Union Budget 2022 – Key Direct Tax Proposals

UNION BUDGET 2022 – KEY DIRECT TAX PROPOSALS – ROADMAP FOR FUTURE

The Union Budget 2022 was presented on 1st February, 2022. This Budget seeks to lay the foundation and give a blueprint to steer the economy over the Amrit Kaal of the next 25 years. It continues to build on the vision drawn in the Budget of 2021- 22. India’s economic growth in the current year is estimated to be 9.2 per cent, highest among all large economies.

The Budget is focused more on creation of capital assets. The Government aims to attain the following visions:-

• Complementing the macro-economic level growth focus with a micro-economic level all-inclusive welfare focus
• Promoting digital economy and fintech, technology enabled development, energy transition, and climate action, and
• Relying on virtuous cycle starting from private investment with public capital investment helping to crowd-in private investment.

The proposals in this Budget, while continuing with declared policy of stable and predictable tax regime, intend to bring more reforms that will take ahead vision to establish a trustworthy tax regime, to simplify the tax system, promote voluntary compliance by taxpayers, and reduce litigation.

The key Direct Tax proposals in this article have been summarised into the following five categories for ease of reference and understanding.

1. General Tax Provisions

2. Personal Tax

3. Corporate Tax

4. Insertion of New Sections

5. Insertion of New Sub-sections / Clauses / Explanations

GENERAL TAX PROVISIONS

• No changes proposed in basic tax rates for Personal and Corporate tax payers.
• Surcharge rate on long term capital gains arising from transfer of all long term capital assets proposed to be capped at 15%.
• Surcharge rate in case of an Association of Persons consisting of only companies as its members proposed to be capped at 15% (presently 37% in certain cases).
• Surcharge and Cess being deemed tax proposed not to be allowed as business expenditure with retrospective effect from 01.04.2005.
• Alternate Minimum Tax payable by co-operative societies is proposed to be reduced from present 18.5% to 15%. Surcharge capped at 7% for the co-operative societies with total income above Rs.1 crore and up to Rs.10 crore.
• Concessional 15% tax on dividend income, received by Indian companies from specified foreign companies (in which an Indian company hold 26% or more in nominal value of equity shares), is proposed to be withdrawn from 01.04.2023.
• Option to file updated return of income within 2 years from the end of the relevant assessment year to be allowed in certain cases, subject to payment of additional tax of 25% (if return filed in 12 months) or 50% (if return filed after 12 months, but before 24 months) of tax and interest on additional income so furnished.
• Provisions of section 14A of the Income-tax Act, 1961 (‘ITA’) for disallowing expenditures incurred to in relation to earn exempt income are proposed to apply to all cases irrespective of whether exempt income is earned or not.
• Amount received towards COVID-19 related medical treatment (for self / any family member) or on account of death due to COVID-19 (up to Rs.10 lakhs) is proposed to be exempt, subject to such conditions as to be notified by the Central Government.
• Conversion of interest payable into debenture or any other instrument to defer payment of outstanding interest liability to a future date, shall not be deemed to be actual payment, hence not deductible under section 43B of ITA.
• Withholding tax at 1% on higher of sale consideration or stamp duty value is proposed on sale of immovable property if consideration is more than Rs. 50 lakhs.
• Loan or borrowings credited in the books of an assessee are proposed to be treated as explained cash credit under section 68 of ITA only if the source of funds is also explained in the hands of the creditor or entry provider (other than well regulated entity, i.e., a Venture Capital Fund, Venture Capital Company registered with Securities and Exchange Board of India (SEBI).
• It is proposed to not allow set-off of business losses/ unabsorbed depreciation against undisclosed income consequent to search or seizure proceedings.
• Anti avoidance provisions such as dividend stripping under section 94(7) of ITA and bonus stripping under section 94(8) of ITA are proposed to apply to securities and units of Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) or Alternative Investment Funds (AIFs).
• Date of incorporation for eligible start-up, for claiming exemption under section 80-IAC of ITA, is proposed to be extended from 31.03.2022 to 31.03.2023.
• Date of commencement of manufacturing or production of an article or things by new domestic companies, for availing benefit of concessional tax rate of 15% under section 115BAB of ITA, is proposed to be extended from 31.03.2023 to 31.03.2024.
• The Revenue to defer filing of appeals before the Income Tax Appellate Tribunal / High Court where an identical question of law is already pending before the jurisdictional High Court or Supreme Court.
• Income (net of only acquisition cost) from the transfer of any Virtual Digital Asset (‘VDA’) is proposed to be taxed at 30%. Other proposals in relation to VDA taxation are as under:
  • Provision for withholding tax at 1% on payment for transfer of VDA to a resident is sought to be inserted with effect from 01.07.2022.
  • Gift of VDA is proposed to be taxed as deemed income of recipient under section 56(2)(x) of ITA.
