The Indian Finance Minister presented the Union Budget for 2022-23 (Budget 2022) on February 1. With India’s current-year economic growth estimated to be 9.2%, Budget 2022 focuses on infrastructure spending with an aim to boost growth amid continued disruption from the COVID-19 pandemic. It also makes a strong pivot toward the digital economy, climate change, clean energy transition, and ease of living.
The Finance Minister has continued with the underlying theme of seeking to provide a stable and predictable tax regime to promote voluntary compliance, to reduce litigation, while keeping the overall tax structure unchanged.
This Insight highlights some key Budget 2022 tax proposals affecting foreign investors and multinational enterprises doing business in India. Budget 2022 proposals would take effect once both houses of Parliament pass it and Presidential assent is accorded.
The takeaway: Budget 2022 specifically focuses on infrastructure development and expansion, which should have a multiplier effect on the Indian economy. Multinational entities should analyze the impact of key Budget 2022 proposals on their operations.
Income tax rates (including surcharge and cess) for companies (domestic and foreign), firms, and limited liability partnerships remain unchanged, including rates for minimum alternate tax and alternate minimum tax.
Currently, the surcharge rate applicable for individuals and noncorporate entities varies from 0% to 37% depending on the income threshold. A 15% cap on the surcharge rate is provided only for certain specific incomes, i.e., sale of publicly traded Indian shares.
Budget 2022 proposes to extend the applicability of the 15% cap on the surcharge rate to the sale of all long-term capital assets.
Currently, dividends received by Indian companies from investments in specified foreign companies are taxable at a 15% concessional rate. In addition, a deduction is available to Indian companies if the foreign dividend received is further distributed, subject to certain conditions.
Budget 2022 proposes to repeal the 15% concessional tax rate. Going forward, foreign dividends would be taxed at the regular corporate tax rates. However, the deduction for further distribution would continue to be available.
The last date available for new manufacturing companies to commence manufacturing or production and claim a concessional tax rate (15% plus surcharge and cess) would be extended by one year to March 31, 2024.
Further, the last date for the incorporation of start-ups eligible for claiming tax holiday benefits would be extended by a year to March 31, 2023.
Budget 2022 proposes replacing the current provisions relating to ‘faceless audits’ in order to streamline the overall process and overcome operational difficulties and implementation concerns.
Faceless audits for transfer pricing cases also would be implemented, with procedures to be published by March 31, 2024.
In an attempt to reduce and better manage litigation, Budget 2022 proposes that filing of appeals by tax authorities would be deferred where an identical question of law is pending before the jurisdictional High Court or Supreme Court, whether in the taxpayer’s own case or in the case of another taxpayer.
Taxpayers in India were not permitted to file or update their income tax returns beyond specified timelines.
To promote voluntary tax compliance and correction of returns, Budget 2022 proposes allowing taxpayers to file an updated tax return within three years from the end of the fiscal year, subject to payment of additional taxes on the undisclosed income. An additional 25% or 50% of the added liability would be payable based upon the timelines within which the updated tax return is filed.
However, no updated tax return could be filed if it would result in a tax refund or loss (or a reduction in tax liability or increase in refund) when compared to the return originally filed for the fiscal year. Further, a taxpayer could not file an updated return when the taxpayer is subject to an audit for the fiscal year.
Budget 2022 proposes that any tax audits or other tax proceedings made on the predecessor (transferor) during a pending business reorganization (e.g., mergers or demergers) would be deemed to have been brought against the successor (surviving entity).
Further, Budget 2022 also proposes that the successor should file a modified tax return for the consolidated entity (post business reorganization) within a specified period.
Under Indian tax law, the value of any benefit or perquisite availed by a taxpayer in the course of its business is taxable as business income. Budget 2022 proposes to levy a 10% withholding tax on the value of such benefit or perquisite (in cash or in kind) requiring any person responsible for paying or providing such benefit or perquisite to an Indian resident to withhold such taxes.
Budget 2022 proposes a new section of law which provides that if under a grossing-up arrangement, a person deducted tax when no tax deduction was required, they may file an application for tax refund before the jurisdictional tax officer. Furthermore, any order passed in response to the application would be available for appeal if the outcome is unfavorable.
Various Indian courts previously had allowed the claim of health and education cess (4% of tax and applicable surcharge) paid on the corporate income tax as a business deduction.
Budget 2022 proposes to retroactively clarify that such health and education cess would not be allowed as a business deduction. Clarificatory amendment on the removal of ‘goodwill’ from a tax block of assets Goodwill was excluded from the definition of intangible assets for the purpose of claiming tax depreciation in Budget 2021.
Budget 2022 provides for a clarificatory amendment that the removal of ‘goodwill’ from a tax block of assets will be deemed a ‘transfer.’ This clarification is relevant for the purpose of determining tax depreciation on the remaining block of intangible assets.
Budget 2022 introduces a taxation scheme in relation to income earned from virtual digital assets (including cryptocurrencies and non-fungible tokens).
The Budget proposes to tax the transfer of virtual digital assets at a 30% rate irrespective of the holding period and does not allow for any deduction in respect of any expenses (other than the cost of acquisition). Gifts of digital assets would be taxed in the recipient’s hands. Further, any loss incurred on the transfer of digital assets could not be offset against any other income.
In addition, a withholding tax provision requiring a 1% withholding on the transfer of digital assets in certain cases has been proposed. The procedural aspects relating to tax withholding are expected in the future.
The Finance Minister proposed establishing a mechanism to facilitate and speed up the voluntary winding-up of companies. This is expected to reduce timelines from two years to approximately six months.
Necessary amendments also would be made in the Insolvency and Bankruptcy Code to enhance the efficacy of the resolution process and facilitate cross-border insolvency resolution.
Over the past few years, India has provided several tax concessions to units located in the IFSC to make it a global hub of the financial services sector.
Budget 2022 proposes a tax exemption for income of a nonresident from offshore derivative instruments, or over-the-counter derivatives issued by an offshore banking unit, income from royalty and interest on account of a ship lease, and income received from portfolio management services in the IFSC, subject to specified conditions.
Budget 2022 proposes to bring forward the due date for filing GST monthly returns by nonresident taxable persons to the 13th day of each month (previously the filing deadline was the 20th day of every calendar month).
Budget 2022 proposes to impose additional restrictions when applying the ITC under GST laws, requiring additional taxpayer compliance.
Budget 2022 proposes a phase-wise review and removal of customs exemptions/concessions to promote Make-in-India. Thus, rationalization of the Customs duty structure is proposed to continue with nearly 350 exemptions being withdrawn.