Direct Taxes: FM Sitharaman chooses quiet consolidation in Budget

The yardsticks of stability, predictability, rationalisation and simplification define the tax proposals

The Union Budget for 2022-23 was presented when the Indian economy is on a strong rebound, with the GDP growth for 2021-22 at 9.2 per cent and that for 2022-23 projected at 8-8.5 per cent.

The underlying theme of the Budget is promoting digitisation, Make in India, and Ease of Doing Business 2.0. The key direct tax proposals can be classified according to the four pillars of tax policy — stability, predictability and certainty, simplification and rationalisation, and building trust.

Stability

• Tax rates

There is no change in individual or corporate tax rates. The surcharge on long-term capital gains on transfer of all assets has been brought down to 15 per cent, at par with that on listed shares and equity-oriented mutual funds.

Further, surcharge on Association of Persons’ tax is capped at 15 per cent, where all members are corporates.

Even though there are things that can be improved, particularly in the individual tax savings laws, the Budget proposals stayed on their current course.  

• Impetus to manufacturing units and startups

New manufacturing companies set up on or after October 1, 2019, enjoyed a concessional tax rate of 15 per cent. The pandemic had slowed down the investment decisions of many such companies. The sunset

clause will now be extended by one year to March 31, 2024.

Currently, the eligible startups incorporated till March 31, 2022 avail 100 per cent tax holiday for three out of the initial 10 years. The window will now be extended till March 31, 2023.

Both businesses will get breathing space to avail the tax concessions. However, a longer extension of the sunset clause by 3-5 years would have taken care of the Covid-related roadblocks and provided directional assurance to the businesses.

Predictability & certainty

• Tax on virtual digital assets (VDA)

Hitherto, there was no provision for taxing gains from cryptocurrencies. Gains from transfer of cryptocurrencies (VDA tradable in an exchange) will be taxed at 30 per cent. It is expected that the Reserve Bank of India will frame regulation for the digital rupee. Different countries have adopted different policies to tax income from cryptocurrencies.

Payments for acquiring VDA from a resident above a particular threshold will be subject to tax deduction at source (TDS) at 1%. There can be practical difficulties in complying with the TDS requirements.

The proposal brings certainty to the government’s stand on income from VDAs. However, a few clarifications would be necessary viz., head of income for taxing (viz. capital gains/business income/ other sources).

• Decisions overruled

While the trend to reverse Court rulings in favour of taxpayers has continued, it has been used sparingly and in genuine cases.

• Repetitive litigation management

In order to reduce the number of pending litigation, it has been proposed that tax authorities will defer filing appeals for identical questions of law pending before the jurisdictional High Court or Supreme Court, whether in the taxpayer’s own case or in the case of another taxpayer, subject to the taxpayer’s concurrence.

Simplification and rationalisation

• Faceless assessment/reassessment

The provisions of faceless assessment are proposed to be amended to allow mandatory personal hearing (on request by the taxpayer). The proposal is welcome. There should be robust guidelines and in-built system controls for effective administration.

The scope of reopening of assessment has been widened. Now, assessment can additionally be reopened based on audit objection, exchange of information under tax treaties, etc. Reopening of assessment up to 10 years has been extended to include cases of expense, untaxed entry in books etc. Further, revisionary powers under Section 263 in respect of transfer pricing orders will now be granted to the Commissioner (transfer pricing). These can add to litigation and uncertainty.

• Beneficial tax rate on foreign dividend withdrawn

Section 115BBD provided for 15 per cent tax on dividends received by corporates from overseas subsidiaries. The rate matched with Dividend Distribution Tax (DDT). With the change in tax regime for dividends, such a concessional rate has been discontinued. While the new provision would entitle the corporates to take pass through benefits under Section 80M, it may disincentivise remittance of dividend from overseas.

• Charitable trusts and other institutions

Provisions for monitoring operations of tax exempt educational institutions, universities, hospitals etc. [Section 10(23C)] have been brought at par with that of charitable trusts [Section 11].