  • Carry forward and set-off for loss arising on transfer of VDA proposed not to be allowed against any other income.
• Requirement in file Form 52A (under section 285B of ITA) by producers of cinematographic films is proposed to apply to persons engaged in specified activities also. Specified activities include event management, documentary production, production of programmes for broadcast over television, over the top platforms, or similar platforms, sports event management, other performing arts, or any other activity as the central government may specify.
• Penalty amount for default in furnishing of various returns (including withholding tax/ tax collection at source) and statements increased from Rs.100/- per day to Rs.500/- per day.
• Scope for re-assessment proceedings proposed to be extended to cover information available to the tax department from any audit objections, information received from a foreign jurisdiction under Double Taxation Avoidance Agreement, or directions contained in a court order, or information received under a scheme notified under section 135A of ITA, etc.
• Time limit for re-assessment proceedings is proposed to be extended from 3 years to 10 years for income escaping assessment more than Rs.50 lakhs.
• Modifications proposed in the present Faceless Assessment Scheme based on difficulties faced by tax department and the tax payers.
• It is proposed to empower the Assessing Officer to pass effect giving order to the resolution of dispute by the Dispute Resolution Committee.
• It is proposed to defer the timeline to issue directions for the application of the Faceless Assessment Scheme to Transfer Pricing assessments and Dispute Resolution Panel Proceedings from 31.03.2022 to 31.03.2024.
• It is proposed to maintain specified books of accounts by the trusts/ institutions covered by sections 10(23C) and 11 of ITA whose income exceeds maximum amount which is not chargeable to tax. Presently there is no such specific provision exists in ITA.
• Following expenditures are proposed to be disallowed under section 37 of ITA:
  • Expenditure incurred for offences or compounding of offences under any law in or outside India.
  • Expenditure incurred for providing any benefit or perquisite to a person where acceptance of such benefit or perquisite by recipient violates any law or rule or regulation guidelines governing the conduct of such person.
• Provisions of sections 206AB and 206CCA of ITA are proposed to be rationalised to widen and deepen tax-base:
  • Provisions of Section 206AB of ITA not to apply to transactions covered under sections 194-IA (purchase of immovable property), 194-IB (rent) and 194M (works contract) of ITA.
  • Higher withholding tax to apply to non-filers who have not furnished return of income for preceding 1 year (presently 2 years).

PERSONAL TAX

• No changes proposed in the basic tax rates under old as well new regime of taxation.
• Surcharge rate on long term capital gains arising from transfer of all long term capital assets proposed to be capped at 15%.
• It is proposed to exempt following amounts received for medical treatment or on account of death due to COVID-19, subject to other conditions as to be notified by the Central Government in this behalf (with retrospective effect from AY 2020-21):
  • Any sum of money received by an individual, from any person, in respect of any expenditure actually incurred by him on his medical treatment or treatment of any member of his family in respect of any illness related to COVID-19.
  • Any sum of money received by a member of the family of a deceased person from the employer of the deceased person (without limit) where the cause of death of such person is illness relating to COVID-19 and the payment is received within 12 months from the date of death of such person.
  • Any sum of money received by a member of the family of a deceased person from any other person or persons (not exceeding Rs.10 lakhs) where the cause of death of such person is illness relating to COVID-19 and the payment is received within 12 months from the date of death of such person.
• Section 80DD of ITA is proposed to be amended to include insurance schemes that allow the payment of annuity and lump sum amount to the disabled dependent person during the lifetime of the parent and guardians on attaining their age of 60 years or more, and the payment or deposit to such scheme has been discontinued.
  • Presently, the said deduction is available only if insurance scheme provides for the payment of annuity and lump sum amount to the disabled person on the death of the parent and guardians.
• It is proposed to withdraw exemption available to individual consultants under sections 10(8)/(8A)/(8B)/(9) of ITA in respect of income arising out of certain co-operative technical assistance programmes and projects in India, based on the agreement between the Central Government and the Government of a foreign state or an international agency. (from the assessment year 2023-24).
• Provisions of section 206AB of ITA not to apply to transactions covered under sections 194-IA (purchase of immovable property), 194-IB (rent) and 194M (works contract) of ITA.
• Benefit of deduction under section 80CCD of ITA at 14% of salary in respect of contribution to National Pension Scheme by employer is proposed to be extended to State Government employees in addition to Central Government employees (applicable from assessment year 2020-21).

