By Rajeev Dimri & Naveen Aggarwal
Budget FY23 boldly envisions a public-investment-led growth agenda, with a fine balance struck between increased capex outlay and maintaining fiscal prudence. From a tax standpoint, the temptation to tweak corporate and personal tax rates before key state polls has been resisted and the focus maintained on recovery and growth. Two important themes stand out.
The first is enhancing investment and capital formation to drive inclusive growth. The PLI scheme has been a game-changer for the manufacturing industry, with the potential to create 60 lakh new jobs and an additional production of Rs 30 lakh crore over the next five years. This, coupled with the changes in duty rates aligned to Make-in-India, positions India as a globally-competitive manufacturing destination while providing a level playing field to domestic players. Several MNCs are still on a wait-and-watch mode on global supply-chain realignment; there is perhaps no better time to consider India as a viable alternative. However, while the gradual phase-out of duty exemptions on import of capital goods is consistent with Atmanirbhar Bharat, sectors that rely on imports for advanced technology capital goods may face teething issues if the required technology is not available in India.
The renewed thrust on GIFT IFSC will likely have a significant multiplier effect for growth. The slew of incentives and exemptions from domestic regulations will likely accelerate business activities. The proposal to set up world-class institutions and universities will attract not just global investments but also facilitate large-scale skilling programmes in the booming financial services sector.
For start-ups, while the extension of the sunset dates by one year to avail tax exemption is a welcome relief, the budget seems to have missed to provide a regulatory framework to facilitate listing of Indian companies overseas, either directly or through SPAC structures. In addition, enhancing the dividend taxation rate on foreign dividends to 30% may seem counterproductive, especially for startups that have outbound ambitions.
On the home front, the proposed revamp of SEZ law could be another important change. However, the much-awaited clarification on Section 10AA deduction on SEZ units operating under work from home (WFH) remains unaddressed.
Finally, with the BEPS Pillar 1 and 2 inching closer to a global convergence, there was some expectation that the budget would provide clarity on India’s roadmap and approach towards its implementation. Also, much needed clarity and guidance on several aspects of Equalisation Levy and the Significant Economic Presence provisions also didn’t materialise.
The second is moving towards a stable and predictable tax regime and creating a trustworthy ecosystem that encourages voluntary compliance. With a view to reduce litigation, a scheme has been announced for avoiding repetitive appeals on identical issues. Under this, tax authorities will not file an appeal against the taxpayer until the substantial question of law is decided by the jurisdictional High Court or the Supreme Court.If implemented in the right spirit of collaboration and trust, this could help unclog our judicial system paving the way for faster dispute resolution across the board. However, given the large-scale litigation afflicting the Indian tax landscape, there was hope that the government would consider a permanent dispute resolution process to enable negotiated settlement of disputes on a case-by-case basis as well as reconsider the new advance ruling mechanism introduced last year. Specifically, an advance ruling mechanism which includes some independent members and whose rulings are binding on the revenue would go a long way in helping taxpayers obtain certainty and avoid litigation. In summary, while the budget undoubtedly takes a step in the right direction, there is still a lot of ground to cover in this area.
The budget also proposes to provide an ability to taxpayers to rectify any errors in their tax return within a two-year window. However, this only applies with a payment of additional tax and cannot be availed of for any reduction in income/enhancement of refund. With respect to the revamped reassessment regime introduced last year, the budget proposes a mixed bag of amendments. There are proposals aiming to clarify ‘information which suggests that income has escaped assessment’ which form the basis of initiating the reassessment and introducing a requirement of prior approval of senior officers prior to issuing order of re-assessment consequent to search, survey and requisition. However, interpretational issues remain, and more powers are proposed to be granted to the tax department to launch reassessments for upto 10 years. Specifically, this can now be done in cases where income chargeable to tax is represented in the form of expenditure in respect of a transaction or in relation to an event or occasion, or an entry in the books of accounts.
In summary, while the budget rightly focuses on attracting investment and ensuring a stable tax regime, more measures to address longstanding substantive and procedural issues would have gone a long way in building a conducive tax system, critical for achieving and maintaining high growth rates. As always, the success of the current proposals will also depend heavily on whether they are implemented in the true spirit of transparency, trust and improving the ease of doing business.
Rajeev Dimri & Naveen Aggarwal
Respectively, head of tax, and partner, KPMG in India
