Direct tax: Budget gives a blueprint for sustained high-growth trajectory

The Union Budget for 2023-24 builds on the vision set out in the previous Budgets and provides a blueprint for steering the economy towards a sustained high-growth trajectory in the 25-year-long lead up to India@100.

India, showing a strong rebound from the global pandemic and economic challenges, has a vision of a technology-driven and knowledge-based economy with focus on strengthening the macro-economic environment and inclusive growth by providing opportunities to citizens, and specifically youth.

The key direct tax proposals aimed at continuity and stability of taxation, promoting entrepreneurial spirit, simplification and rationalisation of tax provisions.

CONTINUITY AND STABILITY
 

Corporation tax

Corporation tax rates remain the same. Given the pandemic’s disruption, there was a common expectation that the sunset date for beneficial tax at 15 per cent for new manufacturing companies would be extended. The government has the window to extend the timelines next year as well. Strictly from an industry perspective, an upfront medium- to long-term extension would have helped in investment decision-making.

Personal income tax

There is a reduction in the personal tax rates under the new regime. The government has tried to make it more lucrative through tax rebate, reorganising tax slabs, lowering tax rates and surcharge, and extending the standard deduction (Table 1).

This is a measure to do away with tax beneficial deductions and give the benefit without any stipulations. This will provide stability to the tax regime and money in the hands of the taxpayer for investment or spending.
 

The lowering of surcharge from 37 per cent to 25 per cent has resulted in reduction of maximum tax rate from 42.74 per cent to 39 per cent under the new regime (see benchmark in Table 2). The tax slab (old regime), if aligned to inflation adjustment, would have required the threshold to be raised from Rs 2.5 lakh to Rs 3.25 lakh, but the slab remains unchanged (see Table 3).

Table 4 depicts the tax-neutral position under the old regime (with deductions) and the new regime at different income levels.

The finance minister has enhanced the tax exemption on leave encashment on retirement of non-government salaried employees from Rs 3 lakh to Rs 25 lakh. It is expected to be notified soon. 

PROMOTING THE ENTREPRENEURIAL SPIRIT
 

Startups

Eligible startups enjoy relaxation from the condition of having continued 51 per cent shareholding in order to set off and carry forward of losses incurred during the initial seven years of incorporation. The period of seven years is now proposed to be increased to 10 years. Eligible startups incorporated till March 31, 2024 can now claim a tax holiday. This will promote the development of startups in India and provide them with a competitive platform.

The Economic Survey had stated that to accelerate reverse flipping, measures such as simplification of the certification process and ESOP taxation and addressing multiple layers of tax and uncertainty due to tax litigation should be taken. But there is no such measure.

MSMEs

It is proposed that tax deductions would be available to a taxpayer’s business only if payment is made to MSMEs within the time stipulated under the relevant MSME laws. This would promote timely payments to MSMEs, which are the backbone of the economy, resulting in better cash flow positions.

Currently, small businesses having turnover or gross receipts of up to Rs 2 crore are subjected to presumptive tax based on deemed profits on turnover/gross receipts. The threshold will now be increased to Rs 3 crore, provided cash receipts do not exceed 5 per cent of gross receipts. Further, for professionals, the threshold has been increased from Rs 50 lakh to Rs 75 lakh. This will help in simplifying tax compliances and encouraging voluntary return filing.

Cooperative societies

The benefit of a concessional income tax rate of 15 per cent has been extended to new manufacturing cooperative societies set up on or after April 1, 2023, and which do not avail any specified incentive/deduction. However, the requirement to commence manufacturing within March 31, 2024 may be practically unachievable and should be extended.   

Relaxation on cash withdrawal from banks without tax deduction at source has been extended from Rs 1 crore to Rs 3 crore.

International Financial Services Centre (IFSC)

The period for claiming exemption from capital gains tax for relocation of Funds (PE funds, venture capital funds, hedge funds) to IFSC has been extended from March 31, 2023 to March 31, 2025. This is welcome relief for investors who were not able to obtain the benefits until now due to setbacks posed by the pandemic.

