Raghavan Ramabadran, Bharathi Krishnaprasad and Sahana Rajkumar of tax specialist law firm Lakshmikumaran & Sridharan discuss the significant amendments proposed in the budget
Apart from laying out the broad plans of the government in respect of policies and financial outlay allocated to different sectors, the budget also proposes significant amendments to tax laws. The budget for 2023-24 was presented by Finance Minister Nirmala Sitharaman on 1 February 2023.
The tax relief measures for the common man have always been an expectation in every budget. In 2020, individual taxpayers were granted an option to choose between two tax regimes: a default tax regime, which offered certain deductions that could be claimed (the old regime), and an optional tax regime that provides for reduced rates of taxes while however denying the deductions (the new regime).
The present budget proposes a further reduction in the rates and an increased tax rebate in the new regime, while making the new regime the default one and granting an option to choose the old regime.
The proposals are in line with the intent expressed by the government to eventually phase out exemptions and deductions, and build a simpler framework of tax law. The increased tax rebate would effectively mean that any taxpayer under employment with a gross income of up to INR750,000 (USD9,000) will now not be required to pay taxes.
Another significant amendment proposed in the budget concerns taxability of winnings from online gaming. Under the present legal provisions, winnings from lotteries, online games, races, cards and other games of any sort are taxed at the highest rate of 30%.
There also exists a tax deduction obligation on the person paying such winnings when the same exceeds a threshold (INR10,000). The present budget proposes carving out a separate taxing mechanism for net winnings from online gaming. These winnings would continue to be taxed at the highest rate of 30%, and a separate mechanism for withholding of taxes is also proposed to be introduced.
The manner of computing net winnings would be notified in due course. It is pertinent to note that the proposed tax withholding provisions, if enacted, would require taxes to be withheld irrespective of the quantum of the net winnings, as opposed to the threshold-based deduction obligation that was earlier provided.
The budget also proposes to strengthen the government’s initiatives to protect the interests of micro and small enterprises (enterprises classifiable as “medium” are not covered). Claiming business expenditures as a deduction on an accrual basis in calculating income is permitted in law.
However, over time, based on socioeconomic or other significant factors, certain deductions were permitted only when the cash outflow is incurred in respect of the expenditure. The expenditures in respect of which the payments are to be made to a micro or small enterprise are also proposed to be brought into this ambit, to ensure that timely payments are made by such entities.
Startups in India are incentivised with a deduction of 100% of the business profits for a period of three consecutive tax years out of the first 10 tax years from its incorporation. This benefit was available to startups that were incorporated on or before 1 April, 2023. The benefit is now proposed to be extended to startups that are incorporated on or before 1 April, 2024.
An issue surrounding withholding of taxes relates to whether beneficial rates available in the tax treaties can be applied to tax withholding. A decision of the Supreme Court in India had held that where a specified rate is mentioned relating to tax withholding in the domestic tax law in India, that rate ought to be applied as opposed to any lower rate that may be present in the tax treaty.
When a higher withholding is made, the recipient of income can claim any refund only by filing a valid tax return in India. Recognising that such a higher withholding can act as a disincentive to investment, the budget proposes to extend treaty benefits to tax withholding on payouts made in respect of mutual fund holdings to a non-resident.
Deduction and collection of taxes at source has served not only as a collection mechanism, but also as a ready source of information to tax authorities concerning transactions between different parties. The present budget proposes to increase the rate of tax collection on remittances made in respect of overseas tour packages and other foreign remittances (other than remittances for the purpose of education or medical treatment) from 5% to 20%.
The tax law in India provides a requirement to deduct tax at source, at specified rates, in respect of different categories of payments made. Taking cognisance of the fact that in certain cases such a tax deduction may cause hardship to the recipient of income (for example, in a scenario where such income is exempt or where a person is already incurring losses and consequently not liable to pay any tax), the law permits such a person to apply for a tax deduction at a lower or NIL rate.
This benefit to make an application was applicable only to certain provisions of tax deduction. This benefit is now proposed to be extended to payments made by a business trust (a real estate investment trust or infrastructure investment trust) to unit holders. This amendment has been proposed taking specific cognisance of sovereign wealth funds and pension funds that enjoy an exemption under the tax law.
The tax litigation process in India has changed significantly with the introduction of a faceless mechanism of assessments and appeals (at the first level). To implement an effective litigation process that is entirely transparent, reducing the quantum of pending litigations at any given point in time becomes equally crucial.
The present budget proposes to add another level of officers as first appellate authorities (joint commissioner, appeals) before whom appeals can be filed. The addition of more appellate officers at the first level has been done to speed up the litigation process.
In line with the measures recommended in the final report of Action Plan 4 on Base Erosion and Profit Shifting, to curb the practice of claiming excess interest deductions for a tax advantage, a limit on interest deductions was introduced in respect of interest expenditure incurred for borrowings made from a non-resident associated enterprise.
