Union Budget 2022-An Impetus for Growth

Executive Summary – The Finance Minister (FM) in her Budget Speech stated that India’s growth in FY21-22 is estimated at 9.2 percent and that Budget 2022 seeks to lay the foundation and give a futuristic and inclusive blueprint to steer the economy over the AmritKaal (next 25 years)- from India at 75 to India at 100 by achieving the following goals during this period:

• Complementing the macro-economic level growth focus with a micro-economic level all-inclusive welfare focus,
• Promoting digital economy &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.

Artificial Intelligence, Geospatial Systems and Drones, Semiconductor and its eco-system, Space Economy, Genomics and Pharmaceuticals, Green Energy, and Clean Mobility Systems have been mentioned as “Sunrise Opportunities” having immense potential to assist sustainable development at scale and modernize the country as they provide employment opportunities for youth, and make Indian industry more efficient and competitive. Accordingly, supportive policies, regulations and government contribution to build domestic capacities and promotion of R&D in these sunrise opportunities will be provided.

As an Impetus for Growth, the FM acknowledged the need of taking the lead and making capital investments by the Government to support the needs of the economy. The same will pump-prime the private investment and demand in FY 22-23. Accordingly, the outlay for capital expenditure in this Budget has been stepped up sharply by 35.4 per cent to Rs. 7.50 lakh crore in FY22-23.With Grants-in-Aid to States, the ‘Effective Capital Expenditure’ of the Central Government is estimated at Rs. 10.68 lakh crore in  FY 22-23, which will be @ 4.1 % of GDP.

THE IMPORTANT “DIRECT TAX” PROVISIONS IN UNION BUDGET 2022 ARE SUMMARISED HEREIN-

SCHEME FOR TAXATION OF “VIRTUAL DIGITAL ASSETS”

• Virtual digital assets (Cryptocurrency) have gained tremendous popularity in recent times and the volumes of trading in such digital assets has increased substantially.

• Section 2 (47A) is proposed to be inserted in the Act to define, a “virtual digital asset”to mean any information or code or number or token (not being Indiancurrency or any foreign currency), generated through cryptographic means orotherwise, by whatever name called, providing a digital representation of value whichis exchanged with or without consideration, with the promise or representation ofhaving inherent value, or functions as a store of value or a unit of account and includesits use in any financial transaction or investment, but not limited to, investmentschemes and can be transferred, stored or traded electronically. Non fungible token and; any other token of similar nature are included in the definition.

• The proposed section 115BBH provides that the income taxon transfer of any virtual digital assetshall be payable at the rate of 30%.

• 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 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 u/s 56.

INCENTIVES & ANNONCEMENTS FOR START-UPS&CORPORATES

• Extension of date of incorporation for eligible start-ups for Tax exemption: Section 80-IAC provides fortax incentive for three consecutive years out of ten years from incorporation to eligible start-ups established before 31.3.2022. The period of incorporation of the eligible start-ups has now been extended by one more year, i.e. up to 31.03.2023 for providing such tax incentive.

• Extension of incentives for newly incorporated manufacturing entities under concessional tax regime: For establishing a globally competitive business environment for newly incorporated domestic manufacturing companies, a concessional tax regime of 15 per cent tax was introduced. The last date for commencement of manufacturing or production under section 115BAB has now been extended by one year i.e., from 31st March 2023 to 31st March 2024.

• The long-term capital gains (LTCG) on listed equity shares, units etc. are liable to maximum surcharge of 15%, while the other long term capital gains are subjected to a gradedsurcharge which goes up to 37%. It is now proposed to cap the surcharge on all LTCG @15% to facilitate start-up’s and their Employees holding ESOP’s.

• Similarly there are several works contracts whose terms and conditions mandatorily require formation of a consortium. The members in the consortium are generally companies and, in such cases, the income of these AOPs has to suffer a graded surcharge upto 37%, which is a lot more than the surcharge on the individual companies. Accordingly, it is proposed to cap the Surcharge of these AOP’s @ 15%.

• Start-ups will be promoted to facilitate ‘Drone Shakti’ through varied applications and for Drone-As-A-Service (DRAAS).Use of ‘Kisan Drones’ will be promoted for crop assessment, digitization of land records, spraying of insecticides, and nutrients.

• A fund with blended capital, raised under the co-investment model, will be facilitated through NABARD. This is to finance startups for agriculture & rural enterprise, relevant for farm produce value chain. The activities for these startups will include, inter alia, support for FPOs, machinery for farmers on rental basis at farm level, and technology including IT-based support.

• Data Centres and Energy Storage Systems including dense charging infrastructure and grid-scale battery systems will be included in the harmonized list of infrastructure. This will facilitate credit availability for digital infrastructure and clean energy storage.