Anti-avoidance measures

• Section 56(2)(viib) provides for taxation of the amount received by a taxpayer on issue of shares in excess of the fair market value from residents. It is now proposed to extend the purview of this section to cover non-residents. Domestic companies receiving funds from foreign investors would now need to ensure that any consideration received as share premium complies with valuation norms under income tax as well as exchange control regulations. To prevent anti-flipping, a blanket exception could have been provided to funds received by startups from non-resident investors.
• The maximum exemption that can be claimed from eligible capital gains upon purchase of residential property has been capped at a value of Rs 10 crore, as against no limit provided under current laws.
• Currently, any sum of money exceeding Rs 50,000 gifted by a resident to a non-resident is taxed in the hands of the non-resident. This has been extended to gifts of money made to persons not ordinarily resident in India, to curb tax avoidance.
• Presently, no TDS is required on interest payable in the case of listed dematerialised securities. To ensure correct reporting of income by recipient, this has been brought under the purview of TDS.
• It has been clarified that cost of acquisition of property will not include interest already claimed as deduction under House Property. This has been brought in to deny claims of double deduction of interest on borrowed capital.
• Income from life insurance policies having premiums exceeding Rs 5 lakh (individually/in aggregate) during any year has now been made taxable. This will, however, not apply to any sum received on the death of a person.
• Presently, the cost of acquisition and cost of improvement of self-generated goodwill is required to be considered as nil. This has now been extended to all self-generated intangible assets or rights.  
• Exit tax currently gets applied where a registered institution/trust merges with a non-charitable or a charitable but with dissimilar objects, or does not transfer the asset to another charitable trust. Going forward, failure to comply with timelines for renewal of registration would attract exit tax. Hence, proper compliance with such registration requirements becomes critical. 
• Application of income in case of inter-trust donations is restricted to 85 per cent of the donation amount to curb cases where multiple trusts are formed for accumulating 15 per cent at each layer. This should ensure intended application towards charitable and religious purposes. 

WIDENING OF TAX BASE

• Section 194R requires withholding of taxes on benefits or perquisites provided in the course of business or profession which includes cash benefits. The Supreme Court (SC) had earlier interpreted the scope of the charging section to cover only benefits in kind. To bring parity, the scope of the charging section has been extended to cover cash benefits. This may result in taxability of a few items like waiver of loan, which was hitherto held to be not taxable.
• It has been proposed to increase the rate of tax collection at source from 5 per cent to 20 per cent on overseas tour packages and other foreign remittances (except for the purpose of education or medical treatment). This may increase the cost of foreign travel and give an impetus to domestic tourism, while also helping to check foreign exchange outflow.
• TDS at 30 per cent is proposed to be introduced on winnings from online games. Games of skill and games of chance have been treated on the same plane.  
• Capital gains arising from market-linked debentures will be deemed as short-term capital gains and taxable at applicable rates instead of the existing rate of 10 per cent.

RATIONALISATION MEASURES

• Currently, there is no mechanism to claim tax credit in case income is offered on accrual basis and TDS is deducted subsequently on such income on payment basis. To facilitate claims of tax deduction credit in such cases, an application can now be made to the tax officer within two years from tax deduction.
• Persons not required to furnish a return, like non-residents, have been excluded from the rigours of higher TDS/TCS which exist for non-filers.
• Currently, there is a provision to limit deduction for excess interest expense to non-residents in line with BEPS measures (thin capitalisation norms). This does not apply to banking and insurance companies. It is now proposed to exclude NBFCs engaged in similar financing activities from the rigours of such a provision.
• Tax withholding on payments to non-residents in respect of mutual fund units can now be made considering tax treaty benefits. This has been brought in sync with other payments to non-residents.
• A new section will be introduced to grant exemption to development authorities established for achieving public functions/services in line with the SC decision in Ahmedabad Urban Development Authority.
• In the endeavour to ensure speedy disposal of cases, small tax dispute matters will now be taken up by Joint Commissioner (Appeals), having powers commensurate with the Commissioner (Appeals).
• These are welcome moves that will go a long way in improving the ease of doing business.

OTHERS

• Power will be granted to tax authorities to initiate a special audit for inventory valuation by a “cost accountant”.
• Time available for completion of assessment for AY 2022-23 and onwards is proposed to be extended.
• To promote the concept of electronic gold, conversion of physical gold to electronic gold and vice versa has been excluded from capital gains tax.
• Conclusion
• The proposals are in line with the directional tax policy declared by the finance minister in her Budget speech.