The Hon’ble Finance Minister befittingly described the theme of her direct tax proposals under Union Budget 2023 as continuity and stability. Contrary to expectations, Union Budget, 2023 does not rock the boat. Notably, there is no rejig of the capital gains tax regime, buy back tax rates, changes impacting cross-border tax or roll out of new tax incentives for corporate India. Instead, the tax proposals focus on giving relief to the middle-class taxpayer and look to phase out personal income tax related deductions and benefits. Some existing tax incentives have been continued and extended for start-ups and international financial services centers (IFSC). Additionally, a 15% concessional tax rate has been extended to cooperative societies in the manufacturing space. In the corporate tax space, few significant changes include extension of angel tax provisions to share issuances to non-residents, new tax regime for online gaming companies, and taxation of REITs and InVITs. In this article, we summarize some of the key highlights of the direct tax proposals under the Union Budget, 2023.
On the personal income tax front, Finance Act 2020 had introduced an alternative set of lower marginal tax rates for individuals and HUFs (Hindu undivided family) in case they elected to forego certain specified tax deductions (such as life insurance premium, savings and investment related deductions, interest on housing loan etc.) (“New Regime”). To incentivize individuals to make a shift to the New Regime, the Government has introduced a slew of benefits. These include lower tax rates, a tax rebate of INR 7 lacs and capping the surcharge payable by high-net-worth individuals to 25 per cent). In addition, the New Regime will be the default regime unless the taxpayer opts out of it in the favour of the old regime while filing her tax return. Other key changes include increasing thresholds for presumptive taxation for professionals from INR 50 lacs to INR 75 lacs (where cash receipts do not exceed 5 per cent of the turnover). In addition, the roll over benefit which is available on reinvestment of long-term capital gains income in residential property will be capped to INR 10 crores. Finally, to prevent double deduction in respect of interest on borrowed capital for acquiring or constructing a residential house property, the Finance Bill, 2023 (“Bill”) proposes to exclude any interest claimed as a deduction in respect of repayment of such borrowing, while considering the cost base of such property for the purpose of computing capital gains.
The Bill also proposes to introduce new taxation and tax deducted at source (TDS) regime exclusively for online gaming. Users will be taxed at 30 per cent (plus applicable surcharge and cess) on their net winnings. Online gaming companies will be required to deduct tax at source from the net winnings of a user at the end of the financial year. In case of withdrawal of winnings from the user account during the financial year, TDS is to be deducted at the time of such withdrawal on the amount of net winnings withdrawn. Further, it is also proposed that in case where net winnings are wholly or partly in kind and cash winnings are insufficient to meet the amount of TDS, the online gaming company should ensure that TDS is paid before releasing the winnings.
The Government continues to offer tax concessions to units located in IFSC to make it a global financial services hub. In 2021, the income tax law was amended to provide tax neutral treatment to offshore funds on their relocation to an IFSC, provided such relocation occurred on or before 31 March 2023. This time limit has been extended by two years to 31 March 2025. Currently, distributions made by IFSC banking units to non-residents in respect of offshore derivative instruments (ODI) entered by them are subject to double taxation. First, the IFSC banking unit pays tax on the income realized from the underlying Indian securities in respect of which the ODI contract is entered into. Second, the non-resident ODI holder pays tax when the IFSC banking unit distributes the same return pursuant to the ODI contract. It is proposed to exempt the non-resident ODI holder from any tax on such distribution provided that the IFSC banking unit is taxed in respect of the underlying income. For start-ups as well, Government has extended the tax holiday which is currently available on the business profits of eligible starts-ups, to start-ups that are incorporate on or before 31 March 2024. Moreover, start-ups were exempted from the application of the tax rule that results in lapse of tax losses in case of change in shareholding beyond 50%, provided there was a continuity of the shareholders and the tax loss related to the first 7 years. This time frame has now been extended to 10 years.
Another key change relates to the taxation of REITs and InVITs. Typically, REITs and InVITs generate four categories of cash flows from underlying special purpose vehicles (SPV) or assets, namely, interest, dividend, rental income, and repayment of debt (extended by REIT or InVIT to the SPV). Under the pass-through tax regime applicable to REITs and InVITs, interest, dividend and rental income are taxable in the hands of the unitholder and are exempt in the hands of REIT and InVIT. Since amounts received as repayment of debt by REIT and InVIT took similar character in the hands of the unitholder, no taxes were paid on these cash flows because they were not income. The Bill proposes to tax any amounts paid by a REIT or InVIT to the unitholder (not being interest, dividend, rent or income taxed in the hands of REIT or InVIT) as ordinary income of the unit holder. In case such amounts are paid pursuant to redemption of units held by the unitholder, the cost of acquisition of such unit will be deducted from the taxable base.
Surprisingly, the Government has also extended the scope of the angel tax provisions to cover share issuances to non-residents. Currently, if a closely held company (barring certain exceptions such as venture capital companies, eligible start-ups, etc.) issue shares to a resident at a premium, then any consideration received more than the fair value of such shares (determined per tax rules) is taxed in the hands of the issuing company. The Bill proposes to extend the application of such provision even to share issuances to non-residents. The ramification of such provision will be wide considering the interplay with FEMA valuation norms and the practice of non-residents investing in Indian companies at higher valuations than Indian counterparts.
Finally, the Government has introduced certain rationalization measures. Non-banking financial companies have been exempted from thin capitalization rules. The Bill also provides enabling provisions to allow the taxpayer to claim credit for TDS deducted in relation to income that has been offered to tax in prior years. Clarifications have been provided on the taxation of perquisites received in cash, or part cash or part kind. In the tax administration arena, certain notable measures include introduction of Joint Commissioner (Appeals), as a new first appellate authority to share workload of Commissioner (Appeals) and to reduce pendency of cases, enabling officers involved in search and seizures to seek assistance from other persons (such as valuers, forensic experts, and other domain experts) to analyse and decode complex data. In addition, time limit for issuance of re-assessment notices in cases of search and seizure is proposed to be increased in certain cases to accommodate procedural delays.
The Government’s restrained approach in favour of a stable tax regime which reduces compliance burdens and offers relief to the taxpayers is indeed welcome.
Amit Singhania and Gouri Puri are Partners at Shardul Amarchand Mangaldas & Co.
Views expressed by authors are their personal views.