Budget 2022: Progressing towards a stable, predictable tax regime

Budget 2022 reinforces the government’s claim of a stable and equitable tax regime. The emphasis is on simplifying the tax regime, reducing litigation, and promoting voluntary compliance by taxpayers.

Some of the key proposed changes are:

Introducing ‘Updated returns’

In order to give taxpayers a chance to voluntarily correct the omissions and mistakes made in the Income Tax Returns, the Budget has now introduced the concept of an ‘Updated return’ which can be filed within two years from the end of the relevant assessment year on payment of additional taxes of 25 percent/50 percent depending on when the updated return is filed. This reposes faith in the taxpayers to voluntarily pay the right taxes and avoid assessments and related penalty risks. It also shows the government’s confidence in the robustness of its Data and Intelligence Collection mechanism.

Extended timeline for startups and new manufacturing entities

The government proposes to extend the timeline for incorporation of a startup entity to claim tax holiday under section 80-IAC by one more year i.e., up to 31 March 2023. Further, to encourage new investments, it is proposed to extend the deadline for the commencement of manufacturing or production, which provides for a concessional tax regime of 15 percent tax rate, by one year i.e., from March 31, 2023, to March 31, 2024.

Taxation of virtual digital assets

Considering the surge in transactions involving virtual digital assets, a significant amendment that has been proposed is that any income from the transfer of virtual digital assets shall be taxed at the rate of 30 percent without deduction of any expenditure or allowance other than the cost of acquisition. It is also proposed to tax gifts of such virtual digital assets in the hands of the recipient. Further, loss arising on transfer of such virtual digital assets cannot be set off against any other income nor the same can be carried forward to subsequent years. Finally, TDS provisions have also been introduced.

Litigation management

In order to reduce unwanted litigation, it is proposed that cases where matters of law are already being litigated at jurisdictional High Court/Supreme Court level, based on a Collegium opinion, the filing of appeal by the Department will be kept in abeyance until such question of law is decided by respective courts.

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Reduction in tax rates and surcharge

It is proposed to cap the surcharge levied on the Association of Persons (AOPs) and the surcharge on long-term capital gains at the rate of 15 percent from the earlier rate of 37 percent.  Dividends from foreign subsidiaries are proposed to be taxed at normal rates going forward.

Retrospective clarification on ‘Health and Education Cess’ claimed as business expenditure

To put an end to the controversy on a claim of this amount as business expenditure, it is clarified that ‘Health and Education Cess’ is a tax in the form of an additional surcharge on the taxpayer and hence not an allowable expenditure for computation of business income.

No set off and carry forward of losses in case of search and seizure

It is proposed to provide that no set-off of any loss shall be allowed against undisclosed income detected during search and survey operations. The same should prevent people from misusing the provisions of setting off losses.

Other Changes

Changes to overcome past Court decisions include the applicability of section 14A disallowance even if there is no exempt income in a particular year, disallowance of benefits/perquisites given in violation of any law/rule/regulation (including foreign laws), and extension of bonus stripping provisions to securities. SEZ Act is also proposed to be replaced by new legislation and this is an area to watch out for corporates with SEZ units.  Also, a slew of benefits has been proposed in order to promote IFSC.

Overall, a future-looking and growth-oriented Budget with a massive increase in the outlay of 35.4 percent for capital expenditure will have a positive multiplier effect on the economy. Despite the buoyancy in tax collections, the fiscal deficit situation has prevented the finance minister from introducing any radical changes on the tax front and she has followed the mantra, “If it ain’t broke, don’t fix it”.

The writer is Tax Partner, EY. Views are personal.

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