Indian Union Budget 2022: A Snapshot of Tax Highlights

The Union Budget 2022-23 provides a vision to transform India into a resilient economy. Overall, Budget 2022 can be considered as a balanced one that would bolster growth. Some of the standout proposals from Budget 2022 include setting up of Centre for Processing Accelerated Corporate Exit (C-PACE) for the reduction in timelines for winding up of companies, cross-border insolvency resolution process, replacement of Special Economic Zones Law with new legislation, introduction of a Digital Rupee, new regulatory regime for private equity and venture capital, etc. On the direct tax front as well, some changes would impact corporates and individuals. We have discussed a few important changes that may impact your business.

Direct Tax

Tax Rates

  • Income-tax rates (including surcharge, health and education cess) for companies (domestic and foreign), firms, LLPs, and individuals remain unchanged. This includes rates for MAT and alternative minimum tax.
  • For Individuals - Surcharge on the transfer of all long-term capital gains has been capped at 15%. This would primarily boost promoters and investors looking at selling shares of unlisted companies as the effective tax rate has been reduced to 23.92% against 28.50%.
  • Beneficial lower tax rate (currently 15%) on dividend received by an Indian company from a foreign subsidiary/ joint venture is to be withdrawn from 1 April 2022. Accordingly, the foreign dividend would be charged at corporate tax rates. This would discourage Indian multinational corporations from repatriating profits earned abroad.

These provisions apply from 1 April 2022, and hence a small window would be available for companies looking to repatriate the accumulated reserves from outside India.

New Taxation Regime Introduced for Virtual Digital Assets

  • Virtual Digital Asset is defined widely, which may include various digital assets like cryptocurrencies, NFTs, etc.
  • Income from transfer of Virtual Digital Asset to be taxed at a flat rate of 30%. No deduction while computing income except the cost of acquisition of the asset.
  • Loss from the transfer of Virtual Digital Asset cannot be set- off against any other income or carried forward to future years for set-off against future income from Virtual Assets.
  • Withholding tax at the rate of 1% on payment to resident towards purchase consideration for transfer of Virtual Digital Asset.
  • Gift of Virtual Digital Asset also to be taxed in the hands of the recipient. This may lead to double taxation as the recipient of the gift would not be able to take the cost of acquisition.

Ease of Doing Business

  • Relaxation in condition for availing concessional tax regime for manufacturing companies. The companies can commence manufacturing till 31 March 2024 as against 31 March 2023.
  • Tax Holiday extended for startups incorporated till 31 March 2023.

M&A Transactions Clarifications

  • Any proceedings made on predecessor entity during the pendency of business re-organization to be deemed to be made on the successor.
  • Enabling provision introduced to enable Successor entity to file the modified return within six months from the end of the month of issuance of the order.

Providing Tax Certainty

  • Surcharge and cess are not to be allowed as business expenditure. This will be effective retrospectively from 1 April 2005; however, this overturns various recent jurisprudence. Companies need to evaluate the tax position adopted in light of retrospectivity of the amendment.
    • No set-off allowed for any brought forward loss against any undisclosed income detected during search and survey operations.
  • Dividend stripping provisions to apply for InvITs, REITs and AIF. Bonus stripping provisions extended to cover securities as well.

Addressing COVID-19 Impact

  • COVID-19 related tax exemption for the amount received for medical expenses for self and family without limit.
  • Ex-gratia received by a family member of the deceased person:
    • No limit if received from the employer.
    • Up to INR 1 million from any other person.

Tax Compliance and Procedural Changes

  • Withholding tax at 10% is being introduced on any benefits or perquisites given to business associates. Given that provisions are very wide, it would be interesting to see whether volume discounts, turnover discounts, free goods, etc., would get captured in the tax net or not.
  • Updated tax returns are allowed to be filed in certain situations up to two years from the end of the relevant assessment year, subject to payment of additional taxes (25% to 50% of income tax and interest). This is different than the filing of a revised tax return.
  • A number of changes were introduced for rationalizing reassessment provisions.
  • Revenue’s appeal can be deferred until an identical question of law is decided by the jurisdictional High Court or the Supreme Court.
  • Existing provisions of the Faceless Scheme to be streamlined in order to address various legal and procedural problems being faced in the implementation of the said Section.
  • The date for issuing direction for faceless proceedings before Dispute Resolution Panel (DRP) and the Tribunal has been deferred to 31 March 2024.

Indirect Tax

Changes in the Manner and Conditions of Availing Input Tax Credit (ITC)

  • The conditions for availing ITC are proposed to be amended to allow ITC only if the same is not restricted in the details communicated to the taxpayer under GSTR-2B.
  • The time limit for availment of ITC has been extended from the existing due date of filing GSTR-3B for the month of September of the subsequent financial year to 30 November of the subsequent financial year.
  • The manner, as well as the conditions and restrictions for communicating ITC details to be availed by a taxpayer, have been prescribed.

