Budget 2022 – Key Direct Tax Proposals

Article explains Key Direct Tax Proposals proposed by Budget 2022 pertaining to Updated Return – Section 139(8A), Reduced Alternate Minimum Tax (AMT) Rate – Section 115JC and Section 115JF (definition of AMT) and Surcharge for Cooperatives, Tax relief to persons with disability – Section 80DD, Parity between employees of State and Central government – Section 80CCD, Incentives for Start-ups – Section 80-IAC, Incentives for newly incorporated manufacturing entities under concessional tax regime – Section 115BAB, Scheme for taxation of Virtual Digital Assets – Proposed New Section 115BBH, Section 194S[TDS] and Section 2(47A) [Defines Virtual Digital Asset] Litigation management to avoid repetitive appeals by the Department – Section 158AA and Proposed New Section 158AB, Tax incentives to International Financial Services Centre (IFSC) – Section 10 Clause (4E), Clause (4F) and New Clause (4G), Rationalization of Surcharge, Clarification in relation to ‘Health and Education cess’ as business expenditure, Deterrence against tax-evasion – Section 79A and TDS Provisions under New Section 194R.

1. Updated Return – Section 139(8A)

Existing Provision / Issue

Act facilitates filing of a belated return after the expiry of due date, if such return is furnished before 3 months prior to the end of the relevant assessment year or before the completion of assessment, whichever is earlier. Similarly, Act provides the taxpayer an opportunity to revise the original return filed in case of any omission or wrong statement, after due date, which is to be filed 3 months before the end of the assessment year or before the completion of assessment, whichever is earlier.

Proposal

The additional timeline for filing a revised/belated return may not be adequate and hence to provide an opportunity to correct omissions or mistakes committed by taxpayers it is proposed that to file an Updated Return on payment of additional tax. This updated return can be filed within two years from the end of the relevant assessment year.

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From Government point of view it will provide additional revenue and on the other hand it will facilitate ease of compliance to the taxpayer in a litigation free environment.

2. Reduced Alternate Minimum Tax (AMT) Rate 

Section 115JC and Section 115JF (definition of AMT) and Surcharge for Cooperatives

Existing Provision / Issue

Currently cooperative societies are required to pay Alternate Minimum Tax at the rate of 18.5%. However, companies pay the same at the rate of 15%.

Proposal

To provide a level playing field between co-operative societies and companies, it is proposed to reduce this rate for the cooperative societies also to 15%. It is also proposed to reduce the surcharge on co-operative societies from 12% to 7% for those having total income of more than Rs. 1 crore and up to Rs. 10 crores.

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It would definitely cheer the co-operative sector. But I don’t think so it would benefit Indian Economy as such.

3. Tax relief to persons with disability – Section 80DD

Existing provision / Issue

The present law provides for deduction to the parent or guardian only if the lump sum payment or annuity is available to the differently abled person on the death of the subscriber i.e. parent or guardian.

Proposal

There could be situations where differently abled dependants may need payment of annuity or lump sum amount even during the lifetime of their parents/guardians. Therefore, in order to remove this genuine hardship, it is proposed to allow the payment of annuity and lump sum amount to the differently abled dependent during the lifetime of parents/guardians, i.e., on parents/ guardians attaining the age of sixty years.

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I would say it is a good and thoughtful initiative.

4. Parity between employees of State and Central government – Section 80CCD

Existing provision / Issue

Under the existing provisions of the Act, any contribution by the Central Government or any other employer to the account referred to in section 80CCD of the Act (NPS account), shall be allowed as a deduction to the assesses in the computation of his total income, if it does not exceed 14% of his salary where such contribution is made by the Central Government. This limit is presently 10% of his salary where such contribution is made by any other employer.

Proposal

To provide equal treatment to both Central and State government employees, it is proposed to increase the tax deduction limit from 10% to 14% on employer’s contribution to the NPS account of State Government employees as well. This would bring state government employees at par with central government employees.

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It is really a boon for state government employee.

5. Incentives for Start-ups – Section 80-IAC

Existing provision / Issue

The existing provisions of the section 80-IAC of the Act inter alia, provide for a deduction of an amount equal to one hundred percent of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years, beginning from the year of incorporation, at the option of the assesses subject to the conditions specified there in. One of the conditions is that it is incorporated on or after 1st day of April, 2016 but before 1st day of April 2022.

Proposal

Due to COVID pandemic there have been delays in setting up of such units. In order to factor in such delays and promote such eligible start-ups, it is proposed to amend the provisions of section 80-IAC of the Act to extend the period of incorporation of eligible start-ups to 31st March, 2023.

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It would encourage Indian youth. 

6. Incentives for newly incorporated manufacturing entities under concessional tax regime – Section 115BAB

Existing provision

Section 115BAB of the Income-tax Act provides for an option of concessional rate of taxation @ 15 % for new domestic manufacturing companies provided that they do not avail of any specified incentives or deductions and fulfill certain other conditions. One of the conditions is that the new domestic manufacturing company is required to be set up and registered on or after 01.10.2019, and is required to commence manufacturing or production of an article or thing on or before 31st March, 2023.

Proposal

The COVID-19 pandemic has resulted in some delay in setting up/registration of new domestic companies and the commencement of manufacturing or production by such companies. In order to provide relief to such companies, it is proposed to amend section 115BAB so as to extend the date of commencement of manufacturing or production of an article or thing, from 31st March, 2023 to 31st March, 2024.

