The authors are Mukesh Butani, Managing Partner and Shankey Agrawal, Principal Associate, BMR Legal Advocates and views are personal.

Finance Minister announced the 2022-23 Union Budget amidst a robust post-pandemic economic recovery and improved tax collection, with GST collections scaling a new record. Against this backdrop, it was crucial to carry forward the reformative, forward-looking agenda, and it seems she managed a well-balanced Budget proposal containing the tax reform agenda. 

In a welcome step, the finance minister has extended the time limit for newly incorporated manufacturing entities and start-ups under the 15% concessional tax regime (announced in the August 2019 Ordinance) to March 31, 2023. The 30% tax on Income from Digital Assets, which, although seems penal in nature, shall provide much-needed clarity on the taxation of cryptocurrencies and NFTs. What is emerging is that the Digital Currency Bill shall witness passage, though its application for individuals remains unclear. Finance Minister continuing with the trend to curb litigation with proposals such as facilitating filing of updated tax returns and appeals to higher forums by the Union to avoid repeated litigations is laudable. At the same time, the tax evaders would be dealt with iron fists with no set-off of losses against income found added during search operations.

In a much-anticipated move, the proposals contain amendments to Special Economic Zones Act, 2005, which will be replaced with a new legislation to enable the states to become partners. Further, the Customs Administration of SEZs is made fully IT-driven with only risk-based checks to reduce red tape. In a continued focus towards Make-in-India and Atmanirbhar Bharat initiatives, it has announced the removal of over 350 exemption entries, including the concessional rate on import of Capital Goods, Project Imports, and inputs shall be gradually phased out. Further, several concessional rates are incorporated in the Customs Tariff Schedule itself as a simplification measure. 

The world has faced an unprecedented crisis in the last 2 years, but hopefully we should be at the end of it in a few months.  However, the scars have been deep and one would have thought that the direct tax proposals would have factored this in, but that has unfortunately not happened..

In a sense, the Budget is more notable for what has not been done, and some of it is related to Covid-19.  For example, there has been a clamour for increase in standard deduction, partly because of work from home, but that has not been done.  MSMEs have been badly hit, as compared to larger companies which have managed much better; given that most MSMEs function as partnerships and LLPs, one would have expected tax rates to be lowered since corporates are taxed at 25%, but that has not happened.

Also, there was an expectation for increase in limits for mediclaim, insurance, interest on housing loans and education costs, but none of that has happened. 

Amongst a few substantive noteworthy amendments, here are the key ones: 

• The 15% rate for new manufacturing companies had a sunset date for commencement of manufacture of 31st March 2023, which has been extended to 31st March 2024; this is important, since the last 2 years were virtually washouts in terms of commencing new manufacturing facilities.  However, one would have hoped that it would be linked to a unit within an existing company, since one cannot understand the logic of the insistence of floating a new company to avail this benefit; it is administratively very cumbersome and illogical. 
• Given the thrust on infrastructure, consortiums are very common and some consortiums could be taxable as an AOP; given the 37% surcharge for incomes above 5 cr, the tax rate on such AOPs would be 43% approximately, which is punitive.  Now, the surcharge has been capped at 15%, which brings down the rate of 36% and that is a relief; however, one would have thought that it was also logical to extend the 36% rate to private discretionary trusts also, but that has not happened. 
• The 37% surcharge has been capped to 15% (for individuals and HUFs) also in relation to long term capital gains ; that is a relief, and, as an example, brings down the rate on sale of unlisted shares to 23% instead of 28%. 
• In relation to tax on dividends received from investment in overseas subsidiaries/associate companies, the concessional tax rate of 17% (including surcharge and cess) under section 115BBD has been given a go by, and therefore, the normal tax rate of 25% will apply. 
• Virtual currencies profit would be taxable at 30% ; there is unfortunately a TDS provision of 1% which seriously enhances administrative burden and adds to the ever expanding reach of TDS – something which the tax payer is doing on behalf of the Government. 
• Under section 28(iv,) the value of any benefit of any benefit perquisite arising from business or profession is to be taxed as business income in the hands of the recipient. Additionally, applying the logic of non-reporting of such benefit in the return, the TDS net has been widened by the insertion of Section 194R to require the payer to deduct tax @ 10% of the value of such benefit of perquisite; this will put a burden of determining whether the amount is taxable on the payer, in addition to increasing compliance and administrative burden.

Union Budget delivered by FM today, marks Azadi ka Amrit Kaal outlining the blueprint for India100.

I would call the Budget- "holistic" focusing on 2 pillars : Doing Business through a clear transitioning plan to Circular Economy to help in productivity enhancement as well as creating large opportunities for new businesses and jobs, creating a Carbon Neutral Economy, focusing on the sunrise sectors & digital currency.  Further, the  transformative approach through PM GatiShakti driven by the 7-engines is a step towards economic growth and sustainable development.

Truly, the integration of the central and state-level system to achieve this will mark the start of a new phase. 

Second pillar being Continuing with Ease of Doing Business  through domestic capacity creation, providing level playing field to our MSMEs, easing the supply side constraints, repealing redundant laws and building a stable & predictable tax regime.

The budget is a testimony to the Government's vision to make India a USD 5 trillion economy.

GOI and FM have firmly continued the path of long term growth and progressively unshackling hurdles in various sectors of the economy in Budget of 2022-23.  The phenomenal and record setting increase of over 35% in capital expenditure bears testimony to this resolve and firmness in policy objective. Also, rather than providing for peripheral tweaks in existing provisions, FM has rightly opted for complete review and overhaul of important areas like SEZ and PE/VCs whereby, hopefully, many salient recommendations already made will be duly considered. The proposal to extend the date of setting up of new manufacturing unit for the concessional tax rate of 17% (including surcharge), from 31 March, 2023 to 31 March, 2024 will give time to business entities to avail of this incentive especially as many would also be applying for PLI benefits which have been only recently finalised across many sectors. Similarly, the date of incorporating a start ups entity eligible for tax incentives (in 3 out of 10 years) has been extended from 31 March, 2022 to 31 March, 2023. In a welcome move, surcharge on LTCG is restricted to 15% for all assets including unlisted securities and real estate thus partially offsetting the enhanced surcharge of upto 37% applicable to high income earners. Of course, the persistent request of private equity industry to reduce the basic LTCG rate from 20% to 10% for unlisted securities and bring it on par with listed securities has still not found acceptance. The FM has clearly nudged against investing in various forms of ‘virtual currencies’ with the imposition of a flat rate of 30% tax and other restrictions. The salaried class may be disappointed to find no further reliefs in the tax rates or deduction which could be a signal to move towards the alternative lower personal tax regime in due course. Finally, the lack of any incremental tax measures gives a positive signal of stability of tax regime and increasing confidence and reliance on compliance and effective mobilisation of tax revenues as evidenced by healthy tax buoyancy figures. Whilst there may not be any direct fiscal benefits, the intent to work with a fiscal deficit of 6.4% in 2022-23 indicates that FM wants to continue to give herself fiscal headroom to propel government expenditure especially in physical and social infrastructure.

The Budget proposal lay the foundation for strengthening of different sectors like transportation and logistics sectors (Gati shakti), banking and fintech (75 digital units to be set up), agriculture, EV sector (battery swapping policy), among others. 

On the Direct tax front, to further ease compliances for taxpayers, the new IT return system to be introduced; this space to be watched out. The Government has only marginally increased the time limit to commence production by 31.03.2024 for units opting for the beneficial corporate tax rate of 15%. Some steps seem to have taken to reduce litigation, by restricting appeal rights of revenue authorities for consecutive years. Introduction of digital currency by RBI and taxation of digital assets at 30% is a point for discussion, however it would provide some relief for crypto currency holders that are currently being traded in India. 

To give a boost to the start-up community, the Government has also capped the surcharge on long term capital gains at 15% now. As a push to promote exports, SEZ Act to be replaced with a new legislation and states shall become partners for development of infrastructure is a big overhaul and seems to be a positive step. In tandem, reforms are also proposed to be undertaken in the Customs administration of SEZs, with facilitation related changes to be made.

From an Indirect Tax perspective, the concessional rate on capital goods imports under Project Import Scheme is proposed to be withdrawn, to promote domestic industry - imports to be taxed at 7.5% now. With the object of improving indigenous manufacturing, various changes are proposed to be carried out in the Customs Duty rates, while the details would need to be analyzed, the same should ideally be in line the comprehensive rationalized rate structure.

This comment has been co-authored by Sushma Ravindra, Advocate.

1. Introduction:

• If the Economic Survey 2021-2022 figures were to be considered, India appears to have managed Covid Pandemic effectively. The gross value added in Agriculture and Industry are hovering above the pre pandemic level. The gross value added in service has reached pre pandemic level. The private consumption has recovered by 97.1% of pre pandemic level.
• In April to December, the fiscal deficit stood at 50.4% of the budgeted estimate. The Government was able to limit the fiscal deficit target on account of robust revenue growth coupled with expenditure control. The GST collection has consistently been above Rs.1.3 Lakh Crore every month for last four months. Income Tax and Corporate Tax collection have also been significantly above the target. The net collection in direct tax showed an increase of 60.8% as compared to corresponding period of FY 2020-2021.
• With the above figures in mind, there were mixed expectation of Budget 2022, being mindful of forthcoming elections in four states and covid induced limitation on the part of the Government.

2. Cryptocurrency: Taxation of cryptocurrency is provided for at 30%. Non fungible tokens  and similar tokens are also considered. Gift of the same is also made chargeable to tax. TDS of 1% is provided.

3. IFSC: Lease of ship by non-resident to unit in International Financial Service Centre, is exempt on the same lines as aircraft. Similar benefit is extended under Section 80LA.

4. General business:

1. To overcome decision in Maxopp Investment Ltd. v. CIT, it is clarified that disallowance under Section 14A would apply even when no exempt income is derived.
2. Gift, compliments and other benefits provided by pharma companies to doctors would not be allowed as business deduction. Likewise amount paid towards compounding offence is also not allowed as business deduction.
3. Surcharge and Cess is not to be allowed as deduction retrospectively from AY 2005-06.
4. Conversion of interest into not only loan and borrowing but also into debentures or any other instruments will attract disallowance under Section 43B.
5. Air India losses continue to be allowed to be set off despite sale to Tata Company and consequent change in shareholding beyond 51% under section 79.
6. Undisclosed income detected in survey and search would not be entitled to set off against current loss or brought forward loss including unabsorbed depreciation.

5. Salaried class:

1. Deduction towards new pension scheme under Section 80CCD is extended to State Government employees as well.
2. Covid 2019: Medical reimbursement in respect of covid illness is exempt from tax in the hands of employee. If such medical help is received from non-employer, the same would not be treated as gift in the hands of employee. Likewise, covid related death compensation received would be exempt.

6. Make in India:

1. Cut off date for eligible for start up is extended by one year.
2. Cut off date for commencement of manufacture for concessional rate of tax @ 15% under Section 115BAB is extended by one more year i.e. upto 31.03.2024.

7. Capital market:

1. Bonus tripping provisions are extended to securities.

2. Concessional rate of tax for dividend from foreign companies is no more available from AY 2023-24 onwards.

8. Assessment and re-assessment:

1. Assessment:

• Provisions for filing updated return within 24 months from end of the relevant assessment year. But the benefit is not extended to updated loss return.
• Procedure of faceless assessment is re-cast. Sub-Section (9) to Section 144B, which provided for deeming assessment as non-est has been removed with retrospective effect from 01.04.2021.

