Executive Summary
The Finance Minister (FM) in her Budget Speech 2023-24 stated that India’s economic growth in current
year is estimated at 7% inspite of a massive global slowdown caused by COVID-19 and a War, reflecting
India’s pace toward a brighter future. The world has recognised the Indian economy as a ‘bright star’
and Indian economy is now the 5th largest economy in size, in the world. Our economy has now become
a lot more formalised as reflected in the EPFO membership more than doubling to 27 crore, and 7,400
crore digital payments of INR 126 lakh crore through UPI in 2022. In these times of global challenges,
the G20 Presidency gives us a unique opportunity to strengthen India’s role in the world economic
order.
The Union Budget 2023-24 encourages and emphasizes the substantial need of Make in India with a
special impetus on Artificial Intelligence, Fintech, 5G services, IoT etc. paving way to Make AI in India
and Make AI work for India. Recognising Capital investment as driver of growth and jobs, the Union
Budget has increased its outlay to INR 10 Lakh Crore, a significant rise of 33%, amounting to 3.3% of the
GDP. The ‘Effective Capital Expenditure’ of the Centre is budgeted at INR 13.7 lakh crore, which will be
4.5 per cent of GDP. Government has also laid emphasis on the emerging need to incorporate for
efficient end-to-end mechanisms. MSMEs and Start-ups are acknowledged to the driving forces of the
economy, giving way to innovation and development. One of the key areas of leading resource
enrichment has been Centre’s exclusive focus on engaging R&D amenities. Other areas covered in this
Budget includes digital public infrastructure for agriculture, agriculture accelerator fund, agriculture
credit, medical research and pharma innovation, multidisciplinary courses for medical devices,
simplification of KYC processes, common business identifier (PAN), relief for MSMEs, settling
contractual disputes, green hydrogen and energy transition, credit guarantee for MSMEs, review of
financial sector regulations, GIFT IFSC, capacity building in securities market etc. in its endeavours to
build India.
In this document, we have broadly covered the highlights of the Union Budget 2023-24 along with the
initial Impact Assessment of Tax and Investment aspects for Corporates, MSMEs and Start-ups.
Major Provisions for MSMEs and Start-ups
Start-ups
o Extension of Date of Incorporation for Eligible Start-ups
The existing provisions of the section 80-IAC of the Act, inter alia, provides for a deduction of an amount equal to hundred percent of the profits and gains derived from an eligible business by an eligible start-up for three consecutive assessment years out of ten years, beginning from the year of incorporation, at the option of the assessee, subject to the certain conditions. To encourage the start-up landscape in India, it is proposed to amend the provisions of Section 80-IAC of the Act to extend the period of incorporation of eligible start-up to 1st April 2024.
o Relief to Start-ups in Carrying Forward and Setting off Losses
Section 79 of the Act restricts carrying forward and setting off losses in cases of companies, other than the companies in which the public is substantially interested. It prohibits setting off carried forward losses if there is change in shareholding. The carried forward loss is set off only if at least 51% shareholding (as on the last date of the previous year) remains same with the company on the last date of the previous year to which the loss belongs.
However, relaxation has been provided to eligible start-ups as referred to in section 80-IAC of the Act for the carry forward & set off losses for a time of seven years beginning from the year in which such company has been incorporated. It is proposed to increase the given period from seven years to ten years.
o An Agriculture Accelerator Fund will be set-up to encourage agri-startups by young entrepreneurs in rural areas. The Fund will aim at bringing innovative and affordable solutions for challenges faced by farmers. It will also bring in modern technologies to transform agricultural practices, increase productivity and profitability.
o Fintech services in India have been facilitated by our digital public infrastructure including Aadhaar, PM Jan Dhan Yojana, Video KYC, India Stack and UPI. To enable more Fintech innovative services, the scope of documents available in DigiLocker for individuals will be expanded.
o One hundred labs for developing applications using 5G services will be set up in engineering institutions to realise a new range of opportunities, business models, and employment potential. The labs will cover, among others, applications such as smart classrooms, precision farming, intelligent transport systems, and health care applications.
