The boost in digitalization and new era technologies is welcome, but the budget missed the opportunity to align corporate taxation with personal income taxation

By Sandeep Parek

The Ministry of Finance presented a growth-oriented budget for the 2022-23 fiscal year, while also showcasing a massive increase in public investment. In a bid to unleash India Inc’s investment cycle, the government has sharply increased capital expenditure by 35.4%, to Rs 7.5 lakh crore, with effective capital expenditure estimated at Rs 10.68 lakh crore, constituting about 4.1% of GDP.

Fiscal consolidation appears to have been put on hold for the time being, with a budget deficit of 6.9% for the current year and a higher than expected budget deficit of 6.4% for FY23 Nevertheless, a shift towards higher capital spending should boost economic growth, forecast at 9.2% for the coming year, over the medium to long term. An increase in investment spending could also lead to higher corporate profits and have a multiplier effect on the economy.

While a host of welcoming measures have been introduced to boost India’s status as a digital economy by embracing new age technological fields, there has however been little or no relief on the personal income tax front, with no change in income tax brackets or rates. . The gap between personal income tax and corporation tax remains significant, with the latter sometimes accounting for only a third of the former. The gap is really too glaring not to be bridged, especially when it’s not based on an activity to incentivize, but simply on the type of training while wearing a corporate shell.

Recognizing the need to promote fintech solutions, digital banking and payment systems to foster greater financial inclusion and stimulate increased economic activity, the government has proposed to establish 75 digital banking units in 75 districts across the country by through regular commercial banks. In addition, in 2022, all post offices will be integrated into the central banking system allowing customers to access their accounts via online banking, mobile banking, ATMs, and also to transfer funds in the post office accounts and to other bank accounts. These initiatives will help build the technology infrastructure needed to facilitate increased online banking and payments, especially at a time when people are confined to their homes due to the ongoing pandemic.

The proposal to introduce a central bank digital currency (CBDC) in FY23 is in line with the government’s digitalization plan and the momentum of state-backed digital currencies that is gaining traction across the world . In April 2020, China was the first major country to phase in a state-backed digital currency, and it received a good response. The introduction of the CBDC can have several benefits ranging from increased liquidity to better monitoring of funds, which will reduce opportunities for money to be diverted to undertake illegal activities, such as money laundering. However, concerns about cybersecurity threats must be addressed appropriately to maintain people’s trust in the CBDC.

However, when it comes to cryptocurrencies, the Center took the opposite view. It has decided to introduce a tax scheme to generate revenue on income derived from the transfer of virtual digital assets (VDAs), which include cryptocurrencies and NFTs. It has been proposed that income from the transfer of all VDAs be taxed at a rate of 30%. There will be no separate taxation on ARVs based on how long one holds those assets. In addition, apart from the cost of acquisition, no other deduction will be allowed for the calculation of income, and the losses incurred on the sale of the VDAs may not be set off against any other income. In addition, the donation of VDA will be imposed by the recipient. The proposed changes will come into effect on April 1, 2023. It is unclear whether “gas costs” paid at the time of acquisition will be allowed as a deduction.

Through these measures, the Center has reduced tax uncertainty in the digital asset industry. Although taxation is not legalization and legislation that will decide the fate of cryptocurrencies is currently awaited, the crypto market is growing at an exponential scale and the proposed tax will help the government mobilize and generate necessary additional income. In addition, taxation of VDAs will pave the way for regulation of trade/transfer of VDAs and improve government control of these activities. It remains to be seen whether the tax, while lower than personal income tax at the marginal rate, will dampen sentiment and reduce participation in crypto ecosystems. The efficiency of the execution of trades, which often plays out in the shadows, is to be monitored.

The Center also decided to cap at 15% the existing graduated surtaxes on income of associations of persons (AOP) and taxes on long-term capital gains (LTCG) on the transfer of fixed assets other than publicly traded shares. stock market, shares, etc. Currently, while LTCGs on listed shares are subject to a maximum increase of 15%, LTCGs on other fixed assets and income from AOPs are subject to a graduated increase of up to 37%. This rationalization and the removal of disparities between different asset classes should not only result in significant tax savings for investors, but also lead to greater reinvestment and better returns for angel investors, a boost for start-ups.

Giving further impetus to the Centre’s dream of positioning India as a global financial services hub, a series of measures have been introduced to further liberalize the IFSC’s regulated ecosystem. First, world-class foreign universities and institutions will be allowed to set up branches of the IFSC to deliver courses designed to benefit the fintech industry in particular, which would be exempt from all national regulations except those prescribed by IFSCA, the omnibus regulator. Second, to strengthen the dispute settlement mechanism, an international arbitration center will be launched in GIFT city. This would improve the ease of doing business and put GIFT on a par with leading international arbitration centers such as SIAC and LCIA. Third, to encourage various business activities such as offshore fund management and offshore banking, the Center has proposed to grant several tax benefits to units located at the IFSC, such as the proposed exemption on income of non- residents of the transfer of offshore derivatives or OTC derivatives issued by offshore banking units based at the IFSC. In addition, income from funds managed by a portfolio manager in accounts held with an offshore banking unit at the IFSC should be exempt.

To achieve ambitious carbon reduction targets, it was decided to raise funds by issuing sovereign green bonds. Coupled with other climate-friendly measures such as a focus on clean and sustainable mobility, an additional allocation for the PLI program for solar modules and the battery swap policy, the budget took several positive steps towards durability.

The budget offers little comfort to the middle class and investors. The mutual fund industry expected the introduction of a tax-advantaged debt-linked savings scheme, the notification of mutual fund shares as “long-lived assets specified” eligible for exemption from the LTCG under Article 54 EC, and uniform taxation of listed debt securities and debt mutuals. funds. On the personal tax front, not aligning corporate taxation with personal income tax has been a huge failure. In addition, there has been no increase in the Section 80C deduction limits. Given the pandemic pain, the changes were expected, to put more disposable income in the hands of taxpayers.

Co-authored with Rahul Das, Raghuvamsi Meka, both Senior Partners, and Sudarshana Basu, Partner, Finsec Law Advisors

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