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It would help such companies to overcome from the COVID-19 pandemic situation and it would also attract investment, help in creating jobs and trigger overall economic growth.

7. Scheme for taxation of Virtual Digital Assets 

Proposed New Section 115BBH, Section 194S[TDS] and Section 2(47A) [Defines Virtual Digital Asset]

Existing Provision / Issue

Crypto currency was major issue in recent times. There were no provisions which can regularize these transactions.

Proposal

Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially. Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.  Accordingly a new scheme to provide for taxation of such virtual digital assets has been proposed in the Bill.

It is proposed to provide that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent.

No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition.

Further, loss from transfer of virtual digital asset cannot be set off against any other income.

Further, in order to capture the transaction details, It is also proposed to provide for TDS on payment made in relation to transfer of virtual digital asset at the rate of 1% of such consideration above a monetary threshold.

Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient.

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In recent time Crypto currency was the major issue and by proposing the new section w.r.t. such kind of virtual digital assets, it would definitely provides relief to those investors.

8. Litigation management to avoid repetitive appeals by the Department – Section 158AA and Proposed New Section 158AB

Existing provision / Issue

Section 158AA of the Act provides that where the Commissioner or Principal Commissioner is of the opinion that any question of law arising in the case of an

assessee (relevant case) is identical with a question of law arising in his case for another assessment year (other case) which is pending in appeal before the Supreme Court against an order of High Court which was in favour of assessee, he may direct the Assessing Officer to make an application to the Appellate Tribunal stating that an appeal on the question of law in the relevant case may be filed when the decision on the question of law becomes final in the other case, subject to the acceptance of the same by the assessee.

Proposal

Therefore, to provide a procedure when an appeal by revenue is pending on an identical question of law, it is proposed to insert a new section 158AB in the Act, to provide that if a question of law in the case of an assessee is identical to a question of law which is pending in appeal before the jurisdictional High Court or the Supreme Court in any case, the filing of further appeal in the case of this assessee by the department shall be deferred till such question of law is decided by the jurisdictional High Court or the Supreme Court.

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The said proposal if enacted would definitely save lot of litigation time for both of the assessee and the department.

9. Tax incentives to International Financial Services Centre (IFSC)

Section 10 Clause (4E), Clause (4F) and New Clause (4G)

Existing Provision / Issue

Over the past few years several tax concessions have been provided to units located in International Financial Services Centre (IFSC) under the Act.

Proposal

In order to further incentivise operations from IFSC, it is proposed to provide that income of a non-resident from offshore derivative instruments, or over the counter derivatives issued by an offshore banking unit, income from royalty and interest on account of lease of ship and income received from portfolio management services in IFSC shall be exempt from tax, subject to specified conditions.

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It will definitely boost flow of foreign investment in India.

10. Rationalization of Surcharge

Existing Provision / Issue

There are several works contracts whose terms and conditions mandatorily require formation of a consortium. The members in the consortium are generally companies. In such cases, the income of these AOPs has to suffer a graded surcharge upto 37 per cent, which is a lot more than the surcharge on the individual companies.

The long-term capital gains on listed equity shares, units etc. are liable to maximum surcharge of 15 per cent, while the other long term capital gains are subjected to a graded surcharge which goes up to 37 per cent.

Proposal

To address the first issue it is proposed to cap the Surcharge of these AOP’s at 15%.

To address the second issue it is proposed to cap the surcharge on long term capital gains arising on transfer of any type of assets at 15%.

View

As the outgo will reduce, it will help start-up sector and manufacturing companies in particular.

11. Clarification in relation to ‘Health and Education cess’ as business expenditure

Existing Provision / Issue

There were many litigations on considering Health and Education cess as business expenditure or not.

Proposal

To reiterate the legislative intent, it is proposed to clarify that any surcharge or cess on income and profits is not allowable as business expenditure.

View

In big business houses this amount of Health and Education cess runs in crores and therefore retrospective amendment in the law may result in demand against those who had claimed Health and Education cess as business expenditure in their Return of Income. 

12. Deterrence against tax-evasion – Section 79A

Existing Provision / Issue

It is noticed that in some cases, assessees claim set off of losses or unabsorbed depreciation, against undisclosed income corresponding to difference in stock, undervaluation of stock, unaccounted cash payment etc. which is detected during the course of search or survey proceedings. Currently there is no provision in the Act to disallow such set-off and no distinction is made between undisclosed income which was detected owing to search & seizure or survey or requisition proceedings and income assessed in scrutiny assessment in the regular course of assessment though for incomes falling in section 68, section 69, section 69B etc., such restriction is there.

Proposal

In order to bring certainty and to increase deterrence among tax evaders, it is proposed to provide that no set off, of any loss shall be allowed against undisclosed income detected during search and survey operations.

View

It would help in ensuring that proper tax is paid on income detected due to a search or survey and also result in increased deterrence against tax evasion.

13. Rationalizing TDS Provisions – New Section 194R

Existing Provision / Issue

As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.

Proposal

In order to widen and deepen the tax base, it is proposed to insert a new section 194R to the Act for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds Rs. 20,000 during the financial year.

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It would help to track those non-filers who earn that type of income.