From India at 75 to India at 100—Budget 2022 Lays the Path

With a fundamental focus on comprehensive development, productivity enhancement, energy transition and climate action, India’s Union Budget 2022 is a progressive budget. It aims to create a blueprint for India’s economy over the next 25 years and realize Prime Minister Narendra Modi’s vision for “India@100.”

Embracing new global trends, such as digitization and automation, that have the potential to boost economic growth, Finance Minister Nirmala Sitharaman announced the launch of a digital currency by the Reserve Bank of India in 2022-23. In addition, several innovative projects will be launched, such as a digital DESH (Digital Ecosystem for Skilling and Livelihood) e-portal, a national tele-mental health program, and sovereign green bonds in public sector projects to promote sustainable and inclusive development.

Tax rates and slabs have not been changed.

Several measures introduced by the budget are laudable, providing tax certainty and simplifying procedures. They include the following measures discussed below.

Opportunity to File “Updated Return”

To provide taxpayers with an opportunity to correct any errors such as omissions or inadvertent mistakes in correctly estimating income for the purposes of paying tax, a new legislative provision will allow taxpayers to file an updated return on payment of additional tax. This updated return can be filed within two years of the end of the relevant assessment year, subject to payment of additional tax of 25% or 50%, as applicable.

This is a positive step that will enable taxpayers to declare income that they may have omitted when filing their return and which will shield them from the inconvenience of the adjudication process.

Tax Reliefs for Cooperatives

The current provisions of the Income Tax Act (ITA) require cooperative societies to pay alternate minimum tax (AMT) at the rate of 18.5%. The budget has proposed to reduce this rate to 15%. This will ensure a level playing field between cooperative societies and companies, as companies are required to pay AMT at the rate of 15%.

Also, with a view to increasing the income of cooperative societies and their members, who are mostly from rural and farming communities, the surcharge of 12% will be reduced to 7% for cooperatives with total income of more than 1 crore Indian rupees ($134,000) and up to 10 crores ($1,137,000).

Parity for Employees of State and Central Government

The central government’s contribution of 14% of its employees’ salary to the national pension system (NPS) is allowed as a deduction in computing the taxable income of the employee. However, state government employees are allowed a deduction of only 10% of their salary. To create parity between central and state government employees and enhance social security benefits, the budget will increase the tax deduction limit for state government employees from 10% to 14% of salary. However, private sector employees will still only be allowed a 10% deduction.

Extension of Timelines to Incentivize Start-ups and Manufacturing Companies

Start-ups have borne a huge burden of the economic devastation as a result of the pandemic. Presently, eligible start-ups under ITA, section 80-IAC incorporated before March 31, 2022 are provided a tax incentive for three consecutive years out of ten years from incorporation. In order to help Indian start-ups to scale up in size and further propel the country’s growth, the Finance Bill 2022 has proposed extension of the period of incorporation of eligible start-ups to March 31, 2023.

Likewise, in the case of manufacturing companies, the date of commencement of manufacturing or production is proposed to be extended to March 31, 2024 for eligibility to take advantage of the benefit of a concessional tax rate at 15% under section 115BAB. This will attract significant investment, create jobs, and promote overall economic growth.

Introduction of Tax on Transfer of “Virtual Digital Assets”

The government has reaffirmed its outlook towards embracing advances in the technologies of the future. The Finance Minister has proposed to tax gains from transfer of virtual digital assets at 30%. The gains will be required to be calculated without accounting for any expenses other than cost of acquisition.

It has also been stipulated that loss on sale of virtual digital assets will be not allowed to be set off. Even in the case of a “gift of virtual digital asset,” the recipient will be subject to tax.

The government is encouraging digital progress by way of a slew of clarificatory regulations. The introduction of specialized provisions for taxation of digital assets will further address ambiguities and allow investment in a tax-compliant manner.

Proposals and Clarifications to Curb Litigation Problems

In line with the intention to promote sound litigation management, the budget proposes that if a question of law in the case of a taxpayer is identical to a question of law which is pending in appeal before the jurisdictional High Court or the Supreme Court, the filing of further appeal in the case of this assessee by the department shall be deferred until such question of law is decided by the jurisdictional High Court or the Supreme Court.

This move is likely to help in reducing repeated litigation between taxpayers and the tax department, thereby saving time and resources consumed in filing of appeals involving identical issues.

A few clarifications have also been introduced in respect of controversial questions in order to avoid litigation. The claim of health and education “cess” as business expenditure by businesses has been upheld by the courts: However, this was not the legislative intent. Accordingly, it has been clarified that any surcharge or cess on income and profits shall not be allowed as business expenditure.

Further, it has also been proposed that no set-off of any loss shall be allowed against undisclosed income detected during search and survey operations. This will clamp down on tax evasion and tighten the noose for tax evaders.

Furthermore, section 14A of the ITA provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income, i.e. exempt income. Rule 8D read with section 14A requires disallowance of the expenditure even where the taxpayer has not earned any exempt income in a particular year.

However, some courts have taken a view that if there is no exempt income during a year, no disallowance can be made for that year. The budget reiterated that the interpretation was not in line with the intent of the legislature. Accordingly, it has been stipulated that the provisions of section 14A will apply, and shall be deemed to have always applied, in a case where exempt income has not accrued or arisen or has not been received and the expenditure has been incurred during the previous year in relation to such exempt income.

Another important clarification is in respect of the provisions of section 43B of the ITA that provide for deductions based on actual cash outflow. Despite the explanations to the section, some taxpayers are claiming deduction on account of conversion of interest payable on an existing loan into a debenture, on the ground that such conversion is a constructive discharge of interest liability and therefore amounts to actual payment. This position has also been upheld by several courts, which is again not in line with the legislative intent.

The budget proposals seek to clarify that conversion of interest payable into debenture or any other instrument by which liability to pay is deferred to a future date will not be deemed to have been actually paid and thus no deduction will be allowed.

Rationalization of Rates of Surcharge

The budget proposes to cap the surcharge on income of associations of persons (AOPs) and that on long-term capital gains arising on transfer of any type of assets at 15%.

Works contracts often require formation of a consortium by individual companies. The income of the consortium is subject to surcharge of up to 37% as against 15% on individual companies. The budget proposal will therefore accord significant tax relief by lowering the effective tax rate for AOPs.

Likewise, capping of the surcharge on long-term capital gains on unlisted equity shares will reduce the effective long-term capital gains tax rate from 28.49% to 23.92% and will stimulate investments in shares of start-ups and new manufacturing companies.

Going Forward

Budget 2022 is being hailed as a blueprint of the economy from India at 75, to India at 100. Its proposals are likely to address fiscal and economic issues while ensuring substantial revenue for the government, thereby charting the path for growth of the Indian economy and inching it closer to its $5 trillion objective.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rakesh Nangia is Chairman and Neha Malhotra is Director with Nangia Andersen LLP.

The authors may be contacted at nangia@nangia.com; neha.malhotra@nangia-andersen.com