowed to be carried forward. A gift of a digital asset will also be taxed. To ensure compliance withholding tax of 1% on the transfer of digital assets is also proposed. This puts the digital assets or cryptocurrencies in a disadvantageous position as compared to other investment assets.
It is widely accepted that the taxation of a particular income does not provide legitimacy to the source of income and hence one must be careful in assuming that this new tax provides any legitimacy or recognition to the cryptocurrencies.
Rationalisation Of Surcharge Rates For Capital Gains Tax
The maximum surcharge applicable for long-term capital gains on all assets other than listed securities was 37%. This now proposed to be brought at par with listed securities, being 15%. Thus, the long-term capital gains rate on all assets would reduce from 28% to under 24%. This would primarily give a boost to promoters and investors who are looking at selling a stake in their unlisted companies.
Filing Of Updated Tax Return
In order to promote voluntary compliances and reduce litigation, Budget 2022 proposes to allow taxpayers to file an updated return within three years from the end of the relevant financial year with additional tax (i.e., for the year-ended March 2023, an updated return can be filed up to March 31, 2026). It would be pertinent to note that the updated return is not allowed in cases where there is a reduction in income or an increase in losses. Also, while filing updated returns, the taxpayer is required to pay an additional tax of 25% on tax and interest amount due (if filed within two years from the end of the financial year) or 50% (if filed after two years or before three years).
Litigation Management To Reduce Litigation
An option has been provided to the tax authorities to not file an appeal on a question of law if the issue is already under consideration by a High Court or the Supreme Court of India in the case of the same taxpayer or a different taxpayer. This move would help in reduction in piling of cases before the courts on the same issue and help manage litigation.
Clarity On Business Reorganisation
In cases of mergers, the time involved from the time of filing an application and receiving approvals is a long-drawn process. There have been cases where the notices and litigation were conducted on the predecessor entity and taxpayers were arguing that such proceedings are not valid as the predecessor entity does not exist post a court order on amalgamation.
Budget 2022 clarifies that any proceedings on the predecessor entity would be considered valid and would have been deemed to have been made on the successor.
It also clarifies that entities undergoing reorganisation would be allowed to file modified returns for the period between the date of effectivity of the order and the date of issuance of a final order by the competent authority.
Conclusion
In our view, Budget 2022 appears to be a balanced budget and could spur growth in the economy with an increased outlay for capital expenditure. However, on the tax part, a lot of issues remain unaddressed as taxpayers were expecting clarity on various issues including provisions of the Equalisation Levy, Significant Economic Presence, etc. Also, the salaried class and middle-class taxpayers would be disappointed as no relief on the standard deduction, slab rates, investment link deduction are provided in the budget.
Maulik Doshi is Deputy Managing Director and Partner - Direct Tax and Transfer Pricing Services, at Nexdigm.
The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.