2. Re-assessment:

• Re-assessment is made applicable even in respect of unflagged information
• Scope for re-assessment is extended to:
  • C & AG objection, whether final or not
  • Information received under treaty
  • Information received under Section 135A
  • Information requiring action in consequence of order of Tribunal/Court
• Expenditure related to survey under section 133A(5) could trigger re-assessment
• Scope of re-assessment upto 10 years is extended to cases of income represented by expenditure or entry in books of account

9. Others:

1. Certain foreign consultancy income under Technical Assistance Grant Agreement which was exempt is made chargeable from AY 2023-2024.
2. Explaining source of source under Section 68 is made mandatory for loan or borrowing.
3. Alternate Minimum Tax is reduced to 15% for Co-operative societies.
4. Business perquisites are made subject to TDS
5. Power of revision is extended to TPO’s order
6. Penalty increased 5 times under Section 272A(2) for various non-compliance mentioned therein

10. Conclusion: As usual, the budget aims to neutralise the adverse rulings in respect of sections 14A, 37, 144B etc. Provisions like those dealing with filing of updated return are a step in further complicating the provisions of the Act. Tax on cryptocurrency puts an end to tax uncertainty in this area. Removal of concessional rate on foreign dividend is retrograde as it would discourage outbound investments. Provision for bonus stripping being extended to securities is a step in right direction.

Budget FY 22-23 is a great balance between need for increased Infra Investment,  support to MSMEs, extension of steps for ease of doing business & steps to improve lives of Indians. Extension of ECGLS to the Tourism & Hospitality Sector is a great positive considering it employs directly & indirectly a sizable population. Again, higher allocation to Domestic Companies in Defence Capex right from design, development & production of products is a great step for Atmanirbhar Bharat.A higher allocation of Rs. 7.5Lk cr to Capex will positively impact  various supporting sectors like Manufacturing, Services, Technology etc. Several changes, made in Direct Tax Laws some positive and some not positive include :

• Withdrawal of concessional tax currently @ 15% on Dividends repatriated into India from abroad.
• New tax regime for Virtual Digital Assets-tax to be charged @ 30% on gain made (no expenses to be allowed except cost of asset)
• Dept to delay filing of appeals on Questions of law where identical issues are pending before Jurisdictional High Court / Supreme Court  to avoid multiple appeals clogging judicial system.
• Education cess- clarificatory amendment that the same is not deductible while computing taxable income  - designed to overcome several favorable decisions.
• No set off of brought forward loss against income assessed pursuant to search / survey.

A welcome provision that allows Tax Payer to file amended return  (with additional prescribed tax) within 2 years from end of Assessment Year will help those wanting  to amend returns enhancing taxable income & pay tax, interest & specified additional tax thereon voluntarily. There are 84 amendments in the Finance Bill which need to be carefully analyzed for their impact on Tax Payers Income. From an economic perspective, the Budget focusing on Capex, growth, digitalisaton etc will go a long way for a NEW BHARAT.

The 2022 Budget is clearly ticking the right boxes from a country perspective. Starting from the thought process of India @ 100; creation of a high-level committee for urban planning; getting ready for new opportunities such as Animation, Visual Entertainment, Gaming and Comic (AVGC), significant outlay towards infrastructure, capacity building, multi-modal logistics parks, battery swapping policies, end-to-end online e-bill system for Government procurements, policy for sunrise sector, etc. However, when it came to tax proposals, there was nothing on the demand side. Expectations were high on putting money in the hands of consumers post the pandemic but there are absolutely no changes. Probably, the Government felt that the economy is doing very well based on the record GST collections. It should be interesting to analyse the collections and identify whether a significant amount is due to non-availment/ restricted/ blocked ITC. The amendments proposed to Section 16 has virtually taken away the life of Input Tax Credit in GST. With the plethora of glitches and the non-availability of credits in the portal, eligibility to claim ITC would depend upon the auto-generated claim in the portal.  Taxation of virtual digital assets was expected but a 30% levy without any deduction and set off of losses is something huge.  The crypto-market has a huge potential and probably the Government intends to milk as much as possible.  In any event, given the levy of taxes, the banning or prohibition of crypto segment is unlikely.  The obsession to amend the law retrospectively to nullify decisions continues unabated and Cannon bites the bullet.

Under the Income Tax Act, one is mandated to file a return within a definite time frame.  Section 139(4) allows a belated return and Section 139(5) facilitates a revised return.  A new category of updated return enters the statute books through Section 139(8A).  The key features are

(i)      Updated return can be furnished within 24 months from the end of the assessment year.

(ii)     Such return is possible whether or not return has been furnished under Section 139(1) or (4) or (5).

When one rejoices at the benevolence of the Government in understanding the problem faced by the assessee and allowing such a carta blanche, a further reading of the provision indicates something else.

You cannot file an updated return if it is a return of loss or has the effect of decreasing tax liability as stated in your earlier return or results in refund or increases your refund claimed in the earlier return.

You cannot file an updated return if search or survey has been conducted with certain exceptions or notice has been issued under Section 132A with reference to money, bullion, etc.  Further, you cannot file an updated return even for two assessment years preceding the assessment year relevant to the previous year in which the search or survey is initiated or conducted.

You cannot file an updated return if you have already filed an updated return.

You cannot file an updated return where any proceeding for assessment or re-assessment or re-computation or revision of the income is pending or has been completed for the relevant assessment year.

You cannot file an updated return if the assessing officer has information in his position under certain Acts such as Black Money Act or PMLA etc. and the information has been communicated to you prior to filing of the updated return. 

You cannot file an updated return if information for the relevant assessment has been received under an agreement referred to in Section 90 or Section 90A and is communicated to you prior to filing of the updated return.

You cannot file an updated return if prosecution has been initiated.

You cannot file an updated return if you are so notified by the Board.

Once you cross the bridge and ensure that you do not fall under the prohibited categories, be ready to pay additional tax.  An amount equal to 25% or 50% as additional tax depending upon certain time-based parameters is required to be paid apart from interest.  A new Section 140B ensures for payment of the additional tax before furnishing the updated return.

The true objective of this provision is not clear since even survey would bar eligibility.  However, it is clearly a window available for an assessee who might have genuinely missed reporting an income and does not fall within the scope of restrictions.

There is huge upside for Digital in India, since Indian internet users are digitally savvy and tend to use mobile as an integral part of their daily lives. India’s government has done much to encourage digital progress, from clarifying regulations to improving infrastructure. The Finance Minister has now announced digital currency to be introduced by the Reserve Bank of India in 2022-23, which will be based on blockchain technology. This shall further aid India to capture its full digital potential.  The finance minister has also proposed to tax gains from transfer of Virtual Digital Assets at 30%.  This shall ensure mindful investment by retail investors since the gains will be calculated without accounting for any expenses and even the loss is not allowed to be set off. The introduction of specialised provisions for taxation of digital assets will accord the much-needed clarity in view of rise of web 3.0.

The Income Tax Department has been aggressively pursuing measures for establishing a robust framework of reporting of taxpayers' transactions. In line with this intent, the provision to update the return for 2 years will provide an opportunity to correct errors, if any. This shall enable taxpayers to declare the income that may have missed out earlier while filing of return and thus reduce litigation.

The proposal to cap surcharge on LTCG on unlisted equity shares to 15%, instead of graded surcharge going up to 37%, is a welcome relief for start-up sector as it will reduce the effective long term capital gains tax rate on sale of unlisted equity shares from 28.49 per cent to 23.92 per cent.  Fair taxation with stable, trustworthy and growth-oriented tax regime is the need of the hour and shall rightly fuel the growth vision of our PM - India@100.

Budget 2022 announced that tax office will not file repetitive appeal where the same is pending before Jurisdictional High Court/ Supreme Court.  This is indeed laudable and will ease out Litigation Strain.

Budget 2022 is an inclusive and growth-oriented Budget, catering to the needs of every sector. The Finance Minister gave a much needed boost to infrastructure sector by announcing significant capex outlay for infrastructure. The proposal to introduce digital currency using blockchain technology will give an impetus to the digital banking sector. In a move to boost exports, the extant SEZ Act will be replaced with a new legislation that will apply to industrial enclaves. Few proposals were introduced to provide succor to rural and agri-economy. Opening of the doors to overseas universities and setting up of an International Arbitration center in GIFT city are also very welcome measures. 

There are quite a few good announcements on the tax front. In order to provide a boost to the start-ups, the eligibility for claiming tax holiday is proposed to be extended by one more year. Similarly, the concessional tax regime for newly setup manufacturing companies has been extended by one year, to March 2024. The Finance Minister laid to rest the conundrum around taxation of virtual digital assets by introducing a 30% tax on income from transfer of such assets. Further, to provide an opportunity to correct errors, taxpayers can now file an updated tax return within 2 years from the end of relevant assessment year by paying additional taxes. The clarification in relation to education cess being as a non-deductible expenditure, will put to rest the controversy on that front. In a welcome measure, a new Tax Litigation management scheme is introduced with a view to reduce tax litigation. Under this scheme, where a question of law in the case of a taxpayer is identical to the one pending in High Court or Supreme Court in any other case, the filing of appeal by the Tax Department shall be deferred till such question of law is decided by the Court. 

Directionally, it was a good Budget aimed at pump priming the economy, ramping up government expenditure and stimulating growth in the economy.

No increase in tax on corporates and individual is good news of Union Budget 2022-23. Although there is no change in the tax rates for any taxpayer, predictable and stable tax policies have been proposed for taxpayers ease and improving trust governance. Key highlights are given under:

Voluntary tax compliance and reducing litigation: To facilitate ease of compliance and motivate taxpayers in litigation free environment, a voluntary updated return can be furnished by taxpayers debarring few cases, within 2 years from relevant AY, on payment of 25% / 50% of tax and interest on the omitted / additional income as the case may be. This is an important step in reducing tax litigation for a taxpayer (both resident and non-resident).

Incentives for start-ups: on account of delays due to repetitive pandemic in setting up start ups and to boost business promotion for eligible start-ups, the period of incorporation for eligibility of tax holiday has been extended upto March 31, 2023.

Surcharge on any long-term capital gain capped at 15%:

The FM has kept its words on commitment to Atma Nirbhar Bharat by capping the surcharge on long term capital gain to 15% from 37%. Thus, long term capital gain from sale of shares of closely held company by a resident will be taxable at 20% plus surcharge. The net benefit will be approx. 4.5% tax rate. Capping tax rates are still not at par for resident and non-resident.

Tax incentives to IFSC: In continuation making global hub of financial sector by offering tax concessions to units set up in IFSC, this budget proposes to extend tax exemption on the income from transfer of offshore derivative instruments entered with offshore banking unit of IFSC and royalty, interest on account of lease of a ship, transfer of a ship and portfolio management fees. Foreign investment in IFSC will get further boost.

Taxation on Virtual Digital Asset (VDA):

The proposal for taxing the income from VDA has brought cryptoinvestors under tax net. Although, Government planned to regulate the cryptocurrency market last year, but it is yet to be approved by the Union Cabinet. However, proposal for introduction of digital rupee sets out as an indication that the Government and RBI may consider cryptocurrencies as an asset.Therefore, proactively the FM has introduced a tax on income from VDA at the rate of 30% (which includes crypto currency which is currently out of legislation in the Indian market). The effective tax rate can go upto approx. 43% with surcharge. Further, these transactions will be tax deductible at source at the rate of 1% for residents. Losses from sale of VDA cannot be offset against other income

If a non-resident transfers virtual digital asset to a resident in India, it may not be taxable in India as the income is not deemed to accrue or arise in India.

Tax on New manufacturing companies: The deadline for commencement of production has been further increased by a year i.e. March 31, 2024.

Others: Removal of concessional rate of dividend income under section 115BBD to provide parity in the tax treatment for dividend received from domestic vis-à-vis foreign company. Dividends received from a foreign company / subsidiary till March 31, 2022, should continue to avail concessional tax rate. TDS on perquisites at 10% above income of INR 20,000 in FY under section 194R of the IT Act, retrospective amendment for disallowing cess and surcharge as deduction from business income. The due date for issue of directions by the Central Government for faceless transfer pricing assessment extended till March 31, 2024.