• Government backed Funds NIIF and SIDBI Fund of Funds have provided scale capital creating a multiplier effect. For encouraging important sunrise sectors such as Climate Action, Deep-Tech, Digital Economy, Pharma and Agri-Tech, the government will promote thematic funds for blended finance with the government share being limited to 20% and the funds being managed by private fund managers. 

• Electric Vehicle (EV) Industry: Battery Swapping Policy

Considering the constraint of space in urban areas for setting up charging stations at scale, a battery swapping policy will be brought out and inter-operability standards will be formulated. The private sector will be encouraged to develop sustainable and innovative business models for ‘Battery or Energy as a Service’. This will improve efficiency in the EV eco-system.

• Defence Industry: The Government is committed to reducing imports and promoting AtmaNirbharta in equipment for the Armed Forces. 68% of the capital procurement budget will be earmarked for domestic industry in 2022-23, up from 58% in 2021-22. Defence R&D will be opened up for industry, startups and academia with 25% of defence R&D budget earmarked. Private industry will be encouraged to take up design and development of military platforms and equipment in collaboration with DRDO and other organizations through SPV model.

• An expert committee will be set up to examine regulatory and other frictions and suggest appropriate measures for scaling up of Venture Capital and Private Equity investments facilitating start-up and growth ecosystem.

PLI SCHEME FOR SOLAR AND TELECOM SECTOR

• SolarPower: To facilitate domestic manufacturing for the ambitious goal of 280 GW of installed solar capacity by 2030, an additional allocation of INR 19,500 crore for Production Linked Incentive for manufacture of high efficiency modules with priority to fully integrated manufacturing units from polysilicon to solar PV modules, will be made.

• Telecom : A scheme for design-led manufacturing will be launched to build a strong ecosystem for 5G as part of the Production Linked Incentive Scheme.

To enable affordable broadband and mobile service proliferation in rural and remote areas,  five per cent of annual collections under the Universal Service Obligation Fund will be allocated. This will promote R&D and commercialization of technologies and solutions.

MSME SCHEMES WITH HOSPITALITY PUSH

• Extension of Emergency Credit Line Guarantee Scheme (ECLGS) with focus on hospitality sector The ECLGS will be extended up to March 2023 and its guarantee cover will be expanded by Rs. 50,000 crore to total cover of Rs. 5 lakh crore, with the additional amount being earmarked exclusively for the hospitality and related enterprises.

• will be revamped with required infusion of funds to facilitate additional credit of Rs. 2 lakh crore for Micro and Small Enterprises and expand employment opportunities.

• Raising and Accelerating MSME Performance (RAMP) programme with outlay of Rs. 6,000 crore over 5 years will be rolled out. This will help the MSME sector become more resilient, competitive and efficient.

INTRODUCING NEW UPDATED RETURN FOR OMMISSIONS

• sub-section (8A) in section 139) permitting taxpayers to file an Updated Return on payment of additional tax equal to twenty-five percent or fifty percent on the tax and interest due on the additional income furnished. This updated return can be filed within two years from the end of the relevant assessment year.

RATIONALISATION OF ALTERNATE MINIMUM TAX RATE AND SURCHARGE FOR COOPERATIVE SOCIETIES

• In order to provide parity between co-operative societies and companies, it is proposed to modify sub-section (4) of section 115JC to reduce the AMT rate at which co-operative societies are liable to pay income tax to 15%.
• The surcharge on co-operative societies has also been reduced to 7 percent for those having total income of more than Rs. 1 crore and up to Rs. 10 crores to support its members who are mostly from rural and farming communities.

STRATEGIC DISINVESTMENT OF PUBLIC SECTOR COMPANIES

• Facilitating strategic disinvestment of public sector companies: It order to facilitate the strategic disinvestment of public sector companies, it is proposed to amend section 79 of the Act to provide that the provisions of sub-section (1) of section 79 shall not apply to an erstwhile public sector company subject to the condition that the ultimate holding company of such erstwhile public sector company, immediately after the completion of strategic disinvestment, continues to hold, directly or through its subsidiary or subsidiaries, at least fifty one per cent of the voting power of the erstwhile public sector company in aggregate.

RATIONALIZATION OF TDS ON SALE OF IMMOVABLE PROPERTY

• In order to remove inconsistency, it is proposed to amend section 194-IA of the Act to provide that in case of transfer of an immovable property (other than agricultural land), TDS is to be deducted at the rate of one percent of such sum paid or credited to the resident or the stamp duty value of such property, whichever is higher.

LITIGATION MANAGEMENT TO AVOID REPETITIVE APPEALS BY THE DEPARTMENT

• 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. This will greatly help in reducing the repeated litigation between taxpayers and the department.