MSMEs
o Promoting Timely Payment to MSMEs
Insertion of a new clause has been proposed in section 43B of the Act to provide that any sum payable by the assessee to micro or small enterprise beyond the time limit specified in Section 15 of MSME Development Act, 2006 shall be allowed as a deduction on actual payment. It is further proposed that the proviso to Section 43B of the Act shall not apply to such payments meaning that the MSME payments would have to be paid by the end of the Financial Year for claiming them as expenses.
o Preventing misuse of Presumptive Schemes under Section 44BB and Section 44BBB
It is proposed to insert a new subsection to Section 44B and to Section 44BBB of the Act to provide that notwithstanding anything contained in Section 32(2) and Section 72(1), where an assessee declares profits and gains of business for any previous year in accordance with the provisions of presumptive taxation under these sections, no set off from unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year.
o Increasing threshold limit for presumptive taxation schemes
In order to ease compliance and to promote non-cash transactions, it is proposed to increase the
threshold limits for the presumptive scheme in section 44AD and section 44ADA of the Act on fulfilment of certain conditions.
a. under section 44AD of the Act, for eligible businesses, where the amount or aggregate of the amounts received during the previous year, in cash, does not exceed five percent of the total turnover or gross receipts, a threshold limit of three crore rupees will apply.
b. under section 44ADA of the Act, for professions referred to in sub-section (1) of section 44AA of the Act, where the amount or aggregate of the amounts received during the previous year, in cash, does not exceed five per cent of the total gross receipts, a threshold limit of seventy-five lakh rupees will apply.
Investment Provisions
Bringing the Non-residents within the ambit of Section 56(2)(viib) to eliminate tax avoidance
Section 56(2)(viib) of the Act, inter alia, provides that where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income-tax under the head ‘Income from other sources’. Rule 11UA of the Income-tax Rules provides the formula for the computation of the fair market value of unquoted equity shares for the purposes of the Section 56(2) (viib) of the Act. However, the said section is not applicable for consideration (share application money/ share premium) received from non-resident investors.
It is now proposed to include the consideration received from a non-resident also under the ambit of clause (viib) by removing the phrase ‘being a resident’ from the said clause. This will make the provision applicable for receipt of consideration for the issue of shares from any person irrespective of his residency
status.
Accordingly, fresh issue of shares to Non Residents of a closely held company would also require valuation of such shares from a Merchant Banker where DCF method is applied.
Taxation of Life Insurance Policies
It has been proposed to tax income from insurance policies (other than ULIP) having premium or aggregate of premium above five lakh rupees in a year. Income is proposed to be exempt in case of the
death of the insured person. This income shall be taxable under the head ‘income from other sources’.
The deduction shall be allowed for a premium paid if such premium has not been claimed earlier. Currently, Clause (10D) of Section 10 of the Act provides for Income tax exemption on the sum received under a life insurance policy, including bonus. However, high net worth assesses has been investing in policies with large premiums and claiming exemptions on the sum received under the policy.
With this, the growth of insurers could slow down significantly and its models would need review as
tax efficient investment tools.
Excluding NBFC from restriction on Interest Deductibility
It is proposed to amend Section *94B (3) of Act to provide a carve out to certain class of NBFCs and to
provide that nothing contained in Section 94B (1) shall apply to:-
a. an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance; or
b. such class of non-banking financial companies as may be notified by the Central Government in
the Official Gazette in this behalf.
*Section 94B of the Act provides restrictions on deduction of interest expense of any debt issued by
non-resident, being an associated enterprise of the borrower. This section was inserted to address the
issue of erosion via excess interest deductions.
Strategic Disinvestment
Section 72A of the Act relates to provisions of carry forward and set off accumulated loss and unabsorbed
depreciation in amalgamation or demerger. Section 72AA of the Act deals with the mechanism for one or
more banking companies in the scheme of amalgamation. To further ease the process, it is proposed to amend the definition of ‘strategic disinvestment’ in the section 72A of the Act so as to provide that strategic disinvestment shall mean sale of shareholding by the Central Government, the State Government or Public Sector Company in a public sector company or company which results in
A. reduction of its shareholding below 51%
B. the transfer of control to the buyer.
The requirement of control may be carried out by either of the three or any two of them or all of them.
