Hon’ble Finance Minister Nirmala Sitharaman presented the Union Budget 2022 against the backdrop of a resilient economy that is growing at 9.2 per cent amidst the pandemic.

With buoyant tax collections in the last year and the fiscal deficit under control, the common man hoped to receive some tax concessions. On the other hand, the industry awaited a tax reform that give a fillip to private investments and start-ups. However, as the uncertainties of the pandemic still loom large, the Government has tread cautiously. While the highlight of this year’s tax proposals is indeed the new tax regime for digital virtual assets, there are no other big bold tax announcements, personal tax concessions or changes in the realm of international taxation. While it’s safe to say, the income tax proposals under Union Budget 2022 don’t rock the boat, in this article we highlight some of the key changes.

Notably, taxation of virtual digital asset (which is a widely defined term that extends much beyond cryptocurrency) occupies the centre stage of this year’s budget. The Government has elected not to accord virtual digital assets the status of capital assets, putting an end to characterization disputes. Instead, the tax treatment of virtual digital assets is akin to speculative income. Income from transfer of virtual digital assets will be taxed flat at 30 per cent (plus applicable surcharge and cess) and only cost of acquisition is allowed as a deductible expense. Other incomes cannot be used to set off the losses from transactions in virtual digital assets. Moreover, such losses cannot be carried forward to subsequent tax years. Gifts of virtual digital assets will be taxed in the hands of the transferee. In addition, a 1 per cent withholding tax will need to be deducted by any person making payment to an Indian resident for virtual digital assets (with some exceptions for low value transactions and individuals and hindu undivided family). Although the proposed tax regime for virtual digital assets is conservative, it is a step in the right direction in recognizing the need for tax certainty in the cryptocurrency space. Some open issues remain regarding the valuation of virtual digital assets for tax purposes and applicability of equalization levy.

While there have been no significant changes in tax rates, there are a few special mentions in this category. First, the surcharge is capped to 15 per cent on any long term capital gains earned by a taxpayer on transfer of any assets. This should give a big relief to Indian resident individuals that were paying a high tax bill on big transactions where the surcharge on tax was as high is 37 per cent on long term capital gains income. Hopefully this should aid founders of start-ups and boost private investment. Second, the surcharge rate for association of persons (that comprise only of companies) is also capped to 15 per cent. Finally, the concessional tax rate of 15 per cent that was given to Indian companies for repatriation of dividends from their off shore subsidiaries has been withdrawn. This may act as a disincentive to bringing back overseas earnings back to India.

The budget has introduced the concept of an updated tax return, which gives taxpayers an opportunity to file an ‘updated tax return’ within two years from the end of the relevant assessment year on payment of an additional tax. Until now, taxpayers who missed the deadline to file a belated tax return or inadvertently missed out on reporting any income on their tax return (after the due date for filing a revised tax return) had no recourse in law to voluntarily offer such income to tax. This meant that the only way in which they could correct the wrong was when a tax proceeding was initiated against them, that resulted in litigation, interest and penalties. Therefore, even where the taxpayer had a genuine intent to come clean – there was no formal opportunity to do so. In this sense, the updated tax return is a key reform that should go a long way in minimizing tax disputes. There are a couple of catches here. First, the updated tax return opportunity is not available if it is utilized once a tax proceeding or investigation has been initiated against the taxpayer. Second, the opportunity is available upon payment of an add-on tax, which is 25 per cent or 50 per cent of the applicable amount of tax and interest, depending on whether the updated tax return is filed within one year or two years from the end of the relevant assessment year, respectively.

In case of reassessment proceedings, a limitation period of 10 years applies in case the assessing office has in his possession books of accounts or other documents or evidence which reveal that income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to INR 50 lacs. The Budget has clarified that income represented in the form of expenditure in respect of a transaction or in relation to an event or occasion, or an entry or entries in the books of accounts, will also be covered within the 10-year limitation period.

On tax incentives, the Government continues to propel IFSCs. Tax exemption is extended to a non-resident on income arising from transfer of offshore derivative instruments or over-the-counter derivatives entered into with an Offshore Banking Unit of an IFSC. In addition, royalty and interest earned by a non-resident from lease of a ship to a unit of an IFSC (that has commenced its operations before 31 March 2024) is made tax exempt (previously this benefit was restricted to aircrafts). To boost financial intermediaries in IFSCs, tax exemption has also been accorded to non-residents on income earned from portfolio of securities or financial products or funds, managed by any portfolio manager in an account maintained with an Offshore Banking Unit in an IFSC, to the extent such income accrues outside India. Finally, exemption has been extended from ‘angel tax’ to shares issuances by a venture capital company to Category I and Category II Alternative Investment Fund regulated under the International Financial Services Centres Authority Act, 2019.

There has also been a notable change in director’s liability of a private company. Indian tax laws enable income tax authorities to recover tax due the directors of a private company, where such tax cannot be recovered from the company itself. Since such liability of the directors is not conditional upon liquidation of the company, the heading of the section has been amended from “Liability of directors of private company in liquidation” to “Liability of directors of private company”. Such change removes the scope of confusion with respect to a provision which can have a significant impact on senior management of a private company.

There has also been a notable change in director’s liability of a private company. Indian tax laws enable income tax authorities to recover tax due the directors of a private company, where such tax cannot be recovered from the company itself. Since such liability of the directors is not conditional upon liquidation of the company, the heading of the section has been amended from “Liability of directors of private company in liquidation” to “Liability of directors of private company”. Such change removes the scope of confusion with respect to a provision which can have a significant impact on senior management of a private company.

Amit Singhania, Partner, Gouri Puri, Partner and Nimish Malpani, Associate, Shardul Amarchand Mangaldas & Co. Views of the authors are personal and not that of the firm.