Year 2021 was a year of technology where things in the air (or in the cloud!) dominated a large part of boardroom discussions — whether it was Big Data, AI, NFTs or cryptocurrency. While clarity on legality as well as taxation of income from trading of digital assets was awaited, the Budget 2022 has signalled a step forward, laying down the taxation regime for these assets.
Introducing the concept of Virtual Digital Assets (VDAs), which include all digital assets such as digital currencies and NFTs, the gains from VDAs are proposed to be taxed at a flat rate of 30 per cent. Further, set off of any losses generated on VDAs is not allowed. The tax regime for these assets is more stringent than taxation of speculative business activity, where set off of losses is permitted against income from any other speculative activity along with a carry forward provision for four years.
Further, gifting of VDAs is also taxable in the hands of the recipient at the applicable rates, unless the gift is eligible for the qualifying exemptions such as gift between relatives.
While the clear spelling out of taxes on digital assets is indeed quite welcome as it helps remove the uncertainty associated with income arising on trading of these assets, it still needs to be seen if and when India will bring out regulations governing the legality of VDAs.
With successive Covid waves and lockdowns impacting economic activity and expansion plans of Indian corporates, the industry had an expectation for extension of the Make in India concessional corporate tax rate of 15 per cent by a couple of years.
Acknowledging the problems faced by the industry, the Finance Minister has announced extension of the time period for commencement of commercial production by an year to March 2024. Again, a very practical and welcome move, though Corporate India would have liked the extension to be at least till 2025 as it would have provided more time to businesses to prepare and plan their expansion projects.
Similarly, the sunset for availing income tax exemption for eligible start-ups has been extended by an year to April 2023.
Any reduction of taxes?
Though there has been no change in the tax rates for corporates and individuals, an enthralling amendment is the capping of surcharge on long term capital assets at 15 per cent. This reduces the effective tax on long term capital gains for high income individuals from 28.5 per cent to 23.92 per cent for residents and from 14.25 per cent to 11.96 per cent for non-residents.
The markets were anticipating a balance between taxation of listed and unlisted shares. However, the parity was not granted, but the Budget has provided relief to the individuals and the HUFs on sale of any long term capital assets. This reduction covers a multitude of assets such as unlisted shares, real estate and all other capital assets and is expected to give a boost to overall deal activity.
As India witnesses increased participation from private equity and foreign strategic buyers, a reduction of 4.58 per cent tax for the Indian entrepreneur not only is a good fiscal saving, but it also brings various providers of capital on almost the same footing as far as taxation is concerned, thereby reducing the need for creating various LLP/ corporate structures. It will be interesting to see if deal closures are pushed by a few months to avail this benefit.
The Budget 2022 removed the beneficial rate of 15 per cent on dividends earned by an Indian company from a foreign company. Post the change in the dividend taxation regime last year, which made dividends taxable in the hands of the shareholders, this appears to be a move to bring foreign dividends at par with domestic dividends. Also, with the Section 80M deduction, this move is not likely to impact those companies which upstream dividends to their shareholders.
However, as Indian companies increasingly go global, it will certainly impact and increase the tax costs of repatriation of profits from foreign operations if such profits are to be re-invested into the business. Perhaps, the next couple of months could see foreign subsidiaries of Indian companies distribute large amounts of dividends.
On another tangent, the Finance Minister in her speech mentioned that necessary amendments in the Insolvency and Bankruptcy Code will be carried out to enhance the efficacy of the resolution process and facilitate cross border insolvency resolution. While the fine print on this is awaited, it should help in a faster resolution for businesses which have overseas presence.
There has been controversy on the ability of a successor company in a merger/demerger scheme to file a revised return of income post the approval to the scheme by the NCLT, in case the timelines for revision have lapsed. This has led to litigation and various judgments have been passed at various levels, including at the Supreme Court.
The Budget sets the controversy to rest with the provision that a revised return can be filed by the successor entity within six months from the end of the month in which the NCLT order is issued. This is quite welcome given the uncertainty associated with the NCLT approval process.
Overall, the Budget 2022 provides much needed clarity on taxation in the digital age, brings in some parity on taxation of long term capital gains taxes and, more importantly, demonstrates the government’s intent to promote stability in the taxation regime.
With its continued thrust on investment and capital flows into the country and on encouraging innovation, the government has also recognised the contribution of the venture capital and private equity which has helped in catapulting India to be the third largest start-up ecosystem in the world, and promised to set up an expert committee to holistically examine regulatory issues and other challenges faced by them.
This should hopefully pave the way for larger and more impactful initiatives and policy measures in future. A practical, progressive and forward looking approach by the Finance Minister is heartening for the industry.
Vaibhav is Partner, and Pooja is Senior Associate, at Dhruva Advisors LLP. Views are personal