Overall, the tax policies are stable and predictable and will increase confidence of investor community.

Focus on Make-in-India and sustainable growth as India shows tangible signs of economic recovery

Marked as a blueprint for the next 25 years, the impetus of the budget proposals is on public spending to put the economic recovery back on track. The recent GST collections are a positive indication, especially with a record collection in January 2022 at INR 1.40 lakh crores.

From an Indirect tax standpoint, while there have been no big bang rate change announcements, the government’s long-term objective is to support domestic manufacturing, exports and move towards sustainable growth. Gradual increase in Customs duty rates and phase out of concessions under project import scheme are steps in that direction. Likewise, for carbon emission neutrality and sustainable growth, additional INR 19,500 crore have been parked for the production linked incentive (PLI) scheme in the solar power sector.

Another significant announcement has been made for an overhaul of the SEZ laws to enable the States partner in the development of enterprise and service hubs. It is expected that the new legislation will bring in relaxations in export obligations and entry/ exit so that the idle infrastructure can be used efficiently.

On the technology front, as part of the Digital India initiative, the SEZ administration would move to the Customs portal by 30 September 2022 which should also help boost ‘ease of doing business’.  Additionally, the process for import of goods at concessional rate is also being automated and standardized which should accelerate clearances.

Amendment under customs law to retrospectively validate actions of the DRI officials is likely to have a far reaching impact.

Overall, while the budget has hit the right notes and should further help the government achieve its agenda of ‘make in India’, the government has not considered an amnesty scheme under Customs and a RODTEP like scheme for the service exporters. With the new Foreign Trade Policy expected in April 2022, the industry would hope for some incentives for service exports.  

In 2021, the FM has presented, what she called was a ‘once-in-a century budget’ to revive the economy via investing in infrastructure and healthcare while relying on an aggressive privatization strategy and robust tax collection. This year too, the FM has stuck to the elements of her last budget, i.e. aggressive capital expenditure and push for digitalization. Robust tax collections have provided headroom to improve the outlay on the capital expenditure. 

In the last couple of years the Government has been rationalizing the rates of corporate tax, slashing them to 15% for new manufacturing entities, and 22% for all corporates.  These rates are now amongst the lowest across the globe.  In doing so, the Government took an important step forward to attract investment and incentivize manufacturing in India.  However, India has suffered a relatively poor reputation when it comes to the stability of its tax regime.  By not tinkering with tax rates this year- whether corporate tax, personal income tax, peak rates of Customs duty or GST, the Government has sent out a strong signal to the investors that India is indeed a stable and predictable tax regime where they should be looking to invest. 

On the Customs front the rate changes proposed are purely to incentivize the growth of domestic manufacturing in sectors such as electronics, chemicals, capital equipment, etc. given the stiff competition faced by these manufacturers from imports into India.  This increase in tariffs is now a global trend, aimed at reducing imports to nurture the development of local industries. Various simplification measures are also proposed in the Customs Tariff such as elimination of various exemption entries and amendment to Customs duty rate in the First Schedule to the Tariff itself.

Government walks the tight rope with key Indirect tax announcements

During her ‘digital’ Budget speech, the Hon’ble FM Nirmala Sitharaman briefly touched upon the headwinds into GST while lauding the highest-ever revenue collection of INR 1400 billion in January 2022. However, the details lie in the fine print, and Finance Bill 2022 does leave enough for the tax professionals to put the proposals under the microscope. The GST proposals appear to introduce rigorous restrictions on credit availment by linking it to accurate and timely compliance, credit availment and payment of tax liability at the supplier’s end, of which the recipient has no control. This may result in disputes between the recipient and supplier as well as with the government. The Union Budget also gives effect to the GST Council recommendations with respect to the applicability of interest only on reversal of credit availed and utilized, transfer of balance in Electronic Cash Ledger within distinct entities. The extension of the time limit to 30 November of the following financial year for disclosing credit note details, amending invoices, TCS returns, and availing input tax credit appears to align the compliance with due dates for statutory audit and transfer pricing.   

The SEZ law is set to receive sweeping reforms, enabling the states to become partners in ‘Development of Enterprise and Service Hubs’. The Customs administration of SEZ would be fully IT-driven, focusing on higher facilitation and risk-based checks. This reform set to be implemented from 30 September 2022 will certainly impart ease of doing business by SEZ units for promoting exports. It will be interesting to see the developments on this front over the next 8-9 months.  

Like the past two years, the Customs tariff proposals align with the government’s initiatives of ‘Make in India’ and ‘Atmanirbhar Bharat’, seeking to promote domestic sourcing and manufacturing. The Hon’ble FM has proposed to gradually phase out the concessional rates in capital goods and project imports and instead apply a moderate tariff of 7.5%. The customs duty rates would be calibrated to provide a graded rate structure to facilitate the domestic manufacturing of electronics. This could potentially lead to an increase in the prices of various electronics over the coming months.  

One of the significant changes proposed on the Customs legislative front is the empowerment of officers of Customs (Preventive), Customs (Audit), and Directorate General of Revenue Intelligence (DGRI) to recover customs duties not levied/short levied vis-à-vis imports. This proposal appears to nullify some of the recent Apex Court judgments, for instance, in the cases of Canon India Pvt Ltd. and Sayed Ali where such officers were held to be devoid of powers as they did not qualify as “proper officers.” Another noteworthy amendment is the applicability of advance ruling obtained under the Customs law. An advance ruling will now remain valid for a period of three years or till there is any change in law or facts of the case. This provides an expiry date to the advance ruling even if there is no change in law or facts so that the government and taxpayers do not get bound by the same for eternity. 

The government appears to have walked the tightrope by balancing growth support with fiscal consolidation in this year’s Union Budget, bolstering and boosting ‘Make in India’ by taxing imports.

““Brevity has always been a virtue”  - The Hon’ble Finance Minister’s shortest budget speech to date, is likely to be impactful on many fronts. Budget 2022 focuses on several critical issues right from mental health to urban development. 

On the tax front, from the speech, the Government seems to have continued its endeavour towards a stable tax regime. There are no changes in the tax rates or slabs or base tax rates. While one of the key proposals is introduction of a 30 percent tax  for transfer of Cryptocurrency, without allowing for set off of losses against it, some other noteworthy proposals include an enablement of filing of ‘updated returns’, reduction in surcharge rates from 37 percent to 15 percent  on long-term capital gain across all securities (including unlisted securities) and assets like property etc, extension of tax benefits to start-ups established on or before 31 March 2023, extending bonus/dividend stripping provisions to all securities (including units of REITS, InvITS and AIFs  etc). 

Budget 2022 also seems to have proposal aiming to nullifying decisions pronounced by Indian Courts in favour of the taxpayers on matters relating to deduction of education cess, applicability of section 14A when no exempt income has been earned and conversion of interest into loan being eligible as ‘payment’ for section 43B of the Act. While clarity as a principle is always welcome, the above proposal are surely going to glum the taxpayer sentiments.

On reading of the fine print, many other points are likely to emerge.”

The FM, Ms Sitaraman needs to be congratulated for quite a growth-oriented budget which is also lauded by Industry champions.

The extensions provided till 31 March 23 for Start-up  and  till 31 March 2024 for manufacturing company to be set up for claiming tax exemption and 15% concessional tax rate respectively are very welcome. Many tax concessions given for activities and income arising in International Financial Centre shows the Government’s commitment to boost this sector. It should incentivise more such International Financial Centres to be set up and contribute to the growth of the economy.

Capping the surcharge on long term capital gains at 15% is a laudable. This goes well with capping surcharge on dividends to 15%.

Unfortunately, no respite is given either on angel tax or on ESOPs to start-ups. It is hoped that the government will continue interaction with the venture capital industry and start-ups and take appropriate measures soon.

There are several concessions provided to funds, trusts, organisations set up as charitable, education institute, university, hospital which should be extremely helpful in claiming the tax exemption and boost the activities especially in respect of educational institutes, hospital etc.

The much-needed provision for taxation of virtual digital assets -including crypto currencies has been brought in. Making it taxable at 30% instead of 20% seems to reflect government’s intention to discourage smaller investors, especially since losses would not be allowed as deductible.

It is unfortunate that even this Bill makes several rather onerous retrospective changes, such as changing the definition of ‘slump sale’ to ‘slump transfer’, clarifying that health and education cess are not tax deductible expenses, disallowing expense incurred in respect of income which is not part of total income.

There was hope that the compliance burden will be eased. Instead, it has been increased by adding few more TDS provisions!  

A significant expectation was to give respite to salaried people working from home who need to be provided infrastructure to do their duties. Exempting this from perquisite and allowing deduction to employers for such expense is really needed in these times of pandemic, which  seems to have been missed. 

Budget reaction

The Finance Minister today presented the fourth Budget amidst the third wave of COVID pandemic. The budget was focused on self-reliant India by encouraging domestic companies and startups and also leveraging the potential of technology in various sectors.

The following key announcements were made by the Finance Minister during her speech:

1. Capital expenditure for FY 2022-23 is estimated to be INR 7.5 lakh crores
2. Fiscal deficit for FY 2022-23 is estimated to be 6.4 percent of the GDP
3. Roll out of own digital currency by RBI by FY 2023
4. Roll out of policy on EV battery swapping and issue of sovereign green bonds
5. Key direct tax proposals:
   • Introduction of new taxation regime for digital virtual assets
   • Gifting of digital virtual assets to be taxed in the hands of recipient
   • Reduction of goodwill will be deemed as transfer and amendment in the definition of slump sale by substituting the word “sales” with the word “transfer” in the definition towards the end. Both the amendments to be applicable with retrospective effect from 1 April 2021
   • Proposal to do away with concessional rate of tax on dividend (i.e. 15 percent) received from foreign companies by Indian companies with effect from 1 April 2023
   • Extending the period of incorporation of eligible startups for providing tax incentives
   • Proposal to delete Section 144B(9) retrospectively from the date of its inception i.e. Apr 1, 2021
   • Reduction in surcharge for co-operative societies from 10 percent to 7 percent in respect of total income between INR 1 crore and INR 10 crores.
   • Reduction of AMT on co-operative societies to 15 percent from 18.5 percent
   • In order to promote voluntary compliance finance bill proposes introduction of new provisions to allow taxpayers to file an updated return within two years from the end of assessment year for correcting errors
   • Litigation management system to be introduced to avoid repetitive appeals by the Department
   • Concessional tax regime u/s 115BAB for new manufacturing entities has been extended by one year

A pragmatic and forward looking budget and fiscal disciple!

Today the Union Finance Minister has presented her fourth budget. A pragmatic and forward looking budget providing firm impetus to push economic development and growth of Indian economy. Significant push on capital expenditure, development of roads, railways and energy sector are some of the highlights and will provide serious fillip to Indian economy.

On direct tax front, as was expected, the Government has announced ‘full tax rate’ on income from transfer of Crypto currencies (‘Virtual Digital assets’) coupled with the provision that no set off of any losses from transfer of ‘virtual digital assets’ will be allowed in computing taxable income. While one needs to see the fine print of the Finance Bill, it would be reasonable and logical to consider that VDA would include crypto currencies as well.  Given that income from transfer of VDA is to be taxed at flat 30%, it would mean that ‘characterisation’ of gains/profits from transfer of Crypto currencies/VDA as ‘business income’ vs ‘capital gains’ would become irrelevant for tax purposes. 

Some relief on unnecessary tax litigation is announced by preventing tax administration from filing appeals to High Courts on ‘Questions of law’ which are already pending before HCs or Supreme Court. This will lead to reduction in filing of appeals on similar issue thereby saving some trouble of time and resources both to Taxpayers and to the Government machinery…a welcome step in the direction of reducing unnecessary litigation.

