India Inc.’s Expectations of Budget 2022

Every year, the government endeavors to streamline the provisions of the Indian tax code and address the challenges faced by different sectors of the economy, by way of innovative reform stratagems in the budget. With the Budget 2022 just a few days away, it is time to anticipate what the finance minister has in store for taxpayers and how the government is preparing to meet the hopes of the various sectors reeling from the Covid-19 induced crisis.

Budget 2022 will be presented against the backdrop of the need for economic revival after the second wave of Covid-19, and the looming danger of a possible third wave. There is a tight path for the finance minister to tread, with fiscal consolidation on one side and a need to increase concessions for the manufacturing sector to generate employment on the other. There is also populist pressure, reform imperatives, growth necessities, push for distribution equity and budgetary constraints to contend with.

Introducing Cryptocurrency Taxation Measures

In the recent past, India has witnessed a growing interest in the “cryptocurrency space.” However, it remains unregulated for now. From an income tax standpoint, it remains to be seen whether cryptocurrencies will be characterized as capital assets or foreign currency, which will essentially lay down the foundation of how they fit into the existing Indian taxation regime.

Notably, cryptocurrencies do not have a physical form, which requires guidance in respect of the determination of “situs” of cryptocurrencies. This would address ambiguity in classification of cryptocurrencies bought on offshore exchanges as foreign assets.

Further, other pertinent questions such as method of computing fair market value, costs, taxable income, reporting requirements, need to be adequately addressed.

Promoting Adoption of Electric Vehicles

India is under great pressure to reduce the current account deficit by cutting down on oil imports that contribute significantly to the deficit. Electric vehicles (EVs) can significantly help to manage the current account deficit and reduce India’s dependence on oil-rich countries.

The role of the regulator in today’s EV landscape cannot be overstated. Ever-tightening government emissions regulations act as direct stimuli for OEM (original equipment manufacturer) EV investments, and current subsidies and tax exemptions help bridge gaps between OEM pricing and consumer willingness to pay.

To facilitate faster adoption of EVs, the government introduced section 80EEB of the Income Tax Act 1961, granting an exemption of $2000 towards interest on EV loans. An increase in this limit and the introduction of additional tax benefits could provide further much-needed impetus for EV adoption.

Providing Impetus for Start-Ups

Start-ups can lift an economy, and it is important for Indian start-ups to scale up in size in order to help propel the country’s economic growth. For this to materialize, government will have to allocate genuine benefits wherever feasible.

Section 54GB of the Income Tax Act allows exemption for eligible taxpayers from long-term capital gains arising from transfer of a residential property if such gains are invested in an “eligible start-up” specified under section 80-IAC. To facilitate the growth of the start-up space, the scope of section 54GB should be widened and benefit of exemption under section 54GB should be allowed on making investment in all start-ups registered with the Department for Promotion of Industry and Internal Trade (DPIIT).

Meeting General Corporate Expectations

India’s expenditure on research and development (R&D) is relatively low when compared to other developing economies. For India to emerge as self-sufficient, it is absolutely crucial that investment in R&D is encouraged. From FY 2020-21 onward, weighted deduction under section 35(2AB) is not allowed on in-house R&D expenditure. Reintroducing weighted deduction of 150% could significantly incentivize companies engaged in scientific research.

A specific category of business in India incurs substantial costs in the area of social responsibility (CSR) such as education, health, sanitation, women’s empowerment. Section 135 of the Companies Act 2013 requires companies with a net worth of $77.5 million or more, or turnover of $155 million or more, or a net profit of $0.77 million or more during the immediate preceding financial year, to spend 2% of their average net profits of the immediate preceding three years on CSR activities.

The provisions of the Act stipulate that any expenditure incurred for activities relating to CSR shall not be deemed expenditure incurred for the purpose of “business or profession.” As CSR expenses are incurred for social and charitable causes and not for any personal benefit or gain, the Indian government must consider allowing such expenditure as a deduction from business income. This will, in turn, help the government.

Several companies have also spent on Covid-19-related expenses over the past year and are expecting that Covid-19-related expenditure will be made fully tax-deductible this year.

Presently, loss suffered by a group affiliate is not allowed to be set off against profits of another member of the group. This results in undue hardships for group companies. To eliminate such inefficiencies, a “group taxation approach” should be introduced, whereby the consolidated profit of the group is taxed and a group of wholly owned or majority-owned companies is treated as a single entity for return filing purposes.

Healthcare Sector

The lessons learned from the Covid-19 pandemic underline that funding healthcare is no longer optional. Stable, equitable, thriving, and peaceful societies and economies are only possible when no one is left behind. In the order of needs, protecting health is of utmost importance, and due to the pandemic, health insurance is more relevant than ever.

As health insurance is an essential commodity, the goods and services tax (GST) slab should be reduced from 18% to 5%, to make quality healthcare more accessible.

Tax holidays for rural hospitals, with a flexibility to select beneficial years, and viability gap funding by the government at the stage of setting up hospitals in Tier 1 and Tier 2 cities would make this an attractive space for investment and at the same time strengthen the country’s healthcare infrastructure.

The pharma and medical devices sector have gained significant momentum with the government’s Aatma Nirbhar Bharat initiative. Budget 2022 is expected to build on the Production Linked Incentive (PLI) schemes and encourage continued investment in capacity expansion of sensitive APIs, complex excipients, drug intermediates, biopharma, and medical devices.

Financial Services

Gujarat International Finance Tec-City (GIFT City) is developing fast with various stakeholders showing keen interest. Its growth potential is however hampered by uncertainty and lack of clarity on term benefits. Certain regulatory framework and tax-related changes could make GIFT City a more attractive proposition.

Some of the areas that are expected to be addressed: Increasing the term of the income tax deduction, exemption from Minimum Alternate Tax, providing a stable and predictable tax regime for investors, and removing applicability of general anti-avoidance rules (GAAR) to transactions with International Financial Services Center (IFSC) units.

Looking Forward

The government, in sometimes unconventional ways, has helped India emerge as a nation with promising signs of progress. The upcoming budget will surely be a compelling one as expectations are running high.

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