CORPORATE TAX

• No changes proposed in the basic corporate tax rates.
• Surcharge and Cess being deemed tax proposed not to be allowed as business expenditure with retrospective effect from 01.04.2005.
• Concessional 15% tax on dividend income, received by Indian companies from specified foreign companies (in which an Indian company hold 26% or more in nominal value of equity shares), is proposed to be withdrawn from 01.04.2023.
• Date of incorporation for eligible start-up, for claiming exemption under section 80-IAC of ITA, is proposed to be extended from 31.03.2022 to 31.03.2023.
• Date of commencement of manufacturing or production of an article or things by new domestic companies, for availing benefit of concessional tax rate of 15% under section 115BAB of ITA, is proposed to be extended from 31.03.2023 to 31.03.2024.
• Conversion of interest payable into debenture or any other instrument to defer payment of outstanding interest liability to a future date, shall not be deemed to be actual payment, hence not deductible under section 43B of ITA.
• It is proposed to allow to carry forward of losses under section 79 of ITA to public sector companies if the ultimate holding company, immediately after the completion of strategic disinvestment, continues to hold (directly or through its subsidiary/ies) at least 51% of the voting power of the erstwhile public sector company in aggregate.
• It is proposed that assessment / other proceedings pending/ completed on predecessor on business reorganization be deemed to be on the successor and shall be valid. Successor is allowed to file modified return of income for the period between effective date of business reorganization and the date of order of competent authority.
• It is proposed that reduction of goodwill from the block of asset to be treated as deemed transfer under section 50 of ITA.
• Any person responsible for providing benefit or perquisite to a resident exceeding Rs.20,000/-, arising from carrying out business or profession by such resident, shall before releasing such benefit or perquisite ensure that that tax at the rate of 10% has been withheld and paid in respect of the benefit or perquisite.
• Anti avoidance provisions such as dividend stripping under section 94(7) and bonus stripping under section 94(8) of ITA are proposed to apply to securities and units of Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) or Alternative Investment Funds (AIFs).
• Following expenditures are proposed to be disallowed under section 37 of ITA:
  • Expenditure incurred for offences or compounding of offences under any law in or outside India.
  • Expenditure incurred for providing any benefit or perquisite to a person where acceptance of such benefit or perquisite by recipient violates any law or rule or regulation guidelines governing the conduct of such person.
• In order to further incentivise operations from International Financial Services Centre (‘IFSC’), referred to in section 80LA(1A) of ITA, it is proposed to provide the following additional incentives:
  • To exempt income accrued or arisen to or received by a non-resident on transfer of offshore derivative instruments or over-the-counter derivatives entered into with an Offshore Banking Unit of an IFSC – Section 10(4E) of ITA
  • To exempt income of a non-resident by way of royalty or interest on account of lease of a ship paid by a unit of an IFSC if the unit has commenced its operations on or before 31.03.2024 – Section 10(4F) of ITA
  • To exempt any income received by a non-resident from portfolio of securities or financial products or funds managed or administered by any portfolio manager on behalf of such non-resident in an account maintained with an Offshore Banking Unit in any IFSC to the extent such income accrues or arises outside India and is not deemed to accrue or arise in India – Section 10(4G) of ITA
  • Provisions of section 56(2)(viib) of ITA are proposed not to apply on shares issued to Category I or Category II Alternative Investment Fund regulated under the International Financial Services Centres Authority Act, 2019.
  • Income (capital gain) arising from the transfer of an asset being a ship (in addition to the income arising from the transfer of an aircraft) leased by a unit of the IFSC to any person shall be eligible for deduction provided the unit has commenced operation on or before 31.03.2024.