Income tax is not a tax deductible expenditure. In some judicial rulings, a view was taken that health and education cess is not really income-tax and can be claimed as business expenditure. As was expected, the FM has announced that such view is against the intention of the Government and has thus provided that no deduction can be claimed for such cess.  This will do away with unnecessary controversy and tax litigation on this point.

Hon’ble FM has announced concept of ‘New Updated tax return’ permitting taxpayers to report the income missed out in original return. She stated that one can file such return within two years from the end of relevant assessment year. One would need to see the details in Finance Bill to understand its proper scope and mechanics, some questions does arise like whether the taxpayer has to also pay penalties when one is filing such updated return alongwith tax and interest? Also, is such return can be field upto two years from the end of relevant assessment tear, how in practise it will work since time limit for completion of tax assessment is shorter i.e. 12 months (or 9 months) from the end of relevant assessment year. So one will have to study and understand these aspects.

This Budget, through PM GatiShakti Scheme providing much needed impetus to Infrastructure and job creation. Also, inclusive development and climate related proposals are more forward looking while much depends on implantation at ground level.  On the direct tax front, there at least seem to be no new taxes or enhancement or reduction in taxes other than some minor tweaks.  Ahead of the Budget, there was an expectation that the FM would leave more money in the pockets of middle class when everyone is reeling under the pressures of Pandemic and the aftermath which does not seem to have been addressed.

While comparatively, FM spent very less time on direct tax proposals, the Finance Bill carries many amendments which need detailed analysis to understand the impact.

This comment has been co-authored by Jitendra Jain, Executive Director, Price Waterhouse & Co LLP

As we near the two year mark of the pandemic, the global economic situation continues to remain volatile with pandemic induced disruption, geopolitical tensions, supply chain disruptions and higher than expected inflation in both advanced and emerging economies.

Despite the lower than expected global growth, the government of India has continued its efforts to fuel the growth momentum in India and get the country back to 8-9% GDP growth levels. 

The Finance Minister presented a progressive and forward-looking budget amidst the above backdrop.  The budget has continued its thrust on increasing capital expenditure for infrastructure development.  Quality infrastructure is key to sustained economic growth as it has a multiplier effect on job creation on the one hand and stimulates consumption on the other hand.

Tax proposals such as provisions for updating tax return on payment for additional taxes, abeyance of repetitive appeals by the tax department till the disposal of matter by the High Court and Supreme Court would go a long way in improving ease of doing business.  The Finance Minister deserves credit for continuing with the underlying theme of providing a stable, predictable and trustworthy tax regime, promoting voluntary compliance and reducing litigation.

Start-ups continue to be a significant contributor in fueling India’s growth.  Similarly, production linked incentives have also paved the way for manufacturing led growth in the long run.  Therefore, extension of time-limit for eligibility of concessional tax regime for newly set up manufacturing companies and eligible start-ups should be huge positives for both these sectors. 

As expected, the budget has also announced a separate scheme for taxation of virtual digital assets.  This would not only provide much needed clarity on taxation of such assets.

Lastly, the OECD Inclusive Framework has set an ambitious timeline of 2023 for implementing Pillar One and Pillar Two proposals.  While the taxpayers would have welcomed a high-level announcement in this budget, it seems the government has adopted a wait and watch approach before laying out a roadmap for the implementation of these proposals.

At an overall level, while the budget has provided a foundation for infrastructure-led growth, it has also provided a blueprint to propel the economy over the next 25 years towards its journey from India@75 to India@100.  A trust based tax system would act as an enabler in this journey.

"Withdrawal of Sec 115BBD - Indian corporates benefited from a lower tax rate on dividends of 15% received from their foreign "affiliates" (where the shareholding was 26% or more). This has now been withdrawn and such dividends will now be taxed at regular rates. The justification for this is being traced back to the removal of dividend distribution tax. The lower rate provided an incentive to bring back the cash to India."

The ongoing pandemic, coupled with the rising inflation, has adversely affected the household expenses of the common man for an elongated period now. However, with the higher capex and fiscal deficit target the Finance Minister has limited specific relief to individual taxpayers.

To provide impetus to trust based governance as a concept, an updated tax return system has been introduced wherein a taxpayer can file a tax return upon payment of specified taxes within 2 years from the end of the relevant assessment year.  A specific tax regime is introduced for income from virtual digital assets to be taxed at the rate of 30% with no deduction for any expenditure except the cost of acquisition of such asset.

Interestingly, some relief to individuals with income above 2 crores in the form of capping of surcharge @ 15 per cent on long term capital gains (on specified assets) from existing graduated rates.

It would be relevant to analyze the fine print of the finance bill for other announcements and tax sops if any on the personal tax front.

Budget 2022 serves well the cause of macroeconomics to support the growth momentum in our economy. Individual tax payers seeking increase in personal disposable income may be disappointed as there is no change in personal income tax rates/ slabs and no additional / enhancement in deductions. Rationalisation of surcharge by capping it at 15% on long term capital gains across all categories of assets is a step in the right direction. Given the intense activity in trading of crypto currency, non fungible tokens (NFTs), the Government has proposed to tax the income from transfer of such assets by introduction of a strict non nonsense tax regime of  @30 %  rate of tax with no deductions save the cost of acquisition of such virtual digital asset. The Government has also offered a window for conditional voluntary tax compliance  for unreported income where such compliance results in additional tax being paid.  

Over all – a sensible budget with promise of a bright future for the country and its citizens but for now it may leave the common man cold and untouched!

The Union Budget 2022 presented by the Hon’ble Finance Minister was on expected lines. The government has rightly continued on the path of increased capital expenditure. As per estimates, the capex for FY 2022-23 is likely to be around Rs. 7.5 lacs crores. Infra push and social spending continues to be at an all time high.

On the Direct Tax front, the government has clarified on the taxation regime for cryptocurrency trades, which comes as a respite, though the tighter provisions regarding set of losses would be a disappointment for many. Extending the timeline to 31st March, 2023 to set up a start up company for exemption under Section 80-IAC is a welcome move. Similarly, the pandemic scenario has impacted new manufacturing projects and hence it was logical for the government to extend the due date to commence manufacturing from 31st March, 2023 to 31st March, 2024. Further, restricting the surcharge to 15% on all kinds of Long Term Capital Gains should give relief to the taxpayers. Tightening the bonus stripping provisions to include securities was a surprise, but it was long overdue. 

The two year window to rectify one’s tax return is an interesting provision and one would need to read the fine print to evaluate as to whether the Government has provided for a back door introduction of a milder version of voluntary disclosure scheme. 

No change in tax slabs nor any increase in 80C limits and Salary Standard deduction is a bit of disappointment. No enhancement in tax concessions relating to investment in residential property could be a dampener for the retail buyers.

Customs duty reduction to 5% on cut and polished diamonds and gems as well as duty concessions to electronics items should augur well for these Industries. More than 250 exemption entries under Customs law are being phased out, which is on expected lines. 

Further push to IFSC, IBC reforms and introduction of digital currency as well as sovereign green bonds are financial reforms in the right direction. 

Considering the GST collections for January 2022 at a record 1.40 lacs crores as well as stable Direct Tax collections, alongwith a projected GDP growth rate of 9.2%, the future economic outlook looks promising. It’s time for our country to shift to fifth gear !

Budget 2022 was set in the context of riding india out of the pandemic years. There was expectations that the budget through changes in personal tax laws and create additional disposable income in the hands of individuals as a stimulus to boost consumption, however the personal tax code has been left unchanged (barring taxation of covid related receipts) in a inflationary backdrop with the threat of high fuel prices.  The corporate sector has the benefit of setting up and commencing a new manufacturing co and avail 15 percent corporate taxes if they commence manufacturing by March 31, 2024 (updated from March 31, 2023.

The budget proposals continue the trend of updating the tax laws to counter favourable rulings which denied applicability of 14A when no exempt income was earned for where deductions were judicially allowed for inter-alia penalty incurred outside India or for compounding of offences or on cess.  Foreign dividends earned by Indian parents will lose their concessional tax rate of 15 percent and will be taxed as applicable corporate tax rate.  The wait for clarifications on EL 2.0 or on Two Pillar regime continue.  As expected RBI will now monitor digital currency and will come up with guidelines and there are suitable provisions to tax virtual digital assets at 30 percent, treating them as speculative.  It appears we have the end of the road for any more tax concessions for corporates for activities such as ESG, R&D and the GIFT city with its ever expanding set of business (education, ship leasing  new c) alone being entitled for concessions.

There are interesting provisions which allow a tax payer to suo moto file an updated return  to his original, revised or belated return within 2 years from the AY and settle his disputes with a additional premium of 25-50 percent (calculated based on the time involved) provided he is not inter-alia already on the tax man’s radar.  Given the initial challenges seen on faceless regime, the department has sought time until March 31, 2024 to implement the scheme for TP, DRP and ITAT.  The powers of the revenue to re-assess without show-cause procedure has been introduced where the revenue has inter-alia material on record.

Seen in overall context, the tax man reins supreme; tax payers will need to adequately plan and invest in managing their compliances and ensure their tax positions are carefully assessed.

With a focus on four pillars of development - inclusive development, productivity enhancement, energy transition and climate action - the Union Budget 2022 has sought to promote growth, inclusive welfare and technology-enabled development. The Budget has sought to lay a foundation for an expected GDP growth of 9.2%, the highest of any large economy, with a mix of short-term and long-term incentives.

Some of the key highlights of the Budget in terms of direct taxation include the introduction of an updated return in the spirit of honouring the honest taxpayer and to promote cooperative compliance, extension of incentives for startups and manufacturing companies given their contribution to the economy, a cap on the surcharge levied on long term capital gains (LTCG), certainty in the taxation of virtual assets, reduction of taxes on co-operative societies in order to bring them at par with companies and efforts to minimise protracted litigation.

There, however, are remarkably few real changes to the personal income tax structure in a year that has seen demands from various quarters for some sort of relief or another in times of a pandemic.

Belying expectations, the Budget has not tinkered with personal income tax rates applicable to individuals hoping for lower taxes and higher liquidity. A change in the slab rates or an increase in the basic exemption limit would offer better relief to the common man and entitle him to claim the benefit of the new taxation regime more effectively, especially considering the rising inflation and that spending habits had been impacted during the pandemic. Further, an increase in the limit of tax deductions available and an expansion of its scope would offer taxpayers the flexibility to undertake diversified investments, while mitigating taxes.

The burden of LTCG had acted as a deterrent towards investor confidence. Major economies in the world today do not have LTCG tax itself especially for foreign investors. In India too, the expectation from the Budget was that LTCG on the sale of Indian-listed equity shares would be exempted as it would boost investment through the stock exchange.

With India emerging as the third largest startup ecosystem in the world, the tax incentives provided for startups do not address the core need of startups to be given more incentives in the form of an extension of the tax holiday, as required, especially considering that most startups are loss-making in the initial few years. The Budget has failed to introduce tax incentives that keep up with the agile functioning and funding methodologies adopted by new-age digital startups.

While the Budget has some positive interventions, it still lacks major steps towards simplification and rationalisation of the income tax regime for the salaried, common man. Tax policies that focus on minimising substantial inequities between the incentivisor, taxpayers and the incentive while promoting value-creation, are the need of the hour.

This Budget2022 is a balanced one and would bolster growth with an increased capital expenditure outlay. On Ease of Doing Business front the amendments proposed on reducing the timelines for winding up of companies would give cheer to lot of corporates which are looking for a smooth exit from India. Amendments to the IBC for Cross border insolvency resolution is also a welcome move.

