Union Budget 2023 has set the standards of fiscal prudence maintained by the Finance Minister Nirmala Sitharaman. Our finance minister has managed to deliver the balanced Union Budget despite the fact that a lot was riding on her shoulders due to huge fiscal deficit and persistent global pressure. Proposals laid down in the budget clearly reflect the focus on growth and job creation post-pandemic.
Union Budget 2023 has come up with a plethora of tax proposals having a significant impact on individual personal tax regimes, corporate sectors, transfer pricing and litigation, etc. A lot of changes have been proposed in the new tax regime for individuals to make it a more lucrative option and would leave more disposable income in the hands of individuals. Key proposals from the personal taxes standpoint (under the new tax regime) includes capping the surcharge rate to 25% which would benefit the super-rich individuals, full tax rebate to individuals having income up to 7lakhs (USD 8,533 approx.). One dampener for HNIs has been the restriction on deduction under Section 54 and 54F (purchase of residential accommodation) to Rs 10 crores (USD 1.2 million approx.).
From the corporate tax standpoint, a beneficial proposal has been moved for encouraging the corporate sector. The turnover limit for presumptive taxation for businesses and professionals is enhanced at INR 3 crores (USD 365,700 approx.) and INR 75 lacs (USD 91,425 approx.) turnover respectively subject to cash receipts not exceeding 5%. Deduction under Section 43B for expenditure for the payments to MSME will be allowed only on a payment basis. It is to be noted that such a deduction would not be available even if the payment of expense is made before the due date of filing the return. Further, the government has shown much faith in the startups by extending dates for commencement and carrying forward losses. Losses would be allowed to set off and carry forward for 10 years which was earlier allowed for 7 years. The government has also proposed to extend the benefit of prevailing tax incentives to the startups incorporating until 01 April 2024.
The budget proposes several measures in the form of tax proposals to several other sectors such as special economic zones, business trusts, start-ups, and expansion of the 15% beneficial tax rate to co-operatives. The Special economic Zone entities shall be entitled to a deduction u/s 10AA only if they file their tax return timely. Also, there is no time limit prescribed for timely remittance of the export proceeds from the sale of goods or provision of services by SEZ units while claiming deductions at present. Hence, the timeline for such realizations has been proposed to be within a period of 6 months from the end of the relevant year. As an anti-avoidance measure, there have been changes proposed for the business trust that the payments related to the repayment of debt shall be taxable in the hands of the unit holders under the head of other sources.
One big change has been widening the scope of angel tax which has typically caused a lot of distress to start-ups. It has been proposed that investment received from non-residents would come under the ambit of section 56(2)(viib) which effectively means even FDI could be taxed via this section. Under FEMA, valuation norms prescribe the minimum floor for the purposes of bringing in FDI whereas as per the proposed amendment, the department would seek to tax any premium above the fair value. One can expect the tax department to start examining FDI in start-ups which will result in litigation going forward. The current environment would lead to big down rounds and a lot of litigation around valuations. From the context of TCS, the proposed rate of 20% instead of 5% at present is proposed for the sale of overseas tour packages without any threshold, which would cause difficulties for people intending to go on foreign travel.
It would be worth highlighting that the proposal enacted in Budget 2023 demonstrates the central government’s intent to simplify the direct tax assessment and appeal procedures in true spirit. Key proposals such as the introduction of a new first appeal authority at the Joint Commissioner level, rationalization of time limits for assessment and reassessment (in search and seizure cases), and allowing the tax authorities to take help of any person in cases of search and seizure among others would help tax department in conducting the assessments and appeals with greater efficiency and more quickly.
Further, proposals like introducing a specific time limit of 3 months for filing tax returns after notice of reassessment, decriminalization of minor offenses by the liquidator, and expansion of the scope of appealable orders before ITAT are welcome and much-needed steps to transform the taxpayer's experience while dealing with the tax department.
Indirect Tax perspective:
This year’s budget from a customs standpoint exemplifies Government’s intent to promote domestic manufacturing, with a special focus on green mobility. This is evident from the Nil rate of Customs duty being introduced for capital goods/ machinery for the manufacture of Lithium-ion cells for use in EV batteries, the reduction in customs duty rate for import of denatured ethyl alcohol to promote petroleum blending and the increase in import tariff rates for petrol/diesel-run vehicles along with EVs manufactured outside India.
On the GST front, most of the changes were largely aligned with Council recommendations, such as decriminalization of offenses, clarity in definitions of OIDAR/ non-online recipient, etc. The amendments to the CGST Act in expanding the scope of Section 17(5) are unwarranted since, on one hand, the law expects the corporate sector to step in and mandatorily spend on CSR and the other hand, denial of ITC on such activities would only increase the cost. The amendment in the definition of OIDAR services removes the condition of use of essentially automated and minimal human interventions in the services to tax the supply which is being provided with the significant human interventions. This shall surely increase its scope and put a lot of litigations at rest.
Please click here to view the highlights of Budget 2023 and we hope you find this useful.
