Budget 2023-24 Expectation: Government should simplify complex capital gains tax regime

A Union Budget carries a huge burden of expectations. Considering this is the last full Budget of the current government before the 2024 general elections, this budget is no exception.  While expectations of the common man are high, the corporate sector is not way behind. While India’s growth has been a silver lining to the global economy, there are challenges galore like high inflation, global recession fears, etc.  The financial services sector is a strong pillar and a very crucial part of any economy. There is a strong hope that the government might come up with some pioneering reforms to promote growth in the sector. Capital gains tax regime is complex The capital gains tax regime is quite complex in India.  There is a strong case to simplify the capital gains tax regime including rationalizing the holding periods and tax rates for various asset classes.  Apart from capital gains, the Government should consider simplification some of the TDS/TCS provisions. For example, provisions relating to TDS on benefits and perquisites under section 194R require clarification/relaxations due to practical challenges in implementation. Cut in the rate of corporate tax Rationalising the rates of headline corporate tax for foreign companies has been a constant ask. The rate of corporate tax of foreign bank branches is 40 per cent and that of the Indian Companies is brought down to as low as 22 per cent.  The reduction of tax rates for foreign bank branches would attract foreign banks to increase their coverage in India and shall help attract more foreign capital. Bring parity between banks, NBFCs Non-Banking Finance Companies (NBFCs) play a key role in covering rural areas and areas where banking presence is low.  The recent regulatory changes in the framework of NBFCs have increased hopes of convergence in the regulations of NBFCs and banks. The finance minister can take the next step by bringing parity between Banks and NBFCs by exempting NBFCs from (i) the applicability of TDS on interest income (ii) thin-capitalization provisions which put a cap on deduction of interest expenses; and (iii) provisions of section 269ST and 269T of the Act, pertaining to loan repayments, etc. Productive changes like these will enable NBFCs to perform their duties in a smooth and effective manner. Growth of fintech critical for financial services Technology will pave the way for a better future. The growth of the fintech sector is critical for the digitisation of financial services.  The fintech sector is an upcoming sector expecting major steps towards faster growth of the sector by making some changes in the first loan default guarantee (FLDG) provisions without diluting the objective of digitization, liberalization of taxes, both GST and Direct taxes, and financial inclusion. Announce policies to attract FPIs Foreign Portfolio Investors (FPIs) have contributed exponentially to India’s growth story over the years. Recently, due to external global factors, there have been significant outflows in portfolio investments. To boost the sentiment of foreign investors, the government can send out some positive signals by bringing in changes like extending the date for eligibility of the beneficial tax rate of 5 per cent on government securities and bonds beyond 1 July 2023 and further perpetual extension to ensure a steady flow of foreign investor funds into debt securities, bringing parity in the surcharge rates for all streams of income received by non-corporate FPIs and capping the surcharge at a rational rate. Amendments beneficial for insurance sector The insurance sector in India is going to experience a top-gear impetus due to major/notable changes in the Insurance Act/regulations as proposed by IRDAI.  Many more changes are expected to lead way toward the IRDAI’s objective of “Insurance for all” by 2047. On these lines, Union Budget 2023 should also bring amendments beneficial for the insurance sector. An increase in 80C and 80D limits supported by lower GST rates on insurance premiums should encourage more people to secure their and their family’s life and health and help increase the market coverage for the insurance sector. Insurance companies would benefit if the premium to sum assured ratio is linked with IRDAI regulations, simplification/relaxations are provided in the taxation of ULIPs, and clarity on the allowability of depreciation and deduction under section 40(a) to insurance companies other than life insurance companies and clarity on taxation of reinsurance branches. Promote IFSC for growth of financial services Promoting International Financial Services Centre (IFSC) is key to the growth of the financial services sector.  Over the years, the government has introduced many benefits to making IFSC lucrative. The introduction of benefits like increasing the tax holiday period, complete exemption from MAT, providing exemption for dividend and capital gains tax to foreign investors investing in aircraft leasing units in IFSC, etc. can help attract global companies to IFSC. Badala is Partner and Head, Financial Services Tax, KPMG in India,and Jain is a Chartered Accountant. They tweet @KPMGIndia. Views expressed are personal. Read all the  Latest News,  Trending News,  Cricket News,  Bollywood News, India News and  Entertainment News here. Follow us on  Facebook,  Twitter and  Instagram.