How Budget 2022 will impact corporates

Jaiman Patel and Jugal Kajaria

Budget 2022 has been issued in the backdrop of Economic Survey 2021-22, wherein a robust growth of 8-8.5 percent has been forecasted for the financial year 2022-23. Overall, Finance Minister Nirmala Sitharaman has tried to ensure that the tax rates and regime is consistent with the last year, so as to provide avenue for the corporates to continue business without any major tax changes.

The article provides a summary of major corporate tax amendments introduced in the Budget 2022:

Education Cess And Surcharge

The current provisions state that any sum paid on account of any ‘rate or tax’ levied on business profits shall not be allowed as expenditure in computing the total income. However, certain court rulings allowed ‘education cess’ as deductible expenditure. It is now clarified (retrospectively) that the term ‘tax’ includes any ‘surcharge’ or ‘cess’, thereby denying deduction for the same.

Voluntary Tax Compliance And Reducing Litigation

The IT Act casts a responsibility on the taxpayer to furnish a return within a definite time period or file a revised or belated return within prescribed time limits. Budget 2022 proposes to provide an opportunity to taxpayers to file an updated return of income over a period longer than the extant timelines for filing of the return of income by paying an additional tax equal to 25 percent or 50 percent of tax and interest due on such additional income furnished. The rationale appears to be two-fold i.e. bring use of huge data with the IT department to a logical conclusion resulting in additional revenue realisation, and to facilitate ease of compliance to the taxpayer in a litigation free environment. However, the Budget is silent on levy of penalty on such voluntary tax payments.

GIFTs For IFSC

To further promote the international financial services (IFSC), Budget 2022 proposes to provide that the following income earned by the non-resident shall be exempt from tax: (a) offshore derivative instruments and over the counter derivatives issued by an offshore banking unit, (b) income from royalty and interest on account of lease of ship paid by an unit in an IFSC; and (c) income received from portfolio of securities managed by a portfolio manager in an account maintained with an offshore banking unit in an IFSC.

Additionally, income arising from transfer of ship which was leased by a unit in IFSC shall be eligible for tax holiday. Also, exclusion on the applicability of Section 56(2)(viib) is proposed to be extended to Category I and Category II Alternative Investment Fund in IFSC. Overall, these changes will boost IFSC in GIFT city as a global financial hub.

Extension Of Incentives

Since startups have emerged as drivers of growth for the economy and in light of the COVID-19 pandemic, the period of incorporation of eligible startups is proposed to be extended by a year to March 31, 2023. Further, for availing the concessional tax rate regime of 15 percent for newly-incorporated domestic manufacturing companies, the last date for commencement of manufacturing or production is proposed to be extended to March 31, 2024.

Interest Deduction

The IT Act provides for deduction of interest payable on loan or borrowing from specified financial institution/NBFC/scheduled bank or a co-operative bank, only if such interest has been actually paid. To avoid claiming interest deduction upon conversion of outstanding interest into an existing loan by treating it as constructive discharge of interest, the Budget proposes to clarify that conversion of outstanding interest liability into debentures or any other instrument to defer the liability to a future date is not an actual payment, and cannot be claimed as deduction under Section 43B of the Act.

Facilitating Strategic Disinvestment

The IT Act provides for carry forward of and set-off of losses in cases of companies, except where certain conditions are breached such as change in shareholding. In order to facilitate the strategic disinvestment of public sector companies, it the proposed that the above condition shall not apply to an erstwhile public sector company provided that the ultimate holding company continues to hold directly or indirectly at least 51 percent of the voting power of the erstwhile public sector company in aggregate.

Withdrawal Of Concessional Rate

The IT Act provides for a concessional rate of tax of 15 percent on the dividend income received by an Indian company from a foreign company in which the said Indian company holds 26 percent of equity shares. In order to provide parity in the tax treatment in case of dividends received by Indian companies from specified foreign companies vis-à-vis dividend received from domestic companies, the concessional tax rate is proposed to be withdrawn i.e. the said income would now be taxable at applicable rates. As a result, there will be no leverage between equity or debt investment in offshore subsidiaries (since both interest and dividends will be taxable at same rates).

GST Changes

Enabling provisions have been introduced in GST laws to limit the amount of input tax credit that can be used to pay output tax liability. While the percentage of credit to be restricted or class of taxpayers has not been notified, this is an enabling provision. It seems perhaps that the government are looking to augment the cash collection of GST to meet the increased expenditure demands.

There are many other changes around ligation, deduction of expenses, withholding tax, etc. that may impact corporates. The Budget is never short on the excitement. The devil lies in the details.

Jaiman Patel is Tax Partner, and Jugal Kajaria is Tax Director, EY India. Views are personal, and do not represent the stand of this publication.