Co-authored with Raghuvamsi Meka and Rahul Das, Senior Associates and Sudarshana Basu, Associate, Finsec Law Advisors
The finance ministry has presented a growth-oriented budget for FY 2022-23, while headlining a massive hike in public investment. In a bid to unleash India Inc’s capex cycle, the government has sharply increased the outlay for capital expenditure by 35.4%, to Rs 7.5 lakh crore, with an estimated effective capital expenditure of Rs 10.68 lakh crore, constituting about 4.1% of the GDP.
Fiscal consolidation appears to have been put on the back burner for the moment, with the current year fiscal deficit at 6.9% and an estimated higher-than-expected fiscal deficit of 6.4% for FY23. Nonetheless, a shift towards higher capital expenditure is expected to boost economic growth, projected at 9.2% for the upcoming year, in the medium to long term. An increase in capex could also witness a rise in corporate earnings and have a multiplier effect on the economy.
Whilea host of welcoming measures were introduced to augment India’s status as a digital economy by embracing new-age technology areas, there was, however,little to no relief on the personal income tax front, with no changes in income-tax slabs or rates. The gap between personal income tax and corporate income tax remains wide, the latter could at times be as low as one third of the former. The gap really is too glaring not to be addressed, and particularly so when not based on an activity to be incentivised, but simply based on the type of formation by wearing a corporate shell.
Recognising the need for promoting fintech solutions, digital banking and payment systems to bring about greater financial inclusion and stimulate increased economic activity, the government has proposed to set up 75 digital banking units in 75 districts throughout the country through scheduled commercial banks. Further,in 2022, all post offices will be brought under the core banking system enabling customers to access their accounts through net banking, mobile banking, ATMs, and also transfer funds within post office accounts and to other bank accounts. These initiatives will help develop necessary technology infrastructure for facilitating increased online banking and payments,especially at a time when people are restricted to their homes due to the on-going pandemic.
The proposal to introduce a central bank digital currency (CBDC) in FY23 conforms with the government’s plan of digitisation and the momentum for state-backed digital currencies that is gaining ground across the world. In April 2020,China was the first major country to introduce a state-backed digital currency in a phased manner, and it has received a good response. The introduction of CBDC can have several benefits ranging from increased liquidity to better monitoring of funds, which will reduce the scope for diversion of monies for undertaking illegal activities, such as money laundering. However, the concerns of cybersecurity threats have to be appropriately addressed to preserve people’s trust in CBDC.
However,with respect to cryptocurrencies, the Centre took the opposite view. It has decided to introduce a tax regime to earn revenue on income earned from the transfer of virtual digital assets (VDAs), which include cryptocurrencies and NFTs. It has been proposed that income earned from the transfer of all VDAs will be taxed at a rate of 30%. There will be no separate taxation on VDAs based on the period for which one holds such assets. Further, apart from the cost of acquisition, no other deductions will be allowed to compute income, and losses suffered from the transfer of VDAs cannot be set off against any other income. Additionally, gifting of VDAs will be taxed at the hands of the recipient. The proposed amendments will take effect from April 1, 2023. It is not clear whether the ‘gas fees’ paid at the time of acquisition will be allowed as a deduction.
Through these measures, the Centre has reduced the tax uncertainty in the digital asset industry. While taxation is not legalisation, and legislation that will decide cryptocurrencies’ fate is currently awaited, the crypto market is growing at an exponential scale, and the proposed tax will help the government mobilise and raise much-needed additional revenue. Further, taxation of VDAs will pave the way for regulating the trading/transfer of VDAs and improve the government’s monitoring of such activities. It remains to be seen whether the tax, though lower than personal income tax at the marginal rate, will dampen sentiments and lower participation in the crypto ecosystems. The effectiveness of enforcement of trades, which can often be played in the shadows, needs to be watched.
TheCentre has also decided to cap existing graded surcharges on income of Association of Persons (AOP) and Long Term Capital Gains (LTCG) tax on transfer of capital assets other than listed equity shares, units, etc, at 15%.Presently, while LTCG on listed shares attract a maximum surcharge of 15%, LTCG on other capital assets and income of AOPs are liable to a graded surcharge which can go up to 37%. Such rationalisation and removal of disparity between different classes of assets is not only expected to result in significant tax savings for investors but also lead to greater reinvestment and better returns for angel investors, a boost for start-ups.
Providing further impetus to the Centre’s dream to position India as a global hub for financial services, a host of measures have been introduced to further liberalise the regulated ecosystem at IFSC. First, world-class foreign universities and institutions will be allowed to set up branches at IFSC to provide courses inter alia designed to benefit the fintech industry, which would be free from all domestic regulations except those prescribed by the IFSCA, the omnibus regulator. Second, to strengthen the dispute resolution mechanism, an International Arbitration Centre will be launched in the GIFT City. This would enhance ease of doing business and put GIFT on a par with leading international arbitration centres such as SIAC and LCIA. Third, to incentivise various business activities such as offshore fund management and offshore banking services, the Centre has proposed to provide several tax concessions to units located at the IFSC, such as proposed exemption on income of non-residents from transfer of offshore derivative instruments or OTC derivatives issued by offshore banking units based in IFSC. Further, income received from funds managed by a portfolio manager in accounts maintained with an offshore banking unit at IFSC is to be exempt.
To achieve ambitious carbon reduction targets, it has been decided to raise funds by issuing sovereign green bonds. Coupled with other climate-friendly measures such as a focus on clean and sustainable mobility, additional allocation for PLI scheme for solar modules, and battery swapping policy, the budget has taken several positive steps towards sustainability.
The budget offers little cheer to the middle class and investors. The mutual fund industry was expecting the introduction of Debt Linked Savings Scheme with tax benefits, notification of mutual fund units as ‘Specified Long Term Assets’ qualifying for exemption on LTCG under Section 54 EC, and uniformity of taxation of listed debt securities and debt mutual funds. On the personal taxation front, not aligning corporate taxation with personal income tax was a huge miss. Further, there has been no hike in Section 80C deduction limits.Given pandemic pain, the changes were expected, to put more disposable income in the hands of taxpayers.
(This article was first published in Financial Express)