It is also proposed to amend section 72AA which is applicable to banking companies, to allow the carry
forward of accumulated losses and unabsorbed depreciation allowance in an amalgamation arrangement
if it takes place within 5 years of strategic disinvestment.
TCS on Foreign Remittance
The budget proposes to increase TCS on foreign remittance under the LRS scheme. Section 206C (1G)
provides for TCS on foreign remittance through Liberalized Remittance Scheme and on sale of overseas
tour package. The following changes have been made
Limiting the roll over benefit claimed under section 54 and section 54F
Currently, Section 54 and 54F of the Income Tax Act, 1961 allow deduction on Capital Gains arising from
transfer of long-term capital asset, if the assessee within a period of one year before or two years after
the date of transfer, purchases any residential property in India, or within a period of three years of transfer constructs any residential property in India.
It is now proposed to impose a maximum limit to the investment amount in residential property at ten
crores. This would limiting the deduction under Section 54 and 54F to ten crore rupees.
Defining the cost of acquisition for computing capital gains for certain intangible assets
There are certain assets like intangible assets or any sort of right for which no consideration has been paid
for acquisition. The cost of acquisition of such assets is not clearly defined as ‘nil’ in the present provision.
Therefore, it is proposed to amend the provision of Sub-section (2)(b)(1) and Sub-section (2)(a) of Section
55 so as to provide the ‘cost of acquisition’ and ‘cost of improvement’ as ‘nil’.
Market Linked Debentures
Currently, MLDs are taxed as a long-term capital gain at the rate of 10% without indexation. However
these instruments are in the nature of derivates which are normally taxed at applicable rates. Accordingly,
In order to tax the capital gains arising from the transfer or redemption or maturity of these securities
under short-term capital gains, it has been proposed to insert a new section 50AA.
As per Section 50AA, the full value of the consideration received because of transfer or redemption or
maturity of Market Linked Debentures will be reduced by the cost of acquisition and expenditure incurred
exclusively and wholly in making the transaction.
Tax Incentives to International Financial Services Centre
Extension in the relocation of fund:
It is proposed to amend clause (b) of the Explanation to clause (viiad) of Section 47 of the Act to extend
the date for the transfer of assets of the original fund, or of its wholly owned special purpose vehicle to a
resultant fund in case of relocation to 31st March 2025 from 31st March 2023.
Income of Non-resident on the transfer of Offshore Derivative Instruments
To remove the double taxation, it is proposed to amend clause (4E) of section 10 of the Act, to also provide an exemption to any income distributed on the offshore derivative instruments, entered with an offshore banking unit of an International Financial Services Centre as referred to in sub-section (1A) of section 80LA, which fulfils such conditions as may be prescribed.
It has also been provided that such exempted income shall include only that amount which has been
charged to tax in the hands of the IFSC Banking Unit under section 115AD.
Tax Avoidance through distribution by business trusts to unit holders
Currently, Section 115UA of the Act provides a pass-through status to business trusts in respect to interest income, dividend income received by the business trust from a special purpose vehicle in the case of both REIT and InVIT, and rental income in the case of REIT. Such income is taxable in the hands of unitholders.
However, repayment of debt is not taxed at either of the sources which leads to dual non-taxation. To
rationalize the same, it has been proposed to make such a sum received by the unit holders taxable in the
hands of unitholders.
Class (xii) in Section 56(2) of the Act will be added stating that such income shall be chargeable under the
head “income from other sources”. Such a sum shall also include:
a. Any sum which is not in the nature of income as referred to in clause (23FC) or clause (23FCA) of
Section 10 of the Act.
b. Is not chargeable to tax under Section 115UA (2) of the Act.
It is also proposed that where the sum received by the unitholder from a business trust is for the redemption of units held by him, the sum received shall be reduced by the cost of acquisition to the extentsuch cost does not exceed the sum received.
Deeming Provision Under Section 9 to Gift Not-Ordinarily Resident
Under the Act, income which, inter-alia, is deemed to accrue or arise in India during a year is chargeable
to tax. Sub-section (1) of section 9 of the Act is a deeming provision providing the types of income deemed to accrue or arise in India.