In terms of tax proposals, reducing maximum rate for long term capital gains from 28% to under 24% is a good move and would give boost to promoters and investors who are looking at selling stake in their unlisted companies.

As expected, to boost manufacturing and Make in India / Atmanirbhar Bharat initiative the concessional tax regime of 15% provided to newly set-up manufacturing companies have been extended by 1 year to 31st March 2024. This will help corporates to avail the benefit and cover up on the time lost due to pandemic.  

There is now clarity on Taxation of Digital assets – which is being taxes at the maximum rate in line with speculation income. There is 1% TDS on transfer of digital assets and no set off of losses or any expenses. This would act as a disincentive for the Cryptocurrencies being placed adversely as compared to other investment assets.

Budget clarified that Education Cess is not an allowable deduction. Lot of corporates had stated making this claim and this has resulted in lot of litigation at various levels. From the looks of it this seems to be a clarificatory amendment and hence may be retrospective in nature.

Enabling tax-payers to update their tax return is a great move as over the years the reporting in tax returns have increased and it is likely that omission and errors would creep in the tax returns. There is additional tax for filing such updated tax return and this additional tax would act more like penalty in some sense for tax payers.

The dividend received by Indian Corporates from their overseas subsidiaries which was till now taxed at concessional rate of 15% would now be taxed at normal corporate tax rate. This would discourage Indian MNCs from repatriating income earned abroad in form of dividends.

Thrust on reducing litigation has been carried forward in this budget.

Overall at first look budget does not tinker a lot of things on direct tax. No sops / incentives for salaried or middle class is definitely a dampener but may be reserved for a general election.

The Government has been aiming at a comprehensive review of exemptions in Customs and that has been achieved in respect of almost 350 exemptions. Customs tariff structure has been simplified by moving the unconditional concessional rates from existing notifications to the First Schedule of the Customs Tariff Act. Also, in accordance with the provision for sunset date on conditional notifications brought in last budget, the entries being impacted have been identified. To this extent, the ease of doing business has been splendidly achieved in this budget from a simplification perspective.

However, the trend of negating the Supreme Court decisions through retrospective amendments seems to continue and this time it is the decision in the case of Canon India Ltd that has fallen prey to revenue compulsions. But whether a jurisdiction can be conferred retrospectively as is sought to be done by clause 96 of the Finance Bill will surely be subject matter of legal battle.

As a measure of addressing undervaluation in certain classes of goods a provision is being inserted that will enable the Board to specify additional obligations on importers of those classes of goods. The advance ruling obtained by importers will now be valid only for a period of three years notwithstanding that there is no change in law or facts. The redeeming feature of this amendment is that the advance rulings in force will continue to be valid for three years from the date of Finance Act 2022.

The amendments on GST front are replete with restrictions on input tax credit, on utilising the amounts in electronic credit ledger and on claiming of refund of tax paid on inward supplies thereby belying the expectation of any flexibility or simplicity in matter of input tax credit. As a small mercy, the Government has accepted the GST council recommendation of levy of interest on wrongly availed credit only if it is utilised.

Pertinent to note that www.gst.gov.in has been notified as common goods and services tax electronic portal with retrospective effect from 22 June 2017 thereby rectifying the glaring omission and nipping in the bud the challenges to effecting delivery of notices and demands. 

From a macroeconomic standpoint, it’s heartening to see a forward looking Union Budget, 2022 that sets a strong blueprint for India’s economic growth, which is both inclusive and sustainable. The Budget hits all the right chords as it focuses on infrastructure, skill development, ease of doing business, education, financing growth, energy transition and climate change.  On income tax proposals, there are a couple of ley highlights. First, while the Government has restrained from tinkering with tax rates – indeed capping surcharge rates for AOPs (where companies are members) and long term capital gains tax on sale of all assets is welcome. Second, as expected a new tax regime for crypto assets has been set out. However, the Government has taken a conservative stance by levying a flat 30% tax on income arising from transfer of crypto assets. Notably the tax treatment is not comparable to capital gains and no expenses other than cost of acquisition are tax deductible. Third, giving taxpayers an opportunity to file an updated tax return  albeit at a cost, to report any income that was erroneously missed out is a much awaited tax reform. Hitherto, if a taxpayer missed the due date to file a belated return, there was no mechanism in law to self-report any income that was not offered to tax. This left the taxpayer vulnerable to litigation, interest and penalties even when there was an intent to disclose income. This reform should go a long way in reducing tax disputes and building trust between the taxpayer and the Government. On the other hand, withdrawal of the 15% tax rate on dividends received from offshore subsidiaries may discourage repatriation of income back to India. Admittedly, the Government continues to give fillip to start-ups, manufacturing sector and IFSCs. Finally, tweaks in withholding tax provisions, reassessment provisions and taxation of not for profits need to be carefully assessed

“There were contradictory decisions on allowing education cess as a deduction, which instigated taxpayers to file an additional ground in their pending appeals. Going forward this controversy may not survive, considering the clarification provided in the budget to the effect that any education cess or surcharge was also part of income-tax  and therefore not deductible. However, the question whether such amendment can be prospective or retrospective will have to be decided by the court”. 

“Though the government has deferred filing of repetitive appeals by the department, this may have limited coverage for cases involving strictly questions of law. It may still not reduce litigation for fact intensive issues like transfer pricing and international tax. Also the taxpayer needs to consent on whether it is a repetitive question of law, therefore in a situation where the decision goes against the tax payer at the high court stage, it will be difficult for the tax payer to make out a different case”.

From the use of the tablet (instead of using paper to read the budget speech) to introducing virtual currency and to taxing virtual digital assets – this budget is all about going digital! Taxing virtual digital assets give an indication that the intent of the government is not to ban virtual digital assets – it seems that the government is more likely to regulate such assets which in itself is a welcome move. It is great to see that the FM understands the concerns of industries who have been deeply hit by the pandemic specifically the start-up community for whom the tax holiday has been extended and the manufacturing sector who also have been allowed an extension in order to avail the lower tax rate. Adding the super-rich surcharge on the capital gains of unlisted shares was a huge deterrent and capping that surcharge now at 15% is a big move and should have a huge positive impact for private investments. Further, while in the past the tax rates for the manufacturing sector were reduced, it was never enough to replace the benefits available to an SEZ unit previously. This budget indicated an overhaul in the SEZ regime which can turn out to be shot in the arm if brought about correctly. While the fine print is yet to be analysed, the budget does not seem to provide any rationalisation for the salaried / middle class who continue to be taxed under the same regime as earlier.

While we are still going through the Finance Bill in greater detail to examine the nuances, as requested, please find below our immediate responses on Budget 2022-23:

1. A proposal to introduce taxation of cryptocurrency has been introduced. Any amount earned by the taxpayer is expected to be taxed at the rate of 30% only after deducting the cost of such assets. While the Cryptocurrency Bill has not yet been introduced in the Parliament, this proposal to tax the gains therefrom at such high rate is bound to dampen the cryptocurrency market. Moreover, the tax rate of 30% is also extremely prohibitive and may be more than the general rate at which the taxpayer is required to pay its own taxes. Also the fact that no losses from the sale of virtual digital assets can be set off against the regular income and even a gift shall be taxed in the hands of the recipient, are also important features that need to kept in mind;
2. There is a proposal to introduce a Dispute Resolution Committee and the monetary limits provided (i.e. anyone with a taxable income up to Rs. 5 Million and disputed income up to Rs. 1 Million) for approaching them are very reasonable. It is expected to ensure a very high traction among the taxpayers who wish to settle their uncertain tax positions and settle them once for all.
3. A Litigation Management System to be introduced to avoid repetitive appeals involving identical issues. Revenue shall defer from filing appeals against an Assessee until the substantial question of law is decided by the jurisdictional High Court or the Supreme Court. This proposal to avoid filing repetitive appeals is also a welcome change which is expected to reduce tax litigations significantly.
4. She proposes to make the proceedings before the ITAT faceless. A National Faceless Income Tax Appellate Tribunal Centre shall be established and all communication between the Tribunal and the appellant shall be electronic. Where personal hearing is needed, it shall be done through video-conferencing. However, the efficacy of this appellate resolution mechanism shall be understood only after it is examined a few years after its formal introduction. While the intention seems noble, it will have to be seen how it will be implemented and what happens to the appreciation of physical evidences, which had been one of the core points of dispute in India;
5. In order to allow funding of infrastructure by issue of Zero Coupon Bonds, she proposes to make notified Infrastructure Debt Funds eligible to raise funds by issuing tax efficient Zero Coupon Bonds;
6. An opportunity has been given to taxpayers to file a revised income tax return within a period of two years from the end of the relevant assessment year in case such taxpayer comes across any income that had not been offered to tax;
7. To ease compliances for taxpayers, details of capital gains from listed securities, dividend income, and interest from banks, post office, etc. will now also be pre-filled.
8. Further, in order to incentivise funding of the start-ups, the FM proposes to extend the capital gains exemption for investment in start-ups by one more year
9. It is proposed to include, among others, tax holiday for capital gains for aircraft leasing companies, tax exemption for aircraft lease rentals paid to foreign lessors; tax incentive for relocating foreign funds in the IFSC; and to allow tax exemption to the investment division of foreign banks located in IFSC.
10. It is proposed to include, among others, tax holiday for capital gains for aircraft leasing companies, tax exemption for aircraft lease rentals paid to foreign lessors; tax incentive for relocating foreign funds in the IFSC; and to allow tax exemption to the investment division of foreign banks located in IFSC.
11. Concessional tax regime u/s 115BAB for new manufacturing companies extended by one year
12. GIFT City to have an international arbitration centre, world-class university, scientific research centres without having to comply with Indian rules and regulations.

As it is being claimed, the theme of this budget is to take India out of the covid-19 infected slowdown with a significant push towards capital expenditure. A few industrialists have also spoken about reviving the entrepreneurial spirit to make India a manufacturing giant and the budget seems to be encouraging them.

Budget 2022-23 – initial impressions on what lies ahead for the Indian economy

The Finance Minister presented Budget 2022-23 for the second year in succession in a digital manner. Last year, Budget 2021 was presented when the entire world was just moving out of the first wave of the pandemic, ironically not knowing it was heading into the second one. While the entire world is struggling to overcome newer mutations, Budget 2022-23 was presented looking forward to another futuristic year amidst the trying times that could help propel the growth engines of the Indian economy.

It is expected that the Indian economy is expected to witness real GDP expansion of 9.2 per cent in 2021-22 after contracting in 2020-21, the Finance Minister also noted on marking Azadi ka Amrit Mahotsav, having entered into Amrit Kaal, the 25-year-long leadup to India@100. While the revised fiscal deficit is estimated at 6.9 per cent of the GDP, it seems to align with the broader fiscal consolidation path to reach 4.5 per cent by 2025-26.

On the direct tax front, while there have been no tinkering with the tax rates and tax slabs for most categories of taxpayers, there have been certain measures which have focused on the growth trajectory and further the environment of non-adversarial tax regime.

With a view to boost the socio-economic welfare measures, there have been extension of sunset date for entities to commence manufacturing or production of an article or thing by one more year to 31 March 2024 from the earlier date ending on 31 March 2023 to avail the concessional tax of 15 percent, extension of the date of incorporation to 31st March 2023 from the earlier 31 March 2022 for eligible start-ups to avail the exemption.

