Budget 2023: Govt’s last full Budget before general elections is inclusive and growth-focused

Union Budget 2023, being the foundation budget of the Amrit Kaal i.e. next 25 years for the Prime Minister’s Independent India@100 vision, is indeed a crucial budget for India’s growth story. Balancing with dexterity the stable momentum of growth without hampering the fiscal prudence was the need of the hour. The Finance Minister had good headroom available, on back of highly buoyant direct and indirect tax collections in FY 2022-23 primarily due to technology-backed tax governance reforms which simplified tax processes and enhanced compliance. India has shown a resilient economic growth (estimated at 7 percent in FY 2022-23) and hence, there is a firm belief, globally, that India holds a lot of promise. Seven priorities of Amrit Kaal In a first, and rightly so, the financial sector has been listed as one of the 7 priorities “Saptrishi” of Amrit Kaal. On these lines, this Budget has given priority to the development of the financial services sector. Amongst others, this Budget facilitates a comprehensive review of existing regulations in the financial sector to simplify, ease and reduce compliance. IFSC has become a lucrative destination for the financial sector and this year’s Budget has yet again accentuated the government’s intention of promoting IFSC and making it more attractive for investments. Key policy announcements include the introduction of a single window clearance system to seek approvals from the International Financial Services Centre Authority (IFSCA) and permitting acquisition financing by the IFSC Banking Units (IBUs) of foreign banks. This should make it easier to set up an entity in IFSC as now the SEZ and the applicable regulatory clearance (e.g., IRDA) will be obtained through one regulator. Offshore derivative instruments (ODIs) are to be regarded as valid contracts which should give further impetus to IFSC. Income distributed from ODIs entered with an offshore banking unit in IFSC is proposed to be exempt, subject to certain conditions, and the timeframe for relocation of overseas funds to IFSC is extended up to March 31, 2025. No tinkering with tax rates for FPIs The Budget stayed away from tinkering with the tax rates for Foreign Portfolio Investors (FPIs), which was a relief for FPIs as there was a lot of talk about possible changes in the capital gains tax regime. The non-banking financial sector (NBFC) is a growing branch of the financial sector.  To bring parity with banks, a long pending ask for an exemption from thin capitalization provisions has finally seen the light of day.  The NBFC is to be notified of interest deduction to borrowers on a payment basis and special provision for taxability of interest on bad loans. Micro, Small, and Medium Enterprises (MSMEs) are the growth engines of the Indian economy.  Payments made to MSMEs beyond the time limit of the MSMED Act are proposed to be allowed on a payment basis. Turnover limits to avail benefit of presumptive taxation increased from 2 crores to 3 crores. Recently, the insurance regulator – IRDA, under the mission of “insurance for all” by 2047, is rationalising various onerous regulatory requirements. However, this Budget proposes to tax net proceeds received from non-Unit linked insurance policies issued on or after April 1, 2023, where the aggregate premium for one or more policies exceeds Rs 500,000, under the head “Income From Other Sources” which could be a big deterrent in the ‘insurance for all’ mission of IRDAI. Other key tax amendments include allowing treaty relief to non-residents on withholding tax for income distributed by mutual funds, extending anti-abuse provision for taxing the excess consideration received (exceeding fair market value) for issuance of shares at a premium by the closely held company as ‘income from other sources to non-residents, taxing income received from market linked debentures as short-term capital gains and considering cost of acquisition and improvement of intangible assets to be considered as NIL for capital gains purposes. The Budget enhances the scope of taxation for unitholders of business trust. Income received by the unitholders (other than interest, dividend, rental income, or capital gains) in the nature of ‘repayment of debt’ by the business trust is proposed to be taxed as ‘income from other sources’.  Such distribution is to be reduced by the cost of acquisition where units are redeemed. Some administrative amendments include the extension of the duration to complete assessment proceedings from 9 months to 12 months (AY 2022-23 onwards) from the end of the assessment year, a reduction in the time limit to furnish transfer pricing reports in case of relevant proceedings from 30 days to 10 days.  Another welcome change is the introduction of a new authority of Joint Commissioner (Appeals) In order to clear the backlog of small appeals with the Commissioner (Appeals). What missed FM’s attention? Some of the key asks of the financial sector that missed FM’s attention include a reduction in the corporate tax rate for foreign bank branches, relaxation in onerous TDS / TCS compliance provisions, non-extension of sunset clause for concessional rate of tax applicable to non-residents under section 194LC/LD, etc. The last full Budget before the general elections has been inclusive and growth-focused. It does pack the feel-good factor for the financial sector.  Overall, the Budget has tried to meet the golden mean of the financial sector along with being fiscally cautious and has paved a pathway to Amrit Kaal by its goal-oriented approach. Badala is Partner and Head, Financial Services Tax, KPMG  in India (@KPMGIndia). Jain is a Chartered Accountant. 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.