In view of the above, it is proposed to amend clause (viii) of sub-section (1) of section 9 of the Act so as to extend this deeming provision to sum of money exceeding fifty thousand rupees, received by a not
ordinarily resident, without consideration from a person resident in India.
Amendments as related to Business Reorganization
Section 170A of the Act was inserted vide Finance Act, 2022 in order to make provisions for giving effect
to the order of business reorganisation issued by tribunal or court or an Adjudicating Authority under the
Insolvency and Bankruptcy Code, 2016.
It is proposed to substitute section 170A, to provide that notwithstanding anything contained in section
139, in a case of business reorganisation, where prior to the date of order of the tribunal or the High Court or Adjudicating Authority as defined in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016, any return of income has been furnished for any assessment year relevant to a previous year, by an entity to which such order applies, the successor shall furnish, within a period of six months from the endof the month in which the said order was issued, a modified return in the form and manner, as may be prescribed, in accordance with and limited to the said order. This would also enable modification of the returns filed by the predecessor wherever required.
It is also proposed to define the following terms for the purposes of this section:
a. “Business reorganisation” means the reorganisation of business involving the amalgamation or
demerger or merger of business of one or more persons;
b. “successor” means all resulting companies in a business reorganisation, whether or not the
company was in existence prior to such business reorganisation.
Rationalization of Other Tax Provisions
o Removing the minimum threshold of INR 10,000/- for TDS and clarifying taxability relating to
online gaming
o Not treating conversion of gold into electronic gold receipt and vice versa as capital gain: To
promote the concept of Electronic Gold, it is proposed to exclude the conversion of physical form
of gold into EGR and vice versa by a SEBI registered Vault Manager from the purview of ‘transfer’
for the purposes of Capital gains.
o Reducing the TDS rate from 30 per cent to 20 per cent on taxable portion of EPF withdrawal in
non-PAN cases; and
o Decriminalization of Section 276A: It is proposed to decriminalize certain acts of omission of
liquidators under section 276A of the Act with effect from 1st April, 2023.
o For the business establishments required to have a Permanent Account Number (PAN), the PAN
will be used as the common identifier for all digital systems of specified government agencies.
This will bring ease of doing business; and it will be facilitated through a legal mandate.
Personal Tax Amendment: New Tax Regime as Default
o The tax rates for personal income tax have been made attractive under the new tax regime with
Rebate under section 87A raised to INR 7 Lacs. The maximum rate of personal income tax has also
been reduced from 42.74 per cent to 39 per cent by adjustment in surcharge.
Developments in furtherance of Make in India
Green Mobility
To avoid cascading of taxes on blended compressed natural gas, it has been propose to exempt excise
duty on GST-paid compressed bio gas contained in it.
To further provide impetus to green mobility, customs duty exemption is being extended to import of
capital goods and machinery required for manufacture of lithium-ion cells for batteries used in electric
vehicles.
Electronics
Relief has been provided in customs duty on import of certain parts and inputs like camera lens and
continue the concessional duty on lithium-ion cells for batteries for another year.
To promote value addition in manufacture of televisions, it has been proposed to reduce the basic
customs duty on parts of open cells of TV panels to 2.5 per cent.
Marine Products
To further enhance the export competitiveness of marine products, particularly shrimps, duty is being
reduced on key inputs for domestic manufacture of shrimp feed.
Lab Grown Diamonds
The industry is moving towards Lab Grown Diamonds, therefore to seize the opportunity, basic customs
duty on seeds used in their manufacturing has been reduced.
Metals
To facilitate availability of raw materials for the steel sector, exemption from Basic Customs Duty on raw
materials for manufacture of CRGO Steel, ferrous scrap and nickel cathode is being continued.
Similarly, the concessional BCD of 2.5 per cent on copper scrap is also being continued to ensure the
availability of raw materials for secondary copper producers who are mainly in the MSME sector.
Electrical
To rectify inversion of duty structure and encourage manufacturing of electric kitchen chimneys, the basic
customs duty on electric kitchen chimney is being increased from 7.5 per cent to 15 per cent and that on
heat coils for these is proposed to be reduced from 20 per cent to 15 percent.
The below table summarizes the existing and proposed Custom Duty structure on different Industries.
