By Shruti KP, Shashi Mathews, Abhishek Boob, Gaurav Goyal
Union Budget: The Finance Minister Ms. Nirmala Sitharaman will present the Budget 2023 on February 1, 2023, the last full budget before general elections in 2024. As per news reports, direct tax collections were INR 12.31 trillion, registering a growth of 19.55% y-o-y basis till January 10, 2023. With direct tax collections exceeding the budgeted figures, are we likely to see major tax reliefs, particularly for individual taxpayers. On the indirect tax front, certain customs duties are likely to be hiked for sectors covered by PLI schemes in order to provide further impetus to the ‘Make in India’ objective of the Government.
Corporate taxpayers received a bonanza of sorts with the introduction of the concessional tax regime of 15% (plus surcharge and cess) for new manufacturing companies commencing business on or after 1 October 2019. This was introduced with an intent to provide an impetus to the manufacturing sector, and to generate job opportunities. Moreover, it was also a step towards moving to a lower corporate tax rate, in line with lower tax rates seen in various countries in the region. However, the sunset clause under this provision provides that the manufacturing process should commence on or before 31st March 2024 (extended deadline). Although companies have started availing the benefit, with increased impetus on manufacturing, the Government may further extend the date of the sunset clause to 31st March 2025. Further, in line with the aim to rationalise corporate tax rates to achieve global parity, the 25% corporate rate could be allowed to companies with turnover of INR 500-600 crores too. Given the robust growth in tax collections, hopefully no additional taxes are likely to be imposed on corporate taxpayers. Moreover, there is scope to rationalise the tax rates for limited liability partnerships, which is currently pegged at 30% (plus surcharge and cess), in parity with lower tax rates available for companies.
One major amendment in last year’s budget was with respect to the taxation of Virtual Digital Assets (VDAs) including cryptocurrency. Under the current regime, income on transfer of VDAs are taxed at the highest rate (i.e. 30% plus surcharge and cess), and losses are not allowed to be set-off and carried forward. Moreover, the withholding tax procedure on VDAs is quite cumbersome. This has resulted in a pronounced decline in crypto transactions, and if the government’s objective is not to prohibit or dissuade crypto transactions, the VDA taxation regime warrants a relook. The Government may rationalise the crypto tax regime by reducing the tax rates, allowing set-off and carry forward of losses, and possibly introducing a simplified withholding tax mechanism. Additionally, clarity on ‘situs’ of VDAs in case of cross border transactions, is also the need of the hour.
There is also widespread anticipation that the current capital gains tax regime, which is complex with multiple rates, periods of holding, types of assets, different surcharge rates etc may be rationalised and made simpler. Ideally, the capital gains tax regime should have one rate for all classes of assets, irrespective of the period of holding and tax residency of taxpayer.
One class of taxpayers who have not benefited from the current Government’s tax policies, are the individual taxpayers, particularly those in the salaried class. Though wholesale inflation has been tamed to some extent in this quarter with lower food prices, the overall inflation levels in the last few years has been significantly high. This has potentially impact savings, and availability of disposal income in the hands of middle-class taxpayers, who are perhaps going to be the engines of consumption growth in India. Increases in basic exemption limits and tax deductions therefore are perhaps overdue, particularly since the ‘concessional’ tax regime mooted for individual taxpayers has not been popular. In addition, the Government should also bring measures to expedite the disposal of pending tax disputes for companies as well as individuals. Removing revenue targets imposed on tax officers will itself perhaps go a long way in reducing tax litigations across the country.
On the indirect tax front, the Government might look towards increasing customs duties on imports for sectors such as aerospace, electronics, gems and jewellery, paper, and plastic. Some of the said sectors are covered by the Production Linked Incentive (PLI) schemes of the Government, and the hike in customs duties will be aimed towards promoting the local sourcing and manufacturing of the components required in those sectors. This will further the objectives of the government to promote the ‘Make in India’ scheme.
At the same time, the Government may provide duty concessions in sectors such as telecom and bio-fuel, in order to incentivize further investments in these sectors. The telecom sector in India is moving towards 5G infrastructure, and the industry expects a relaxation on the customs front on import of equipment. 5G is expected to play a crucial role in the Government’s ‘Digital India’ initiative. Similarly, providing a concession in the imports relating to setting up of advanced ethanol production plants may boost the Government’s ethanol blending program. These concessions are also aligned with the concessional imports permitted for Compressed Biogas.
Given the huge success of previous amnesty schemes introduced in respect of the legacy laws such as service tax, excise, and under income tax, the Government may also look towards bringing out an amnesty scheme for customs laws, so as to also benefit from the crores of rupees worth recoverable duty amounts, which are currently blocked due to ongoing litigation. The said scheme will provide an opportunity to all the stakeholders, and specially the MSME sector to close their ongoing disputes with the tax authorities. Some of the key disputes that can be covered under the said amnesty scheme may include disputes relating to fulfilment of export obligations, issues on classification issues covered by clarifications issued by the Central Board of Indirect Taxes and Customs (CBIC).
There’s enough cheer in the tax world given the buoyant tax collections this year. Here’s hoping the finance minister brings great cheer to taxpayers as well with a magnum opus Budget 2023!
Shruti KP, Partner – Tax, Shashi Mathews, Partner – Tax, Abhishek Boob, Principal Associate -Tax, Gaurav Goyal, Senior Associate – Tax.
Disclaimer: Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Shruti KP, Partner – Tax, Shashi Mathews, Partner – Tax, Abhishek Boob, Principal Associate -Tax, Gaurav Goyal, Senior Associate – Tax.