The Finance Minister’s Budget Speech was a short one, and she made only a handful of references to the direct tax changes envisaged. Nonetheless, the Finance Bill is a detailed one, and contains several important, albeit low-key amendments on the direct tax front.
On the all-important topic of personal tax rates, the Budget contains no major changes. This will come as a disappointment to many who were expecting relief from changes to slabs, a lowering of rates, or at least through an increase in key tax deductions. Some benefit by way of COVID relief is, however, provided both in respect of treatment costs as well as in respect of sums paid to family members of those who passed away in the pandemic. In a sense, with strong domestic demand and the looming threat of inflation, perhaps the government chose to adopt a wait-and-watch approach towards tax relief, despite the imminent elections in key States. However, this is something that the government may have to consider in the coming years, especially if tax collections continue to remain buoyant.
On the procedural side, there is an important change that will enable taxpayers to update their returns beyond the short existing time limits for filing belated returns. This will now be possible up to 2 years from the end of the assessment year, but comes with a cost — the taxpayer has to pay an additional tax of between 25% and 50% of the tax on the additional income declared in the updated return . This is a far reaching change, and will enable taxpayers to address inadvertent errors and obtain certainty without going through a complex and time consuming litigation process.
For businesses, the tax proposals are something of a mixed bag. Start-ups established up to March 31, 2023 (instead of March 31, 2022) will now be eligible for tax relief.
Similarly, to avail of the concessional 15% tax rate, new manufacturing companies had to commence manufacture by March 31, 2023. This date has been extended to March 31, 2024.
On the other hand, the scope of TDS has been extended to benefits or perquisites arising in the course of business. In fact, over the past few years, the scope of TDS provisions has been gradually increasing. Many taxpayers have expressed concern over this trend and suggested that the scope of TDS on domestic payments should be curtailed since this imposed significant compliance costs and led to significant litigation. The current amendments could add to this burden.
Another important change is the withdrawal of the concessional 15% rate available in respect of dividends earned from foreign subsidiaries. Such dividends will now be taxed at normal rates.
The Budget also provides a detailed set of rules for taxing virtual digital assets, which would include crypto currencies and Non Fungible Tokens (NFTs). Gains from their transfer have been subject to a flat tax rate of 30% with no deduction for any expenditure (other than cost) or any set off of losses.
TDS on payments for their transfer has also been introduced, and provisions relating to gifts have been expanded to include them. The restriction on set-off of realized losses against gains is unusual, considering that income tax law has long allowed set off and carry forward of losses in speculative businesses, albeit with a restriction that such losses can be used only against speculative profits. It is not clear why this principle could not be applied to virtual assets.