This restriction was, however, not applicable to an entity engaged in the business of banking and insurance, considering their unique business model. This benefit is now proposed to be extended to non-banking financial companies (NBFCs) that also engage in the business of financing, similar to a bank.
At present, if a closely held or an unlisted entity receives share capital from a person resident in India, and the value per share subscribed to is higher than the face value and the fair market value of the share, then the entity receiving such capital is levied a tax on the amount exceeding such fair market value. This provision was introduced as a measure to curb money laundering practices.
However, taxing such an amount was not possible if such share capital was received from a person who was a non-resident. To strengthen the angel tax provisions, receipt of share capital from a non-resident has also been included within the ambit of angel tax provisions.
Based on the recommendations of the GST Council during its 48th meeting, the Finance Bill has proposed to decriminalise certain offences under the Goods and Services Tax (GST) such as tampering or destroying material evidence or documents, obstructing officers in their duties, and failing to supply information or providing false information.
Further, the threshold for prosecution has been increased from INR10 million to INR20 million for all offences except what is colloquially understood as fake invoicing or bill trading. Having said that, the intention of the framers to come down heavily on such persons involved in issuing invoices without any actual supply of goods or services is evident.
Such persons would also no longer be eligible to compound their offence once the changes proposed in this budget are brought into force. All other persons eligible to compound would become entitled to pay not less than 25% of the tax demand involved, which can now go up to 100% of the demand. As the law stands to date, the minimum threshold is 50% of the tax demand, and it can go up to 150%.
There is a clear shift in the policy framework, possibly with an intention to facilitate trade and promote the ease of doing business in India by way of providing a reprieve to taxpayers committing certain types of offences that are now being perceived as less serious than others.
Criminalising tax offences and applying effective sanctions is recommended by the OECD to act as a deterrent and send a message about the fairness and integrity of the law. Yet the government understands the importance of a balancing act between policy and business, and through the changes proposed in the budget a line has sought to be drawn between non-compliant and criminal behaviour.
The Budget 2023 bore witness to changes proposed to the GST law governing digital supplies such as goods/services sold through electronic commerce and services facilitated through information technology (referred to as “online information and database access or retrieval services”).
It is evident that the framers understand that the future is digital and thus the law needs to evolve to catch up with the technological transformation. Considering that various small-scale traders have gone digital to survive the pandemic, the Finance Bill, 2023, proposes to extend the benefit of the composition levy to intrastate suppliers of goods through e-commerce.
Considering the leeway provided to suppliers on one end, screws have sought to be tightened at the other end through heavy penal consequences on the e-commerce platforms that facilitate supplies by persons who are not eligible to transact. The primary onus would lie on the e-commerce platforms to create safeguards that ensure they only facilitate supplies for eligible entities.
Further, the law relating to online information and database access or retrieval services rendered to non-taxable online recipients (i.e., unregistered persons located in India) has been sought to be allegedly streamlined by attempting to reduce the scope for interpretation where significant human intervention is involved in effecting such supplies.
Time will tell if these proposed changes simplify the tax regime or lead to further issues. Cross-border suppliers of such services should re-evaluate their tax positions, both for the past and future, to avoid mitigable disputes.
As per the extant law, the place of supply where goods are transported to a location outside India is the place of destination of the goods. Accordingly, when a shipping line and a recipient are located in India, and such shipping line is appointed to deliver goods to a place outside India, the service rendered by the shipping line would qualify as an interstate supply on which integrated goods and services tax (IGST) is payable.
This position gave rise to several questions with regard to eligibility to input tax credits, qualification as an export of service, etc. Some of these issues were sought to be clarified by the Central Board of Indirect Taxes and Customs vide a recent circular, dated 27 December 2022.
However, the Finance Bill, 2023, proposes to delete the above-mentioned place of supply provision in order to put all doubts to rest. Going forward, the place of supply of such transportation services will be the location of the recipient, and if the shipping line is located in the same place, only central goods and service tax (CGST) and state goods and service tax (SGST) would be payable.
The impact of this proposal to past treatments, where entities have remitted CGST+SGST instead of IGST due to prevailing confusion in the industry, remains to be seen.
For the sake of brevity, all the budget proposals from a direct and indirect tax perspective have not been covered by this article. The intention is to only throw light on some of the important proposals that stimulate discussion and thought.
The common aim of the government through the budget proposals has been to stabilise the tax structures of the country through simplification and rationalisation. Although the proposed measures will not be entirely free from trials, there is no doubt that challenges are the pathway to progress.
Raghavan Ramabadran is an executive partner, Bharathi Krishnaprasad is an associate director and Sahana Rajkumar is a principal associate at leading tax firm Lakshmikumaran & Sridharan. The views expressed in this article are personal.
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