The introduction of the facility to file an updated return would further the cause of environment of trust, it may also avoid a lengthy adjudication process and lead to voluntary tax compliance. With a view to promote sound litigation management, Budget proposals also defer the filing of an appeal by the revenue in a case where an identical question of law is pending before the jurisdictional High Court or Supreme Court. This coupled with the proposal on the non-allowability of ‘Health and education Cess’ as a business expenditure would also reiterate on the furtherance of a non-adversarial taxation regime

With a view to address the spiraling growth in the Crypto-currency transactions, Budget proposals include taxation on income from transfer of ‘Virtual digital assets’ (VDA) at the rate of 30 per cent without any deduction allowed (except for the cost of acquisition of the asset). Gift of VDA is also proposed to be taxed in the hands of the recipient. The loss arising on transfer of VDA shall not allowed to be carried forward and set-off. Further, withholding tax provisions are also made applicable at the rate of 1 per cent above monetary threshold of INR 50,000 and 10,000 for specified category of persons, an aspect that may perhaps need a re-look is whether the thresholds have been kept too low.

With the rationalization of surcharge for certain category of taxpayers (capping of surcharge for AOP and capital gains on listed equity shares, units, etc.), it surely would help bring down the tax cost of certain category of taxpayers and would be re-assuring to operate in these challenging times.

On the global front, with the OECD gearing up for action on the Two-Pillar proposal front to address the base erosion and profit shifting, there was no mention of any sunset date for the ‘Equalisation levy’ and similar digital levies, which was introduced as an interim measure till global consensus was being achieved which now seem to be inching closer towards a realistic regime.

The budget was presented against a backdrop of optimism for a faster economic recovery amid visible signs of recovery following the pandemic. The Hon'ble Finance Minister not only acknowledged the situation, but also boldly set forth spending plans to support infrastructure development. The government appears to have made a sincere effort to push the growth goal and reward numerous economic constituents to boost stimulation to the economy which can be understood from the fact that the fiscal Deficit in 2022-23 is to be estimated at 6.4% of GDP at macro level.

There were no significant adjustments on the corporate tax front, given the fact that the Govt. had previously streamlined the corporate tax rates. However, to incentivise the newly incorporated manufacturing entities under concessional tax regime u/s 115BAB extension of one year has been provided which will provide extra time to set-up manufacturing unit. Similarly, extension of one year has also been provided to the eligible start-up is incentivising.

Notably, the FM has put to rest the much talk about ambiguity for virtual digital assets (viz. cryptocurrency, NFT, etc.) by introducing the tax rates (@ 30%) and also propose the applicability the withholding provisions (@1%) to capture the transaction details.

Further, in order to reduce the litigations various amendments have been proposed such as:

• The initiative to defer the appeal filing by department to curtail the repetitive appeals (where the matter is already pending before the HC or SC) will be a significant boost and litigation cost saver for taxpayers. Also, the proposed amendment in Faceless Assessment will bring more transparency and accountability.
• An option to file the updated return after paying additional tax may reduce the number of needless tax litigations. However, whether the thresholds of 25% and 50% will detract from the goal will have to be observed in the future.
• The FM also provided clarity in relation to deduction for payment ‘Health and Education cess’ as business expenditure. This will reduce the litigation since various corporates have filed additional ground to claim the education cess as expenditure.
• The Proposed clarification on applicability of Section 14A even if no exempt income earned may put additional burden on the assesses.

However, common taxpayers' aspirations have been ignored on the personal tax front, as the FM has left the income tax slabs/deductions constant since FA 2014, and no relief has been granted to particular classes suffering so many hardships in this trying time.

India Union Budget 2022-23 

Indirect Tax – Revenue: 

• The revised estimates of total indirect tax revenue for FY 2021-22 is INR 12.7 trillion against the budgeted estimates of INR 10.8 trillion.
• The budgeted estimates of total indirect tax revenue for FY 2022-23 is INR 13.4 trillion. 

Good and Services Tax:

• GST law to be amended to provide for communication of details of inward supplies and input tax credit to the recipient and the to specify the details of inward supplies in respect of which input tax credit may be availed and the details of supplies on which input tax credit cannot be availed by the recipient.
• GST law to be amended to do away with the concept of ‘claim’ of eligible input tax credit on a ‘provisional’ basis and to provide for availment of self-assessed input tax credit.
• GST law to empower Central Government to prescribe restrictions for utilising the amount available in electronic credit ledger.  Central Government also empowered to prescribe the maximum proportion of output tax liability that can be discharged through electronic credit ledger.
• Provisions relating to interest to be amended retrospectively, with effect from July 1, 2017, to provide for levy of interest only on input tax credit wrongly availed and utilised and not only on input tax credit wrongly availed.  The rate of interest would be 18% (and not 24%). 

Customs Duty:

• The Advance Rulings shall remain valid for a period of 3 years or till there is a change in law or facts, whichever if earlier.  For Advance Rulings in force, the period of 3 years will be reckoned from the date of enactment of Finance Bill, 2022.
• Certain entries in Customs Tariff is harmonised to create new tariff lines and in respect of certain tariff items the customs duty rates are revised, effective from May 1, 2022.  In respect of few tariff items the customs duty rates are revised, effective from February 2, 2022. 

Central Excise:

• As new BIS specification IS 17586 has been issued for Ethanol Blended Petrol with percentage of ethanol upto twelve (E12) and fifteen (E15) percent, two new tariff items are inserted – to be effective from enactment of the Finance Bill, 2022.

“The Hon’ble Finance Minister started the speech with engines of growth and the same has been caressed throughout the budgetary proposals. Country had been caught in frequent waves of Covid coupled with need to endure the GDP growth at a faster pace. Taking the advantage of prospering revenue collection and fiscal deficit being in the tolerance zone, the Hon’ble Finance Minister has announced expenditure oriented budget particularly an increase of capex outlay to the extent of 35% from last year. This increase outlay by Government, being the biggest consumer, will ensure a momentum of higher GDP growth rate. To conclude, Government has not left any stone unturned in an attempt to accelerate the growth rate of the economy without losing sight of financial inclusiveness. Now, all the eyes on US tapering/quantitative easing. 

In terms of direct tax proposals, the key highlights are: To begin with, the Bill introduces taxation regime for cryptocurrencies. The scheme of taxation provides for a flat 30% on income arising from the transfer of cryptocurrencies without any deduction (except of cost of acquisition) and set off of losses. The withholding tax provisions are also introduced to ensure that crypto transactions get into the tax net. 

Another significant development being provision of window for updating tax return by paying an additional taxes. It appears to be a partial voluntary disclosure scheme wherein one is given additional time of 2 years to file an updated tax return after payment of additional taxes between 25% to 50% of tax and interest. This is a welcome step as it will ease the compliance burden for a bonafide taxpayer. 

To conclude, this year budgetary tax proposals are not about tax cuts and concession. The focus of proposals have been provide clarity on some long standing issues, aid compliance and ease of doing business.”

Overall a future looking and growth oriented budget with a massive increase in outlay of 35.4% for capital expenditure – this will have a positive multiplier effect on the economy.  The buoyancy in tax collections with the fiscal deficit situation has meant that the FM has not introduced any radical changes on the tax front.  The extended period of 1 year for new manufacturing companies availing concessional 15% tax rate to now commence operations by 31 March 2024 will encourage new investments and is in sync with the Auto PLI Scheme announced earlier.  Start-ups will now have an additional year upto 31 March 2023 to avail special income-tax benefits.  Proposed mechanism where Department will keep appeals in abeyance where matters of law are already being litigated at High Court/Supreme Court level will help reduce unwanted litigation.  Provision to file Updated Tax returns within 2 years from end of relevant AY along with additional tax shows the confidence the Government has in the robustness of its data collection and AI tools and also reposes trust in the taxpayers to voluntarily pay the right taxes and avoid reasessments and related penalty risks.  Capping surcharge on long term capital gains being restricted to 15% similar to listed equities is a positive especially for transactions in unlisted securities. Mechanism to tax Virtual Digital Assets was expected with all the buzz around crypto currencies and NFTs.  Finally, there are various changes to overcome past Court decisions including the retrospective change on non-deductibility of Health & Education Cess, applicability of section 14A disallowance even if there is no exempt income in a particular year, disallowance of benefits/perquisites given in violation of any law/rule/regulation and extension of bonus stripping provisions to securities.

“The budget is forward looking with emphasis on increased capital expenditure, infrastructure development, self-reliance and digital technology. The tax proposals extending the sunset deadlines for start-ups and new manufacturing company are welcome and will continue to fuel the Government’s agenda of Atmanirbhar Bharat. The scheme for taxation of virtual digital assets requires closer examination to understand coverage and implications. The ability to file an updated return is yet another step towards encouraging voluntary compliance. Recognizing the futility of continued litigation, the deferral of appeals by the tax department involving a pending question of law till adjudication by the Courts will ease the burden of controversy. The buoyancy in GST revenues is something to be cheered. The sector specific customs duty changes are aligned towards the overall promotion of make in India. The proposed reform of Special Economic Zones and the related customs administration framework will improve the ease of doing business and promote export competitiveness. Overall, the budget appears to have taken a consistent, investment focussed approach targeting structural growth. “

Budget 2022-23 Highlights from the Budget Speech: 

From a pure tax perspective, the focus of the Budget has been on the objective of simplification, reduction of litigation, sector specific exemptions/ concessions and clarification on specific issues.

I. The big change proposed in the Budget is an ability provided to a taxpayer to voluntarily update its income tax returns and rectify errors/ omissions. This appears to be in addition to the existing facility of revising a return. The new updated return can be filed within two (2) years from the end of the relevant assessment year. This is a voluntary compliance and would now provide for specific consequences and time bound resolution.

II. In furtherance of litigation management system, unnecessary litigation will be significantly reduced by not filing repetitive appeals on identical questions of law (with respect to an assessee) pending before jurisdictional HC or SC.

III. Much needed clarity on cryptos provided. The transfer of virtual digital asset will be subject to capital gains tax @ 30% - only deduction of cost of acquisition to be provided - loss cannot be set off against other income except income from cryptos. Even gift of cryptos will be taxable in the hands of the recipient. A new provision for TDS @ 1% on payments made for transfer of cryptos is proposed, subject to threshold limit. This will be very helpful to decide the pending claims of the tax department under Sections 194-O, 194-H and 194-Q.

IV. Clarification on Surcharge & Education cess being not admissible as business expenditure – overrules few favorable Tribunal decisions.

V. Brought forward losses can rightly not be set-off against income disclosed in a search or seizure by tax department – clarified.

VI. At the request of industry, due to COVID hiccups, companies could not commence manufacturing. Therefore, eligibility to claim concessional rate under Section 115BAB enhanced till 31st March 2023.

VII. SEZ Act to be replaced with a new legislation to enable participation of States. Needs to be seen whether SEZs will continue to be delineated as tax free zones. This will be a major booster for exports. States will also be made partners. Therefore, fine print of the new legislation to be analyzed to see the new changes. Customs administration to be aligned accordingly.

VIII. On IDT side, Government lauded its own efforts of digitization by giving an example of record earnings of Rs. 1.40 lakh crores in January 2022, being the highest since inception of GST. According to the Government, this shows clear acceptance and embrace to IT enabled system of GSTN.

IX. Under Customs, sector specific announcements were made to promote domestic industry by proposing reduction of rates in Electronics, Gems & Jewelry, critical Chemicals and MSMEs. Simultaneously, more than 350 exemption entries relating to agriculture, fabric, medical devices etc. proposed to be gradually phased out – this is a welcome stand to boost Atmanirbhar Bharat.

With the motto of “Drawing Wisdom from Ancient Texts”, the Hon’ble Finance Minister announced an inclusive, forward looking and digital led budget. Overall, the speech aimed to touch every sector and area, viz. education, infrastructure, energy, solar, EV, healthcare, defence, research & development, Fintech, climate change, rural, urban areas, etc.

