By Gouri Puri and Suyash Sinha
Budget 2023: As India readies to occupy CenterStage in the world order, as the fastest-growing economy in the world, its corporate tax proposals for Union Budget 2023 will be key to set the scene for its burgeoning economic growth. For both corporate India and the foreign investor community, the wish list revolves around boosting India’s share in global manufacturing, expanding credit availability, creating new businesses, and promoting foreign investment in India’s capital markets.
Resultantly, at the forefront of corporate India’s expectations is an extension in the dates to avail the 15% concessional corporate tax rate currently available to manufacturing companies, which commence production before March 31, 2024. The Government’s continued policy support will help achieve its goal to increase the manufacturing sector’s contribution to up to 25% of the GDP.
Moreover, presently, India extends a concessional withholding tax rate of 5% to foreign portfolio investors who invest in rupee-denominated bonds issued by Indian companies. Additionally, a 5% withholding tax rate is also provided for foreign currency-denominated bonds and loans approved under the ECB scheme. Considering that such tax benefit is set to expire on July 1, 2023, it is hoped that the Government will consider an extension to facilitate continued access to foreign credit.
Corporate India also expects a rejig in India’s capital gains tax regime, which is currently marred by varied holding periods and tax rates across different asset classes and investors. Reportedly, the Government is looking at a simpler set of tax rules that address the distortionary effect of divergent tax norms.
Rationalization of capital gains tax rates, STT, CTT will also help develop India’s capital markets. Similarly, it is hoped that the tax rate for LLPs will also be aligned with the prevailing corporate tax rates to give LLPs a level playing field. Additionally, it is hoped that the Government will also give clarity on the tax treatment of transactions entailing transfer and reorganization of LLP interests, which become complex because of the hybrid structure of an LLP. The Government should also consider for providing parity in the taxation of buy back of shares and dividends to mitigate tax distortions.
As corporate India looks outwards to diversify and reap the benefits of globalization, a high tax rate on dividends disincentives repatriation of profits back to India. Notably, several European nations have provided participation exemptions or exempt dividends from home country taxation. It is hoped that the Government would consider reinstating the 15% concessional tax rate applicable to dividends received by Indian companies from foreign subsidiaries.
Digitalization and technology have been significant drivers for Indian businesses and markets. Several new Web 3 products and business models have emerged. Yet, the Government has adopted a conservative stance towards the taxation of digitalization businesses. Notably, tax policy continues to paint cryptocurrencies and other digital assets with the same brush and subjects the entire industry to a harsh tax regime. More so, the industry’s asks relating to allowing a refund or credit of equalization levy against withholding tax on royalties and fee for technical services, clarity on the scope of equalization levy’s catch-all provisions and burden of section 194-O TDS provisions in business models where the platform operator is not involved in the transaction chain – all remain unaddressed.
Over the years, Indian Government has introduced several tax measures to encourage the Indian start-up ecosystem. Tax incentives aside, certain tax issues that have become commonplace for start-ups such as deductibility of ESOP expenses, lack of clarity on taxation of ESOP trust structures, application of Section 68 to investments from foreign investors, taxation of earn-outs, etc. Despite favourable judicial precedents, these issues continue to plague start-ups.
Legislative intervention on these issues will help provide more tax certainty.
Needless to say, Union Budget 2023 is eagerly awaited by corporate India and should take India’s growth story forward.
(Gouri Puri, Partner and Suyash Sinha, Principal Associate, Shardul Amarchand Mangaldas & Co.)
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