India’s Union Budget (the “Budget”) was announced on February 1, 2022, and the Finance Bill, 2022 (the “Finance Bill”) was tabled in Parliament. The Finance Bill will be discussed in Parliament before its enactment, and therefore, it is likely that the Finance Bill may be amended because of these discussions. Please find the Finance Act, 2022 here.
We have summarized below some of the key income tax proposals made in the Budget.
New taxation scheme for virtual digital assets
Virtual digital assets (like cryptocurrencies and NFTs) have gained tremendous popularity in recent times and their trading volumes have increased substantially. A new taxation scheme has been proposed in the Finance Bill to tax virtual digital assets.
As per a new section 115BBH of the Income-tax Act, 1961 (the “IT Act”), any income arising from the transfer (sale) of any virtual digital asset shall be taxed at the rate of 30% with applicable surcharge and education cess. No deduction in respect of any expenditure (other than the cost of acquisition) shall be allowed. Further, no allowance or set-off of any loss shall be allowed while computing the income from the transfer of such assets. Furthermore, loss from such a transfer shall not be allowed to be carried forward to subsequent assessment years.
A virtual digital asset has been defined to mean any information, code, number or token (not being an Indian currency or any foreign currency) generated through cryptographic means or otherwise providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, including, but not limited to, investment schemes, and can be transferred, stored or traded electronically. Non-fungible tokens and all other tokens of similar nature are included in the definition.
A gift of virtual digital assets will also be taxed at the rate of 30% with applicable surcharge and education cess in the hands of the recipient.
This amendment will apply in relation to assessment year 2023-24 and all subsequent assessment years.
Separately, to widen the tax base in relation to these assets, the Finance Bill has proposed to provide for a tax withholding on payments for transfer of virtual digital assets to a resident at the rate of 1% of such payment. In addition, in cases where the payment for such a transfer is: (i) wholly in kind or in exchange of another virtual digital asset where no cash is involved; or (ii) partly in cash and partly in kind but the cash portion is insufficient to meet the tax deduction liability in respect of whole of such transfer, before making the payment, the buyer will have to ensure that the taxes have been paid in respect of such consideration. The tax deduction compliance requirement will be effective from July 1, 2022.
Taxation of digital assets like cryptocurrencies was on the anvil. The government is endeavouring to curb the speculative frenzy that has gripped the cryptocurrency and NFT markets by making such transactions taxable, and thereby, reducing the return on investment. Please find our update on legal validity of cryptocurrency here and our update on the Cryptocurrency Bill, 2021 here.
Tax exemption of amounts received for medical treatment and on account of death
due to COVID-19
To give effect to the press statement dated June 25, 2021, by the Finance Ministry, the Finance Bill has proposed to amend the IT Act such that:
- any sum paid by the employer in respect of an expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in respect of any illness relating to COVID-19, subject to such conditions as may be notified by the Central Government, shall not form part of “perquisites.”
- any sum of money received by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family, in respect of any illness related to COVID-19, subject to such conditions as may be notified by the Central Government, shall not be considered as the income of such person.
- any sum of money received by a member of the family of a deceased person, from the employer of the deceased person (without limit), or from any other person or persons to the extent that such sum or aggregate of such sums does not exceed INR10,000, where the cause of death of such person is illness relating to COVID-19 and the payment is received within twelve (12) months from the date of death of such person, and subject to such other conditions as may be notified by the Central Government, shall not be considered as the income of such person.
These amendments will take effect retrospectively from April 1, 2020.
Clarifications on non-allowability of illegal expenditure under section 37 of the IT Act
Section 37 of the IT Act provides for allowability of revenue and non-personal expenditure laid out or expended wholly and exclusively for the purposes of business. Further, any expenditure incurred by a taxpayer for a purpose that is an offence, or which is prohibited by law, shall not be deemed to have been incurred for the purpose of business and, hence, no deduction or allowance shall be made in respect of such expenditure. However, certain taxpayers were claiming deductions on expenditure incurred in offering certain benefits and perquisites to a person, such as gifts, illegal considerations, expenditure related to travel, hospitality, conferences or a payment which is an offence under a foreign law, or for compounding an offence for violation of a foreign law. Further, freebies have been given to doctors by pharmaceutical companies that are in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.
The Finance Bill has clarified that all the foregoing payments will be considered as illegal and not be allowed as a business deduction. The proposed amendment will be effective from April 1, 2022.
Tax exemptions on incomes received from International Financial Services Centre units
The Finance Bill has proposed certain tax concessions to incentivize operations from the International Financial Services Centre (“IFSC”) such as:
- Tax exemption on the income of a non-resident on the transfer of offshore derivative instruments or over-the-counter derivatives to an offshore banking unit in the IFSC.
- Tax exemption on the income of a non-resident by way of royalty or interest, on account of lease of a ship in a previous year, paid by an IFSC unit, if the unit has commenced its operations on or before the March 31, 2024.
- Tax exemption on income of a non-resident from securities or financial products managed by a portfolio manager on behalf of the non-resident in an account maintained with an offshore banking unit in the IFSC to the extent such income accrues or arises outside India and is not deemed to accrue or arise in India.
- The angel tax provisions relating to taxation of share premium will not apply to Category I or Category II Alternative Investment Funds that are regulated under the International Financial Services Centres Authority Act, 2019.