TAX INCENTIVES TO IFSC

• To further promote the IFSC, 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

CLARIFICATION IN RELATION TO ‘HEALTH AND EDUCATION CESS’ AS NON ALLOWABLE BUSINESS EXPENDITURE

• It has been clarified that any surcharge or cess on income and profits is not allowable as business expenditure. This amendment will take effect retrospectively from 1st April, 2005.

DETERRENCE AGAINST TAX-EVASION

• It has now been provided that no set off, of any loss shall be allowed against undisclosed income detected during search and survey operations.

AMENDMENTS RELATED TO SUCCESSOR ENTITY SUBSEQUENT TO BUSINESS REORGANIZATION (M&A / NCLT Orders)

• It is proposed to insert a sub-section (2A) to section 170, to provide that the assessment or other proceedings pending or completed on the predecessor in the event of a business reorganization, shall be deemed to have been made on the successor.

• It is proposed to insert a new section 170A to the Act, to enable for the entities going through such business reorganization, for filing of modified returns for the period between the date of effectivity of the order and the date of issuance of final order of the competent authority.

• It is proposed to insert a new section 156A to the Act to give effect to the orders of the competent authority and to modify such demands in accordance with such directions.

PROVISIONS PERTAINING TO BONUS STRIPPING AND DIVIDEND STRIPPING TO BE MADE APPLICABLE TO SECURITIES AND UNITS

• The current provisions of sub-section (8) of section 94 of the Act do not apply to bonus stripping undertaken in case of securities. It is also not applicable to units of InvIT or REIT or AIFs as the definition of the term “unit” has not been modified subsequent to introduction of provisions relating to RETIs, InvITs etc.

Further, the current provisions of sub-section (7) of section 94 of the Act, i.e. provisions pertaining to dividend stripping, are not applicable to the units of new pooled investment vehicles such as InvIT or REIT or AIFs. Accordingly, these provisions are being amended to make the said provision applicable to securities as well as include units of business trusts such as InvIT, REIT and AIF, within the definition of units.

CLARIFICATION REGARDING DEDUCTION ON PAYMENT OF INTEREST ONLY ON ACTUAL PAYMENT

• Section 43B of the Act provides for certain deductions to be allowed only on actual payment. It is provided that deduction under section 43B on account of conversion of interest payable on an existing loan into a debenture on theground that such conversion is a constructive discharge of interest liability and,therefore, amounted to actual payment shall not be allowed.

MISC. DIRECT TAX PROVISIONS

• Parity between employees of State and Central government under section 80CCD on deduction of NPS contribution made by the Governments to the account of their employee @14%.This amendment will take effect retrospectively from 1st April, 2020.

• Rationalizing TDS Provisions  As a business promotion strategy, TDS has been proposed by the person passing any benefits to their agents, if the aggregate value of such benefits exceeds Rs. 20,000 during the financial year. 

• Withdrawal of concessional rate of taxation on dividend income under section115BBD on the dividend income received by an Indian company from a foreign company in which the said Indian company holds 26% or more in nominal value of equity shares.

• Modification in definition of the term “slump sale”:

Vide the Finance Act, 2021, the definition of “slump sale” was amended to expand its scope to cover all forms of transfer under slump sale. However, inadvertently, in the last sentence there is reference to the word “sales” instead of “transfer”. Therefore, it is proposed to carry out consequential amendment by amending the provision of clause (42C) of section 2 of the Act, to substitute the word “sales” with the word “transfer”. This amendment will take effect retrospectively from the 1st April, 2021.

SOME IMPORTANT ANNOUNCEMENTS IN UNION BUDGET 2022 ARE ALSO SUMMARISED BELOW –

“DIGITAL RUPEE” TO BE ISSUED BY RBI

• Introduction of Central Bank Digital Currency (CBDC) will give a big boost to digital economy. Digital currency will also lead to a more efficient and cheaper currency management system. It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting FY 22-23.

INSOLVENCY AND BANKRUPTCY CODE AMENDMENTS

• Necessary amendments in the IBC Code will be carried out to enhance the efficacy of the resolution process and facilitate cross border insolvency resolution.

ACCELERATED VOLUNTARY WINDING-UP

The Centre for Processing Accelerated Corporate Exit (C-PACE) with process re-engineering, will be established to facilitate and speed up the voluntary winding-up of companies from the currently required 2 years to less than 6 months.

SPECIAL ECONOMIC ZONES (SEZ) REPLACEMENT

The Special Economic Zones Act will be replaced with a new legislation that will enable the states to become partners in ‘Development of Enterprise and Service Hubs’. This will cover all large existing and new industrial enclaves to optimally utilise available infrastructure and enhance competitiveness of exports