According to the press release issued by the Central Board of Direct Taxes (CBDT) earlier this month, gross direct tax collections up to January 10, 2023 were 24.58% higher than the corresponding period for last year. This is, indeed, a notable jump, given the 7% growth rate in FY23 that has been predicted by the National Statistical Office.
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The Indian economy has done well to leave the impact of the Covid-19 pandemic behind and continues to outperform other global economies. Credit, in part, is due to various government initiatives such as privatisation, reduced tax rates, incentives for manufacturing, Production Linked Incentives (PLI), and the National Education Policy. These have strengthened India’s position as a global power.
The Union Budget 2023 should focus on areas such as simplicity, tax certainty, litigation management, anti-avoidance, and digitalisation within the tax framework. Importantly, aligning the tax system to international developments and the increasingly transnational nature of companies will be critical to success.
Taxpayers continue to seek certainty with regard to their tax positions as a reduced litigation footprint as well. With the Board for Advance Rulings being in limbo, taxpayers have been unable to obtain a confirmation on their tax position, especially for high-value transactions or complex interpretational issues. Additionally, while on the one hand, faceless assessments have reduced the interactions that taxpayers are required to have with authorities, on the other, it has led to an increase in requests for data and tax adjustments which could have been avoided had physical hearings taken place. This has led to an increase in the number of avoidable appeals. Further, increased scrutiny by tax authorities (often through search and survey proceedings) have led to a multi-fold increase in litigation. The government should consider provisions to ensure that repetitive litigation on routine matters is avoided. Additional measures to bring in certainty on tax positions such as ensuring a time-bound disposal of advance rulings and appellate cases would be welcome.
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Towards the end of 2021, the Organisation for Economic Cooperation and Development (OECD) along with the international tax community agreed upon the two-pillar solution to address tax challenges of the digital economy. Towards the end of 2022, OECD released a consultation document on the withdrawal of digital service taxes and other measures under the Pillar One solution and an implementation package for Pillar Two. The Union Budget 2023, taking this cue, should introduce measures relating to the Pillar Two enactment, factoring in the Global Anti-Base Erosion Rules, which lay out a minimum effective tax rate of 15% for large multinational companies and a plan to phase out digital services tax as agreed under the Pillar One solution. How this could impact corporate restructuring in the coming years is also a space to watch out for as tax rules will require companies to ensure that their fair share of taxes is discharged globally.
Budget 2022 introduced provisions with respect to taxation of virtual digital assets (VDAs). These provisions, in their nascent stage of implementation, have left a lot of taxpayers’ questions unanswered. The broad definition of VDA could be amended or clarified to provide a specific set of exclusions to align with the true intent of introducing the law. Applicability of the provisions with respect to non-residents and taxation of transactions in crypto derivatives, which do not result in income from direct transfer of VDAs, are some aspects that need clarification.
Further, the law with respect to ‘significant economic presence’ has caused a lot of uncertainty regarding the nature of transactions proposed to be covered under its ambit. The law, as it reads today, covers any transaction in goods or services by a non-resident with a person in India exceeding the prescribed threshold. Clarity in these provisions should be high on the budget’s agenda.
Given the evolving startup ecosystem in the country, the budget could consider some relaxations in rules on carrying forward losses for startups, both in terms of continuing shareholder ownership as well as the period for which these losses may be carried forward. Additionally, expanding the 15% tax rate for new manufacturing companies to more industries will be a bold and welcome move.
In a world of increasing cross-border businesses and complex transaction flows, the rationalisation of withholding tax provisions, especially with regard to non-residents, including clarity on applicability of withholding tax on transactions with residents will be important. The budget can consider reducing withholding obligations to a common rate across all provisions. Similarly, measures can be introduced to ensure that tax authorities follow the provisions of tax treaties that India has signed with various countries.
A well-balanced budget, addressing some of the areas noted above, would go a long way in ensuring that the Indian economy continues to chart a course of growth.
(Partner, Price Waterhouse & Co Llp)