INSERTION OF NEW SECTIONS

1. Section 79A – No set-off of any loss against undisclosed income consequent to search, requisition and survey.

2. Section 115BBH – Tax on income from transfer of Virtual Digital Asset.

3. Section 115BBI – Taxation of specified income of certain institutions covered under section 10(23C) and section 11 of ITA.

4. Section 140B – Tax on updated return under section 139(8A) of ITA.

5. Section 148B – Prior approval for assessment, reassessment or re-computation in certain cases by Assessing Officer.

6. Section 156A – Modification and revision of section 156 notice of demand in certain cases.

7. Section 158AB – Appeal by tax department where an identical question of law is pending before High Courts or Supreme Court.

8. Section 170A – Filing of modified returns of income by successor after business reorganisation.

9. Section 194R – Withholding tax on payment of benefit / perquisite relating to business or profession.

10. Section 194S – Withholding tax requirement from sum payable on transfer of Virtual Digital Asset.

11. Section 239A – Application for refund of withholding tax deposited for cases where no tax was required to be deducted under section 195 of ITA.

12. Section 271AAE – Penalty for violation of provisions by specified institutions / trusts under section 10(23C) and section 11 of ITA.

INSERTION OF NEW SUB-SECTIONS / CLAUSES / EXPLANATIONS

• Sub-section (47A) to section 2 inserted –Meaning of ‘Virtual Digital Asset’.
• Explanations 3A/3B to section 11 inserted – Taxation of voluntary contributions received by trusts/ institutions for renovation and repair
• Explanation to section 14A inserted – Disallowance of expenditure irrespective of exempt income earned or not.
• Explanation 3 to section 37(1) inserted – Disallowance of expenditure incurred for any offence / compounding of offence outside India, and of any benefit or perquisite to a person in violation of any law or rule or regulation guidelines governing the conduct of such person.
• Explanation 3 to section 40(a)(ii) inserted – Defines the term ‘tax’ to include any surcharge or cess.
• Explanation to section 50 inserted – Goodwill reduced from the block of asset to be treated as deemed transfer.
• Clauses to section 56(2)(b)(xi)/ (xii) inserted – Exemption of amount received for medical treatment or on account of death due to COVID-19.
• Clauses inserted to section 79 – Eligibility to set-off and carry forward business losses in case of strategic disinvestment of public sector companies.
• Sub-section (3A) to section 80DD inserted – Deduction for payment for new insurance scheme for annuity to a disabled person.
• Section 139(8A) – Furnishing of updated return of income.
• Sub-section (1A) to section 149 inserted – Scope for issuing section 148 notice expanded.
• Sub-section (1A) to section 153 inserted – Time limit for passing order under sections 143/144 for return of income filed under section 139(8A).
• Sub-section (5A) to section 153 inserted – Time limit to modify effect giving orders of Transfer Pricing Officer by the Assessing Officer.
• Explanation (xi) to section 153B – Exclusion of period in search cases
• Sub-section (2A) to section 170 – Assessment / other proceedings pending/ completed on predecessor on business reorganization be deemed to be on the successor.
• Sub-section (2A) to section 245MA – Power to Assessing Officer to pass order giving effect to the resolution of dispute by Dispute Resolution Committee.
• Section 285B – Submission of statements by producers of cinematograph films or persons engaged in specified activity.

Apparently, it may seem that Budget 2022 has not offered / less offered goodies to the citizens, but the steps taken keeping in mind the future shape of India will reap benefits in the long run.

Hope you find the above relevant and useful…Happy Reading.

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About Author

The Author is a Practicing Chartered Accountant based out of Mumbai and can be reached on email cajitendra@gmail.com