- In addition to the income arising from the transfer of an asset being an aircraft, the income arising from the transfer of an asset, being a ship, that is leased by an IFSC unit to any person shall also be eligible for a tax deduction, subject to the condition that the unit has commenced its operations on or before March 31, 2024.
This amendment will apply in relation to assessment year 2023-24 and all subsequent assessment years.
Extension of the last date for commencement of manufacturing for tax benefit
Section 115BAB of the IT Act provides an option of a concessional rate of income tax at the rate of 15% for new domestic manufacturing companies if they do not avail of any specified incentives or deductions and fulfil certain other conditions. The new domestic manufacturing company is required to be set up and registered on or after April 1, 2019 and is required to commence manufacturing or production on or before March 31, 2023. The intent of the introduction of section 115BAB was to attract investments, job creation and trigger overall economic growth. However, the impact of the COVID-19 pandemic has resulted in some delays. To provide relief to such companies, the Finance Bill has proposed to amend section 115BAB to extend the date of commencement of manufacturing or production from March 31, 2023 to March 31, 2024.
This amendment will be effective from April 1, 2022.
Extension of date of incorporation for eligible start-ups for tax exemption
Under the provisions of the section 80-IAC of the IT Act, a deduction of 100% of the profits and gains derived from an eligible business by an eligible start-up for three (3) consecutive assessment years out of ten (10) years, beginning from the year of incorporation, at the option of the taxpayer, is allowed subject to certain conditions. One of the conditions is that the eligible start up should be incorporated on or after April 1, 2016 but before April 1, 2022.
Considering the delays due to the COVID-19 pandemic, the Finance Bill has proposed to extend the period of incorporation of eligible start-ups to March 31, 2023. This amendment will take effect from April 1, 2022.
Concessional rate of tax on dividends received from foreign subsidiaries removed
Section 115BBD of the IT Act provides for a concessional rate of tax of 15% on the dividend income received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of equity shares (specified foreign company). The 15% tax rate was aligned to the tax rate provided under section 115-O of the IT Act that dealt with dividend distribution tax.
The Finance Act, 2020 abolished the dividend distribution tax provided in section 115-O of the IT Act to, inter alia, provide that dividend shall be taxed in the hands of the shareholders at applicable tax rates plus surcharge and cess.
To provide uniformity in the tax treatment in case of dividends received by Indian companies from specified foreign companies vis-a-vis dividend received from domestic Indian companies, the Finance Bill has proposed to amend section 115BBD of the IT Act to provide that the provisions of this section shall not apply to any assessment year beginning on or after the April 1, 2023.
Provisions for filing updated tax returns
Section 139 of the IT Act relates to the provisions for filing of income tax returns by taxpayers within the specified due dates. The Finance Bill has proposed to introduce a new provision for filing an updated tax return by a person within twenty-four (24) months from the end of the assessment year in a prescribed manner.
An amount of 25% additional tax will be payable if the taxpayer files the updated tax return within twelve (12) months or at the rate of 50% if the taxpayer files the updated tax return after twelve (12) months (but before the end of twenty-four (24) months) on the tax and interest due on the additional income furnished. Separately, various circumstances in which the new section will work have been provided, as for example, where a tax return has not been filed earlier or tax cases relating to search and seizure, undisclosed income, tax credit eligibility, interest calculation, etc. Notably, the proposal shall not apply if the updated tax return is a loss or has the effect of decreasing the total tax liability determined based on the tax return already furnished, or relates to foreign income and assets, money laundering contraventions, benami property transactions, etc.
The proposed amendments will take effect from April 1, 2022. The proposal aims to facilitate ease of compliance to the taxpayer and reduce tax litigation.
Clarification regarding treatment of cess and surcharge as a non-deductible expenditure
Section 40 of the IT Act specifies the amounts that are not to be deducted in computing the income chargeable under the head “Profits and gains of business or profession.” However, certain taxpayers were claiming deduction on account of “cess” or “surcharge” on the basis that “cess” has not been specifically mentioned as a disallowable expenditure and placed reliance on various tax cases to substantiate the claim.
The Finance Bill has proposed to clarify that the term “tax” includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.
This amendment will take effect retrospectively from April 1, 2005.
Rationalization of provisions of withholding tax on sale of immovable property
Section 194-IA of the IT Act provides for deduction of tax at the rate of 1% on any payment made on the transfer of certain immovable property (other than agricultural land). The Finance Bill states that the section does not consider the stamp duty value of the immovable property, and hence, it is inconsistent with other provisions.
In order to remove this inconsistency, the Finance Bill has proposed to amend section 194-IA of the IT Act to provide that in case of transfer of an immovable property (other than agricultural land), tax should be deducted at the rate of 1% of the sum paid or credited to the resident or the stamp duty value of such property, whichever is higher.
In case the consideration paid for the transfer of immovable property and the stamp duty value of such property are both less than INR5,000,000, then no tax is to be deducted.
This amendment will take effect from April 1, 2022.
About the Author
Ravi S. Raghavan has more than 25 years of experience in corporate tax advisory work, business re-organizations, international taxation (investment and fund structuring, repatriation strategies, treaty analysis, advance rulings, exchange control regulations, FPI taxation), tax litigation services and other tax issues (including withholding taxes, capital gains tax, permanent establishment concerns, employee taxation, and tax holiday schemes).