The Finance Minister in Budget 2022 continues to keep up with the government’s promise of fueling growth, generating employment and achieving inclusive development. The Budget puts together the government’s journey towards India@100 with focus on its four pillars – PM Gati Shakti, inclusive development, productivity enhancement and financing of investments. Here are the key direct tax proposals relevant for the corporate sector.
Taxation of virtual digital assets
Budget 2022 proposes to bring within the ambit of tax gains made on transfer of a virtual digital asset (VDA). The gains from transfer of VDA would be taxed at 30% with only deduction allowed being the cost to acquire the VDA. VDA is defined as any asset generated through cryptographic means or otherwise (cryptocurrencies as commonly known) and non-fungible tokens but excludes Indian or foreign currency.
Further, losses from transfer of VDA will not be allowed to be carried forward or set off. Any gift of VDA will be liable to tax in the hands of the recipient.
In order to be able to track the VDA transactions, there is also a proposal to require persons paying the consideration on transfer of VDA to withhold taxes @ 1 percent if the annual payment exceeds INR 50,000 in case of a resident recipient and INR 10,000 in all other cases. It appears that the proposed VDA tax regime would apply to kinds of transfer irrespective of whether the VDA is held as trading or capital asset.
Provision for furnishing of updated return
Reposing trust in the taxpayers and leveraging data available with tax department to mobilise revenue and achieve better compliance in a litigation-free environment, the Budget 2022 proposes to permit certain taxpayers to file an updated return within 24 months from the end of the year in which the return was due to be filed. Such returns can be filed post payment of taxes and interest as due, with an additional liability of 25% or 50% of such tax and interest depending on when such updated return is furnished.
This provision does not cover all assesses and cases where there is a search and seizure case or cases under the Prevention of Money Laundering Act, 2002/Black Money Act or where information has been received from another country under the tax treaty are specifically excluded.
Extension of sunset clause for start-ups and manufacturing companies
The beneficial corporate tax rate of 15% is applicable to new domestic manufacturing companies provided they commence business on or before 31 March 2023. The government has also proposed to extend the sunset from 31 March 2023 to 31 March 2024 to help the corporate world deal with pandemic-induced delays and provide impetus to manufacturing.
Similarly, tax holiday for start-ups was available for start-ups incorporated before 1st April 2022 – it is proposed to extend this period to up to 31st March 2023. This extension will benefit the start-up community.
Beneficial rate of dividend taxation from foreign companies
With the intent to bring taxation regime of dividend from foreign subsidiary with that of divided received from Indian subsidiary, the concessional rate of taxing dividend from foreign subsidiary at 15% has been done away with.
Litigation management system
There is a proposal to introduce a litigation management system whereby a collegium of two or more CCITs/PCITs may decide on whether the revenue should file an appeal on an issue akin to one already pending before the jurisdictional High Court or Supreme Court.
However, if the original appeal is decided against the revenue, the revenue has been granted an option to appeal against the matter.
Amendments overruling judicial precedents
The FM has proposed following amendments to overrule certain judicial precedents and to clarify legislature’s intent:
- Disallowance of expenditure incurred to earn tax exempt income shall be applicable even if the taxpayer earns no exempt income in a particular tax year;
- Health and education cess is nature of tax and therefore not deductible as business expenditure
- Any expense which is incurred in violation of any law/ regulation and for an offence prohibited by law in and outside India will not be a deductible business expenditure
- Conversion of outstanding interest on loans from Banks/NBFCs to another loan or debenture would not be allowed as deduction on the basis that such conversion is a constructive payment
Cases of business re-organisations/succession
In cases of business reorganisation, it is proposed that proceedings undertaken against the predecessor entity, during the course of pendency of the reorganisation, shall be deemed to have been made against the successor. Therefore, despite the predecessor ceasing to exist post the reorganization, tax litigation would continue to hold good.
Tax benefits for IFSC
To further incentivise investments in IFSC, the Budget proposes to exempt from tax income of a non-resident from offshore derivative instruments, or over the counter derivatives issued by an offshore banking unit, income from royalty, interest on account of lease of ship and income received from portfolio management services.
While the aforesaid are few key direct tax proposals of Budget 2022, on an overall basis the proposals are aligned with the intent of the government to provide clarity, reduce litigation and should provide the required growth impetus to the wider economy.