Stricter Registration Provisions

The GST registration is liable to be canceled where:

  • A person paying tax under the composition scheme has not furnished the return for a financial year beyond three months from the due date of furnishing the said return.
  • A person, other than composition dealer, has not furnished returns for such continuous tax period as may be prescribed.

GST Compliance and Procedural Changes

  • The non-resident taxable person shall furnish the return for a month by the thirteenth day of the subsequent month instead of the twentieth day of the subsequent month.
  • Persons furnishing return under QRMP scheme have been permitted to pay either the self-assessed tax or an amount that may be prescribed.
  • The time limit for rectifying errors in GST returns has been extended to 30 November of the following financial year.
  • Furnishing of GSTR-1 has been mandated to file GSTR-3B for a tax period;
  • The time limit for rectifying any error or omission from a return filed by e-commerce operators has been extended from 20 October to 30 November of the following financial year.
  • In line with the proposed amendment to ITC provisions, the time limit for issuing credit notes has also been extended up to 30 November of the following financial year.

Clarity on Claiming a Refund

Clarity has been provided regarding the relevant date for filing a refund claim in respect of supplies to SEZ developer /unit. According to the new explanation, the relevant date would be the date of furnishing return in GSTR-3B.

SEZ Reform

  • The SEZ Act, 2005 will be replaced with a new legislation that will enable the States to become partners in 'Development of Enterprise and Service Hubs'. This would cover existing and new industrial enclaves to utilize the infrastructure optimally and enhance export competitiveness.
  • The Customs administration shall be fully IT-driven and function on Customs National Portal, focusing on higher facilitation and with only risk-based checks.

Legislative Amendments in Customs

  • The Board, Principal Commissioner, and Commissioner of Customs have been explicitly empowered to delegate necessary functions to other Customs officers.
  • The officers of Director General of Revenue Intelligence (DRI), Audit and Preventive formations would be empowered to initiate proceedings for recovery of customs duty unpaid / short-paid or not levied / short-levied, as "proper officers."
  • Concurrent empowerment of two or more Customs officers has been introduced for the first time, and accordingly, faceless proceedings under the Customs legislation may be initiated by two or more officers jointly. The criteria for selecting such officers are no longer restricted to territorial jurisdiction but can be based on a class of goods, nature of the case at hand, industry expertise, etc.
  • Upon completion of any investigation or audit, the original jurisdictional authority shall undertake further proceedings like re-assessment, adjudication, etc.
  • Advance rulings shall now be applicable for three years from the date of pronouncement or till there is a change in law or facts, whichever is earlier. The existing advance rulings shall be valid for three years from the date of Presidential assent to the Finance Bill, 2022.
  • The time limit of 30 days to withdraw an advance ruling application has been done away with. Now, the same can be withdrawn any time before the pronouncement.
  • Customs (Import of Goods at Concessional Rates of Duty) Rules, 2017 have been comprehensively amended to - (i) simplify and automate the entire process of importation, (ii) standardize forms, (iii) eliminate the need for transactionbased permissions, and intimations, (iv) propose a monthly statement for effective monitoring of the use of goods, and (iv) provide an option to pay voluntary duties and interest through a common portal.
  • The importer shall submit a one-time statement in Form IGCR-1 on the common portal for seeking Import Identification Number (IIN), which shall be relevant for - (i) mentioning on Bill of Entry for availing exemption, (ii) filing of IGCR-2 for non-receipt of goods imported, (iii) reporting in the monthly statement IGCR-3.

Other Key Proposals

  • Provisions relating to matching, reversal and reclaim of ITC and reduction in output tax liability, to be omitted in their entirety. Furthermore, reconciliatory changes are being introduced in other sections which have references to the now omitted provisions.
  • Late fees shall be applicable for delay in furnishing GST TCS returns.
  • The amount available in the CGST head of electronic cash ledger of the taxpayer can be transferred to the CGST or IGST head of electronic cash ledger of distinct person, in a manner that would be prescribed. However, no such transfer shall be permissible if the said taxpayer has unpaid liability in his electronic liability ledger.
  • Provision has been proposed to prescribe the maximum proportion of GST liability that can be discharged using the balance available in electronic credit ledger by a prescribed class of registered persons.
  • It is proposed to prescribe the form and manner for claiming a refund of any excess balance lying in the electronic cash ledger.

The government has continued to support the Make in India initiative and create an ease of doing business in India. From a tax perspective, too, the objective of providing a stable and predictable tax regime has been maintained by not tinkering with tax rates. While the Budget may echo a theme of strategic intent and carry provisions that may bolster and further boost the economy, some of the amendments may require businesses to re-examine their tax position and processes.

Tax Street January 2022