Conditions for withdrawal/cancellation of approval to non-genuine trusts and institutions have also been strengthened. Unreasonable benefits passed on to founders, trustees etc. of these trusts/institutions will attract a penalty up to 200 per cent.

• Amendments in TDS/ TCS provisions

Various amendments have been proposed rationalising the TDS provisions for widening and deepening the tax base.

A new Section 194R requires withholding of tax on freebies in kind to dealers, distributors etc. It would be difficult for the payer/provider to comply with the requirement, in practice.

• Mergers and acquisitions

In case of reorganisation or restructuring of companies especially on amalgamation, the revenue had been completing the assessments for pre-merger years on the defunct company (instead of successor). Such assessments were held as bad in law by the Courts. Henceforth, such assessments will be deemed to have been made on the successor. The successor will be required to file a modified return within six months of the approval of reorganisation. This should lead to reduction of unnecessary litigation.

To facilitate strategic disinvestment of public sector companies, rigours of Section 79 have been relaxed to allow carry forward of business losses if the ultimate holding company continues to hold at least 51 per cent of the voting power.

• Rationalisation of long-term capital gains

Currently, the surcharges on long-term capital gain for an individual taxpayer on transfer of any capital assets (other than listed equity shares and equity-oriented funds) is within the bracket of 10-37 per cent depending upon the income level. The said surcharge has now been capped at 15 per cent. This will reduce the effective tax rate in case of assets such as unlisted shares, house property, and is expected to benefit taxpayers in the higher income tax slabs or investors in venture capital/start-up founders.

Building trust

• Voluntary reporting of additional income

With the gradual reduction in timelines introduced in the past Budgets, the taxpayer gets very limited time to file a belated or revised return. A new section has been inserted which allows taxpayers to furnish updated return within 24 months upon payment of additional taxes.

This is a welcome move which provides an opportunity to taxpayers to offer any missed out/additional income and acts as a good source of revenue collection and reduced litigation for the revenue. Having said so, an updated return cannot be filed if it results in decreasing the tax liability/increasing the refund due in the previously filed return.

• Appeal under Section 248 for TDS refund

Payers under net of tax contracts disagreeing with withholding tax can currently appeal directly to the Appellate Commissioner against such requirement, upon payment of tax. Henceforth, the payer will have to first approach the tax officer for seeking refund of tax paid. Appeal would lie only upon the tax officer rejecting the claim. The tax officer is required to pass the order within six months of the application.

This will give the Appellate Commissioner a holistic view on an issue of both the taxpayer and the tax officer. However, the six-month’s deadline should be mandatory to prevent inordinate delay for the taxpayer.

• Welfare measures

Tax relief for reimbursement of Covid-related medical expenses and grant of ex-gratia to deceased employees’ family brought in earlier through press releases are now legislated. Receipts in excess of Rs 1,000,000 from other persons would be taxable.

Relaxation under section 80DD is available for persons with disability on lump sum or annuity amount of insurance policy only after death. The Finance Bill has addressed this issue such that it will also be available during his/her lifetime.

• Continued emphasis on anti-abuse provisions

Anti-abuse provision with respect to bonus stripping and dividend stripping has been expanded to include units of real estate investment trust (ReIT), infrastructure investment trust (InvIT) and alternative investment funds (AIF).

Receipt of share capital on issue of shares was treated as unexplained income under Section 68 if the issuing company was unable to explain the source of funds in its hand as well as in the hands of the subscriber. This provision will now be extended to loans and borrowings where the lender’s source of funds will also be required to be explained to the tax officer.

Any unabsorbed/brought forward business loss or depreciation shall not be set off against any undisclosed income found through search, requisition or survey Eproceedings.

Conclusion

While there was expectation of a few reliefs on personal taxation, namely — reduction in tax rates and surcharges, increase in ceiling of tax saving investments, relief on work-from-home expenditure, and allowance of pandemic related CSR expenditure,  the government has chosen stabilisation for sustained future growth. Additionally, in line with the international commitments under the BEPS dialogue, status quo has been maintained on unilateral measures like equalisation levy and significant economic presence, which would possibly continue till global consensus is reached on BEPS 2.0 framework.