The announcements made are more towards increasing capital expenditure, which is a welcome move, since the same is towards nation building for the future. Further, digital has been recognized in all sectors i.e. introduction of education channels, National Digital Health Ecosystem and specific recognition to Fintech sectors and benefits to start-ups. Taxpayers’ contribution to strengthen the hands of the Government, was recognized by the Hon’ble Finance Minister. In continuation of the efforts towards increasing buoyancy in tax filings, the provision of allowing taxpayer to voluntarily update the tax return, has been introduced. 

The efforts have been made towards reducing the burden of appeal filing for the repetitive question of law. Further, clarification has been brought in that any surcharge or cess on income-tax tax levy would not be considered as a deductible item for the purpose of computing profits and gains from business or profession. Overall, these clarifications and measures should help in reducing litigation. 

In terms of R&D eco-system, while there are announcements in the budget speech in relation to collaboration with industry and academia, there seems to be no tax incentives with respect to R&D that have been included in the fine print. It was expected to get the weighted deduction of R&D restored so as to encourage and expand the investment / expenditure in the area of R&D.

GST is still a work in progress. Enabling provisions introduced in GST laws to limit the amount of input tax credit that can be used to pay output tax liability! Whether this is only to provide legislative sanctity to Rule 86B or will this be akin to erstwhile service tax laws wherein 20% of the output tax liability was required to be paid in cash, needs to be seen. Several changes made to restrict the claim of input tax credit based on declaration made by the supplier in their outward return thereby providing legislative teeth to GSTR 2B. Clearly the focus of the government is to identify and reduce the claim of improper input tax credit based on fraudulent invoices which is leading to tax leakages. 

A welcome change is specifically providing payment of interest only if the wrongfully availed input tax credit is utilized. Also, increase in time limit for issuing debit and credit notes till 30th November. As widely anticipated, Customs laws have been retrospectively amended empowering the officers of revenue intelligence to issue notices thereby nullifying the decision of the Apex Court in the case of Canon India. Will these lead to another round of litigation for the old cases? 

Rationalisation of customs duty by removing exemptions on finished goods and providing concessional rate on raw material is step in the direction of promoting “Make in India’.

“At the very outset, the Budget 2022 appears to be driven by the avowed objective of “ease of doing business”. The Hon’ble FM impressed upon reduction of 25000 compliances and repealing of 1486 Union Laws thereby placing trust in the public to give a much-needed impetus to the "ease of doing business" mantra. The trust-based governance system is further reflected in the “updated return” modality that is proposed to be introduced in the Income Tax enactment as well as the setting up of International Arbitration Centre in GIFT Cities 

The unwavering dedication of the Government to incentivize exports from India is epitomized by the replacement of the SEZ Act, 2005. The new enactment appears to be a more robust piece of legislation as it shall lend itself to development of new enterprises and hubs. The proposed new enactment also purports to enable Centre-State partnership to fuel growth of SEZs as opposed to the present scenario where the setting up of SEZs is driven by the Centre 

The Hon’ble FM enunciated the taxability of Virtual Digital Assets which presumably includes Cryptocurrencies. With a flat Income Tax rate of 30% on transfers and no deduction of expenses save the Cost of Acquisition, crypto holders are likely to be disgruntled albeit slightly relieved with the tax certainty. The Budget Speech also indicated that the TDS rate on such Assets shall be 1%. 

In a welcome move, directed at easing the burden of Courts, the FM appears to have put an end to the multiplicity of disputes raised by the Department. The move, termed as “litigation management” shall preclude the Revenue from assailing rulings when a jurisdictional High Court or the Apex Court is seized of the same issue.” 

“The Budget speech delivered by the Hon’ble FM focused on the ‘Make in India’ initiative to a large extent. About 350 exemptions on imports are being withdrawn and a comprehensive review of the tariff has been undertaken. The intent is to give level playing field to domestic manufacturers. 

While not much was expected from the Budget as far as GST was concerned considering the recent amendments made effective, the Budget comes as a surprise for taxpayers. With the recent amendment to Section 16 and Rule 36(4), there was an anomaly that was being created in view of Section 42 and 43 which relates to matching of credit, reversal and reclaim. The said sections were incorporated in the law in lines with the erstwhile GST return system (GSTR 1, 2 and 3). The Budget clears the anomaly and omits the said sections to remove any ambiguity. 

Further, Section 16 seems to be an all-time favorite of the Government and never ceases to evolve. A new sub-section has been incorporated i.e. Section 16(2)(ba) to restrict the ITC to the extent available in lines with Section 38 (i.e. auto generated statement or GSTR 2B). Furthermore, one of most significant change that has been brought in is the change in the deadline of 30 September which has been prescribed at various places in the law whether it be issuance of credit notes, rectification of outward supplies or claiming ITC. This timeline has been changed to 30 November of the following financial year or date of filing annual return whichever is earlier. This is a welcome move as taxpayers were under a dilemma that no provisional credit would be allowed post 30 September starting 2022. However, this time limit has now been pushed to 30 November which practically give two more months to the taxpayers for concluding their year-end activities. 

However, most amendments in the GST law seem to be aiming towards streamlining the law with rules, circulars, instructions and judicial rulings (whether or not to overturn such rulings) issued by the Government, such as, doing away of two-way communication for claiming ITC, availment of ITC on provisional basis, restrictions on utilizing electronic cash ledger, etc. Another important aspect is the change in interest rate in case of undue or excess claim of input tax credit from 24% to 18%. With this, the interest rate becomes consistent across the law. Rule 86B which was introduced last year and restricted payment of output tax liability by way of utilising electronic credit ledger has received a legal backing by way of an amendment in Section 49(12). Delinking of cash refund from GST returns has been done under section 54 and can now be received basis the form prescribed. 

A step towards unifying the compliances for legal entities registered in multiple states has been taken by the Budget by way of proposing transfer of balance from electronic cash ledger of one state to another state. This was already decided in the GST Council meeting and was also a part of the press release. However, the law has been synced with the intent. 

The FM in her budget speech proposed a step towards reduction in litigations in Direct taxes by way of restricting the appeals filed by the department on a question of law, in cases where an identical question of law is already under dispute. It remains to be seen whether a similar measure would be incorporated in the GST law as well. 

To conclude, a new SEZ legislation is in the pipeline for the exporter community, and it will be interesting to observe the nuances that the legislation brings in.”

Union Budget 2022-23

The Hon’ble Finance Minister appositely said that with ‘Sabka Prayas, we will continue our journey of strong growth’. The Budget prioritized Ease of Doing Business 2.0, Ease of Living and IT driven administration. From Indirect Tax standpoint, significant & numerous proposals have been made. However, Government’s silence on launch of new Foreign Trade Policy brought resentment amongst exporters’ community. A glance on key proposals are as follows:

SEZ:

SEZ law will be replaced with a new legislation and related procedures will be simplified by September 30, 2022. Depending on changes, it may become a landmark reform for exporters’ community.

Customs:

To strengthen ‘AtmaNirbhar Bharat’ and ‘Make in India’ movement, Government has phased out 350 exemptions for protecting interests of domestic producers. While removal of some exemptions may be warranted, overall the Government ignored ground-level challenges of scarcity of like-quality goods in India, likely increase in price of such goods etc.

Parallelly, to curb litigation, Government has retrospectively made DRI, Preventive & Audit officers as ‘Proper Officer’ to enable them to undertake investigations, issue notices etc. to over-rule Canon India ruling. Also, validity of Customs Advance ruling is restricted to 3 years which is regressive as it will necessitate taxpayers to seek advance ruling again even without change in facts or law. Further, the Government has been empowered to increase value of imported goods where Importer is under additional obligations which is likely to raise disputes. Simplified procedure for bona-fide exporters and simplification of IGCR Rules are welcome steps.

GST:

Having recognized challenges since inception of GST, Government’s dream of GST return matching has now been finally shelved off. This necessitates proper matching of GSTR-1/2B with GSTR-3B by taxpayers. To taxpayers’ relief on compliance front, timelines for availing ITC, reporting of Credit Notes, rectification in GST returns etc. is extended to November 30 of succeeding financial year. Another welcome change is lower interest (18%) for wrong availment and utilization of ITC. Amongst other changes, multiple conditions & restrictions have been added for availing ITC which will make availment and utilization of ITC more difficult for taxpayers. This is totally contradictory to Government’s stated objective of free flow of ITC under GST.   

Amidst 3rd Covid wave, the Budget is a mixed bag and is likely to increase compliance burden of taxpayers’ community.

The Hon’ble Finance Minister presented the tax proposals in the Budget with clear objectives of facilitating domestic manufacture, simplification of compliances, reduction in litigation and adoption of best digital practices. 

From an indirect tax perspective, there could not have been a better day for Budget announcements as highest ever GST collections of INR 1.41 lakh crores for the month of January 2022, were confirmed. The applause for achieving highest ever monthly GST collection in January 2022, can be seen as a measure of India’s economic recovery from the challenges thrown by the pandemic. 

In sync with Phased Manufacturing Program (PMP) to promote ‘make in India’ initiatives, the Government has proposed withdrawal of ~ 350 exemptions under Customs laws. Also, gradual phase out of concessional rates of capital goods in sectors like fertilizer, textiles, leather, footwear, food processing etc. has been announced. Similarly, Customs duty rates have been rationalized on wearable devices, hearable devices and electronic smart meters, to promote domestic manufacturing and exports from India. 

Apart from the above, following key changes are proposed under Customs regulations: 

• For specified products to be notified by the Board additional obligation casted on importers to substantiate their transaction value
• Validity of advance ruling capped at three years or till ‘change in law’, whichever is earlier
• New provision incorporated to protect export and import data, by making publishing of such information an offence under Customs Act.

On GST, the Government continuing with their agenda of easing the compliances and the theme of ‘minimum government and maximum governance’, made following announcements: 

• Extending the relevant date for availing input tax credit, issuance of credit note/ debit note and rectification of details reported in periodic monthly return to 30th November of the following financial year (earlier deadline was 30th September)
• System driven compliances including conditional restrictions on utilization of input tax credit based on system generated statement and sequential filing of GSTR-1.
• Provision for levy of interest, only if credit is wrongly availed and utilized implemented retrospectively from 01 July 2017
• In order to increase liquidity and provide for fungibility of GST credits, transfer of balance in cash ledger (CGST and IGST) has been permitted between distinct persons

The Budget announcements today thus, once again enforced that technology would be the key driver for streamlining tax administration and facilitating ease of compliances.

Indian Budget

In the backdrop of strong post-pandemic economic recovery, FM presented a very futuristic Union Budget 2022-23 moving towards India@100 vision with the underlying theme of promoting digitisation, Make-in-India and ease of doing business 2.0.

Acknowledging the pandemic induced growth through digitization of the economy, various announcements were made to promote the digital ecosystem by way of allocation of funds and introduction of schemes for digital banking, health services, linkages of various platforms to support e-commerce for MSME, digital education and  enablement of logistics services. FM announced the launch of digital currency by the RBI making India as one of the early adopters of blockchain technology for its legal tender. Transfer of ‘virtual digital assets’ will now be subject to tax, which is targeted towards crypto currencies, non-fungible tokens (NFTs), and other such assets in the Metaverse.

Continuing with the dual objective of encouraging make-in-India and ease of doing business, various incentives and fund allocation have been announced to promote domestic companies and start-ups.  In a move to attract foreign investments in GIFT city, exemptions have been provided to portfolio management services, cross-border offshore derivative instruments and over the counter derivative instruments. Setting up of thematic funds to be manned by private fund owners is also a welcome move. SEZ Act to be replaced by a new law to enable States become a partner in mobilising investment and funds into India.

From a good and easy Governance standpoint, a move to ease litigation, taxpayers are going to be allowed to offer any under reported income by way of an updated return up to 2 years and duplicate appeals by tax department on issues pending before High Court/Supreme Court will be checked. Fast track exit scheme for corporates will also aid in fostering investments.

