Indian economy has shown a remarkable resilience in the past year despite the rising fuel costs in the wake of the war in Ukraine, the economic slowdown in China due to its controversial zero Covid stance and high inflation in the western countries. While most of the global stock exchanges are reeling on account of these issues, Indian markets have touched an all-time high. The robustness of Indian economy can also be evidenced from the significant jump in the direct and indirect tax collections for this year. The upcoming Budget 2023 is going to be last full Budget before elections and hence, the government may try to find new avenues to encourage entrepreneurs to start new ventures by adopting new technology and green energy.
Hits and misses of 2022-23
From a direct tax administration perspective, the biggest success story appears to be the seamless implementation of faceless assessment and appeal proceedings. The forced lockdowns have helped the taxpayers to embrace these faceless proceedings quicker than anticipated. There have been a few hiccups along the way, especially with respect to the denial of personal hearings to the taxpayers who have specifically requested for the same. It was originally intended to restrict the personal hearing to absolutely necessary cases, but the Courts have come down very heavily on the tax authorities and have held that concluding a proceeding without granting a fair hearing to the taxpayer constitutes violation of the principles of natural justice. The government has swiftly amended the provisions to provide for a personal hearing.
Another recent change that has triggered huge controversy is the imposition of TDS obligations on the “benefits” and “perquisites”. It was originally conceived to be the TDS on social media influencers to bring the non-monetary benefits received by such influencers under the tax net. However, a subsequent circular issued by the government had substantially expanded its scope which has created significant amount of unrest among the tax fraternity. For example, reimbursements of out of pocket expenses incurred by professionals could be construed as income of the professional and the payor is required to withhold tax on such reimbursements. Similarly, sales incentives and promotional expenditure incurred by the company on its sales representatives (who are non-employees) could be construed as income of such sales representatives and the company is required to withhold tax on the same. This circular has also attempted to reverse the decision of the Supreme Court in the landmark case of Mahindra and Mahindra, wherein it was held that the hair-cut on the loans would not be considered as “benefits” or “perquisites”. However, the circular specifically states that remission of loans could be considered as “benefits” or “perquisites” and, therefore, tax has to be withheld on such benefits, without referring to the above Supreme Court decision.
Indian start-ups are going through a rough phase. The IPO debacle of certain unicorns have raised question marks about their valuation and have also dried-up the flow of funds for other start-ups. The investors are carefully scrutinising the valuations and reviewing the assumptions on the basis of which the valuation is made. While the Indian Government has made great efforts to promote the start-up culture in India, it is crucial that the Government intervenes at the earliest and provides necessary support to the start-ups before it’s too late to revive them. Existing income tax exemptions have played a critical role in enticing investors towards the start-ups. 100% exemption provided to the start-ups is due to expire by March 2023. The start-up ecosystem expects the government would extend the timeline for the tax exemptions beyond March 2023. Also, since many start-ups suffer significant losses for several years, the 3-year income tax exemptions may not actually be realized by many entities. It is hoped and expected that the government may consider providing additional incentives to them so that the tax benefits can actually be realised by the start-ups. The government may also consider granting tax exemption on capital gains earned from the transfer of shares of start-ups, which shall pique the interest of the investors in the start-ups.
Rationalisation of capital gains tax regime is one of highly anticipated amendments expected from the forthcoming Budget. The existing capital gains regime provide different tax rates for different kinds of taxpayers. The holding period for an asset to be qualified as a long-term capital asset also significantly differs for various kinds of assets. The outgoing Revenue secretary has recently made public suggestions that the current capital gains tax regime should be completely relooked and streamlined.
The government may also come up with newer tax incentives to motivate companies look beyond their financial statements and make investments in newer areas that are sensitive to the environment like green energy, electric vehicles, electric busses, etc. These sectors require significant fiscal stimulus from the government as well as subsidies to make them competitive in today’s marketplace and the success of their journey shall depend on the incentives being offered to them in the Budget.
Views are personal. Patnaik is Partner & Head – Taxation, and Thangadurai V.P is Principal Associate, respectively, at Cyril Amarchand Mangaldas.
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