The Finance Minister, Nirmala Sitharaman, in Budget 2023 outlined seven priorities comprising inclusive development, reaching the last mile, infrastructure and investment, unleashing the potential, green growth, youth power and financial sector. These factors complement each other and act as guiding principles for the priorities of the Government.
With the backdrop of several geopolitical issues, recovering from the pandemic and global issues like the looming recession, the Budget seems to have played a balancing act. Given below are the key announcements of the Budget and their potential impact from a direct tax perspective:
Changes in personal taxation
In any Union Budget, an individual looks for the rationalisation of the income tax slabs. Acknowledging this, a new tax regime was introduced in the Finance Act, 2020 providing an option for the taxpayers to opt for lower tax rates and forego certain exemptions and deductions (like house rent allowance, interest on housing loan, etc.), however, not many taxpayers opted for this.
To make the taxpayers adopt the new regime, a new proposal in Budget 2023 includes beneficial tax slabs, increased rebate for taxpayers (having a total income of up to ₹7 lakh) and a reduction of surcharge for high-income taxpayers (from 37 per cent to 25 per cent). According to the proposal, there shall be no tax outflow for taxpayers earning a total income of ₹7 lakh. For high-income taxpayers, the maximum tax rate will be 39 per cent as compared to the previous rate of 42.74 per cent.
Another important change impacting individuals investing in residential properties out of capital gains have been introduced. The proposal has capped the deduction of capital gains to the extent of ₹10 crore against investment of capital gains in residential property. This will impact the individuals who would earn capital gains and invest the proceeds in residential assets.
India has become one of the favourite destinations for start-ups in recent years. The Government has taken several measures in the recent years to promote entrepreneurship and provide a competitive platform for this sector. To address the demand for tax relaxation for this sector, two important proposals have been presented in the Budget.
Any eligible start-up will be entitled for an income tax deduction for its entire qualifying business profits for three consecutive years out of the 10 years from the date of incorporation. This benefit is applicable to the eligible start-ups that have been incorporated on or before March 31, 2023. This requirement is proposed to be extended by one more year to March 31, 2024.
Another proposal that will benefit this sector is the relaxation of certain conditions in case of shareholding changes. The present tax regulations restrict the carry forward of losses to the companies if there is a change in their shareholding beyond a certain threshold.
However, as per the current regulations, the aforesaid restriction shall not be applicable to the start-up company for a period of seven years from the date of incorporation. In case there is change in shareholding during this period, the start-up shall be eligible to carry forward and set off the losses. With the evolving market dynamics, to provide longer duration to utilise such losses, the Budget proposes to extend the period of seven years to 10 years.
With the objective of ease of doing business, over the past few years the Government has taken measures such as faceless assessments and appeals, faster processing of refunds and pre-filled income tax returns. A few additional measures have been announced in the Budget.
Several taxpayers in India have faced challenges due to the sizeable number of appeals pending before the Commissioner of Appeals. The Finance Minister has announced the deployment of 100 officers who can expedite the disposal of such appeals. It will help the taxpayers to close the litigations and, thereby, reduce the number of pending appeals.
The Budget proposes to introduce a scheme detailing the manner and process of handling and disposing the appeal. Changes have also been suggested in the timelines for the assessment cycle to improve the taxpayer’s experience.
Rationalisation of certain provisions
Taxpayers are now allowed to take tax withholding credit in the subsequent years if the corresponding income was offered to tax in the earlier years with certain conditions. However, there is an amendment which will impact Indian companies issuing their shares to non-residents at higher valuations.
In accordance with the proposed amendment and its interplay with Indian foreign direct investment regulations, in a situation where shares are issued at a value higher than fair market value to non-residents, it shall entail tax outgo for the Indian company.
Although India aims to be a $5 trillion economy and the manufacturing sector plays an integral role for this growth, the tax incentives for this sector seems rather limited. There is no extension of timeline for new manufacturing companies beyond March 31, 2024, or a lower tax rate, which was an ask from this sector.
The Union Budget has tried to address the concerns of most of the taxpayers. The extension of tax benefits for start-ups is also a welcome move, it is yet to be seen whether it can benefit the individual and the various sectors.
The writer is Partner, Price Waterhouse & Co LLP