Consistency in tax rates coupled with the rationalization of surcharge rates is a welcome approach to stabilising the economy.

The Finance Minister’s renewed focus on development of infrastructure is an encouraging sign for generation of employment and accordingly boosting of demand for the domestic market. The recovery from the pandemic has been swift but incomplete. Thus, a fine balancing act between the fiscal retreat and economic recovery has been highlighted in the budget. The thrust of this Budget has been on Infrastructure, Education, Digital landscape and Financial sector, which will form the pillars for future economic development. 

On Transfer pricing, the amendments in Section 92CA 153 and 263 are discussed below:   

1. Faceless Scheme for TP cases – Amendment has been proposed to Section 92CA of the Act, whereby the scheme for the purposes of determination of the arm’s length price under faceless scheme has been amended to extend the date for issuing directions from 31st day of March, 2022 to 31st day of March, 2024. 
2. TP Orders now under scope of Section 263 – Amendments have been proposed in the provisions of Section 263 of the Act, whereby the scope of the section has been widened to provide that the Principal Chief Commissioner or the Chief Commissioner or the Principal Commissioner or Commissioner, may call for and examine the record of any proceeding, and if he/ she considers that any order passed by the TPO, to be erroneous in so far as it is prejudicial to the interests of revenue, he/ she may pass an order directing revision of the order of TPO. Though, this amendment may lead to some practical challenges for the taxpayers. 
3. Time limitation for TP cases – Changes consequential to Section 263 of the Act have also been made in the provisions of Section 153 of the Act inter-alia to include the order passed by TPO and where the TPO gives effect to an order or direction under section 263, the AO shall proceed to modify the order of assessment or reassessment or re-computation, within two months from the end of the month in which such order of the TPO is received.

The Union Budget 2022-23 is a modern budget focused on the idea of a nation that is not bogged down by the aftermath of COVID-19 pandemic, but one that is steadfastly progressing towards an age of sustainable development powered by digitisation, robust connectivity, infrastructure, technology, skilled workforce and enhanced private and public investments. It is gladdening to witness a Budget that is not simply driven towards economic growth but also the takes into account the soft issues such as mental health of its populace. The Budget recognises the potential of upcoming sectors, like artificial intelligence, clean energy, fintech, drone technology, animation and gaming, 5G technology, genomics and pharmaceutical, and is focused on realising their potential by implementing supportive policies to build domestic capacity. The opening up of the defence sector for research and development partnership with the private sector especially academia is an indication of the Government’s intent to tap the existing domestic potential. This new age or Amrit Kaal leading up to the 100th year of India’s independence will be powered by initiatives, like PM Gatishakti, inclusive development, and enhanced production and investments. The Government acknowledges the contribution of States in realisation of its vision and has made substantial budgetary allocation towards capital investment.

On the indirect taxation front, the Government received its highest monthly GST collections in January 2022. The customs duty collections also have witnessed buoyancy. The Budget encapsulates various proposals for stabilising and recalibrating the law by plugging loopholes, doing away with obsolete exemptions and replacing SEZ Act with the intent of realigning it with modern day requirements. The amendment empowering officers of DRI to issue show cause notices under the Customs Act, 1962 seeks to nullify the Apex Court judgment in the case of Canon India. Customs duty rates are being reviewed to align them with the objective of Atmanirbhar Bharat. The phasing out of concessional duty rates on capital goods and project imports, agricultural produce, medical devices and medicines will provide necessary impetus to the domestic capabilities. The GST law also has witnessed some welcome changes, viz. linking the interest liability to utilisation of erroneous ITC, extension of time limit for claiming ITC, allowing transfer of balance available in cash ledger to the cash ledger of distinct person. The rationalisation measures include linking the relevant date for claiming refund of tax on supplies made to SEZ units and developers with the due date of filing of Form GSTR-3B return.

All in all, the Budget indicates that the Government has its fingers on pulse of the nation, and it is completely focused on aligning its policies and legislations to engage its domestic capabilities to realise its vision.  

This year’s Budget is an invigorating one as the Government is shifting gears after a COVID ridden financial year and bringing in opulent changes in the infrastructure development of the country, with focus on railways, logistics and telecom, while also pivoting towards energy transition, climate action and sustainable infrastructure for EVs (electric vehicles). There are many welcome changes for India Inc. and Promoters as the Government introduces an accelerated corporate exit mechanism which would reduce the time involved from 2 years to less than 6 months and capped the surcharge rate for long term capital gains from a vexatious 37% to 15% which will give boost to the flourishing start-up ecosystem.  Government, in its attempt to further smoothen the insolvency process, is also introducing amendments in IBC to enhance the efficacy of the resolution process and facilitate cross border insolvency. 

As anticipated, GIFT City has continued to receive incentivization as the government has announced the much-awaited International Arbitration Center, world class foreign universities and institutions free from domestic regulations, and various additional tax sops. This is a significant step towards increasing the flow of capital pools into the IFSC.  However, the highlight of this year’s Budget is the introduction to the long speculated Digital Rupee, that will be based on blockchain technology to be rolled out by RBI.  This adds India amongst the likes of China and Singapore to have its own national digital currency, a move that many major economies including Russia and Japan have been maneuvering towards.  In a related move, the Government has also introduced a specific tax regime for transactions involving such Virtual Digital Assets wherein the income from transfer of such assets will be taxable at a flat rate of 30% which might prove to be a deterrent factor for investors in this space.

"Focus has been on domestic manufacturing sector. Exemptions and concessions of Customs duties on import of goods which are also being manufactured in India is being phased out. Replacement of SEZ Act with a new legislation is a pragmatic step as this will integrate SEZ and Customs administration."

"PLI schemes in high efficiency solar module manufacturing and 5G and broadband equipment is a welcome move." 

"With focus on domestic manufacturing industry, Customs duty exemptions/ concessions for goods which are being manufactured in India is being rationalized. For example, Customs duty rates on Project Imports are being rationalized. Similarly, Customs duty rates for agri products, chemicals, fabrics and medical devices are being rationalized or phased out. This will certainly give impetus to domestic manufacturing”.

This comment has been co-authored by Rajat Mohan,Senior Partner, AMRG & Associate .

As GST is a dynamic law where continuous changes are introduced through notifications and various GST council meetings there are few surprises in the annual budget. Mostly the budget is used as a tool to bring the changes required in the law.

Few changes which were announced during earlier GST council meetings have now found a way in the law though the Budget 2022. These include

• No levy of interest on payment through ITC with effect from 1st July 2017
• Rate of interest reduced to 18% from 24%
• Permit transfer of electronic cash ledger between distinct persons.

The government has extended the time limit for availing the input tax credit, issuance of credit notes and rectification of errors to November 30 of the following financial year. The redundant provisions of law related to the initial procedure of return filing has been omitted to give way to current procedure of compliance.

The Government has brought changes in the law but it remains to be seen when they will be notified and benefit will actually flow to the taxpayers. From the past experience, in some cases CBIC has taken more than an year to notify certain provisions making it ambiguous for the stakeholders.

The direction of the amendments in Direct Tax have been to simplify the taxation system, promote voluntary compliance and reduce litigations. As expected there is no further concession in the tax rates for corporates. Moreover, Individuals have been left wanting for some relief in tax slabs or deductions since year 2014. Amendment has been made to avoid repetitive litigations on the question of law till it is settled by the High court or Supreme Court.

Overall the budget is on the expected lines with fewer and fewer reliefs in the taxation systems. The focus has been on infrastructure boost and digital economy and making the economy towards the Atmanirbhar Bharat.

“As expected, the budget did not have any big bang announcements on direct tax. While there have been some unexpected tax concessions, major theme of the budget has been to tighten the noose. 

HNIs have been pleasantly surprised by the reduction in effective rate of long term capital gains tax by almost 4.5%. it was further surprising that the concession has been provided irrespective of the nature of capital asset sold and would apply to all assets including shares, immovable property etc. 

Another proposal that stands out is introduction of updated tax return that seek to provide a continuing window of tax amnesty. Of course, nothing comes for free; taxpayers could be paying an additional tax of 25% to 50% for getting a second chance to regularise their tax affairs unless caught red handed in a search or a survey. 

It would have been hard for the government to ignore all the activity in the crypto assets and not claim a share of the pie. Providing a tax regime for crypto currency was expected but not necessarily treating gains from crypto in the same way as gambling income. Together with indirect taxes, crypto assets may be attracting an exceptionally high tax and may take some lure off the punt on the highly volatile assets. 

The fine print presents several amendments sought to increase tax collections either directly, for instance taking away the reduced tax rate offered to domestic companies receiving dividends from their offshore subsidiaries, or indirectly by technically overruling some of the judgments in favour of the taxpayers. The tax exemptions to charitable entities is also sought to be more heavily regulated with a special focus on anti-profiteering and misuse of otherwise benevolent provisions.

It appears government has taken this budget as an opportunity to clean up the Act, albeit in its favour.” 

The clarity on tax of digital assets is long over due and was expected to be provided this year. The announcement of tax @ 30% on digital asset, coupled with the government launching its own digital currency, is an indication that the government intends to discourage the same and would intend that only the HNIs make such investments and that the government shall not permit cryptos as currency. The caping of surcharge at 15% is welcome and though no separate relief was given to HNIs, this would also be favourable to such HNIs with high capital gains income. On the litigation front, the announcement that appeals shall not be made in case of similar issues of law pending before the High Court and Supreme Court is an important step in reducing the litigation.

In the amidst of the second year of pandemic, the Finance Minister today presented the Union Budget 2022. This Budget aims to establish the groundwork for Amrit Kal from India 75 to India 100. Though there are no big bang changes, very predictably, mechanism to trace and tax income from crypto currencies have been put in place. Lately the virtual digital assets have grown in popularity, and the volume of trading in such digital assets has increased significantly. While such an income of a resident should have been taxable in any case, the proposed change is going to bring certainty. The profits on transfer of Virtual digital assets would be subject to a tax rate of 30%. The losses however arising on such transfers shall not be allowed to be set off against other income and cannot be carried forward. Further, a 1% tax deduction at source on payments made related to purchase of virtual assets is being proposed – this will help trace the income.

In an attempt to promote voluntary tax compliance the FM proposed that the tax returns can now be revised for omission and mistakes including declared income not reported. The changes can be made through a one-time window till two years from the end of the assessment year on payment of an additional tax and interest due on the additional income furnished.

On the other hand, there weren’t much noteworthy tax changes to provide impetus to the manufacturing or the service industry. Individual taxpayers were definitely looking forward for some tax break amidst the pandemic. On the tax front, the budget seems to aim at constituting a stable tax regime which provides static guidance and nudging taxpayers towards self-compliance. 

Significant changes made to GST ITC provisions. Quantum and eligibility of ITC to be claimed proposed to be determined by GSTR-2B. Consequential amendments proposed to be made in CGST Act,2017 to give GSTR-2 a silent burial.

Default in furnishing GSTR-1 or GSTR-3B for any period will now lead to blockage in filing facility for subsequent period.

Some welcome amendments include: a) fungibility of balance available in electronic cash ledger (subject to conditions and restrictions prescribed) across types of payment, taxes and registrations of distinct person; and b) interest on wrongly availed credit henceforth applicable in case credit is wrongly availed and utilized.

Changes in Custom Tariff rates, as expected, are in line with Government of India Atma Nirbhar Bharat initiative and will provide protection to domestic players. Other changes in Custom Tariff are in respect of EV, solar power generating equipment, renewable energy and clean fuels. Similarly blended fuel incentivised under Excise.

Definition of proper officer amended to covered DRI officers to overcome the effect of ruling of Apex Court in case of Canon India.

SEZ regulations likely to be see a significantly change. While this may bring more clarity and uniformity in legislations, it may result in reduction in State or region-specific concessions.