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India’s Union Budget 2022-23 – Overview of important amendments

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The Indian Union Budget made some significant changes that will affect taxpayers, as Ranjeet Mahtani, Saurabh Shah, and Meetika Baghel of Dhruva Advisors explain.

Against the backdrop of the pandemic, the 2022 Union Budget was expected to usher in economic growth and recovery. This year marks the 75th year of an independent India. While the economy was recovering in the midst of a COVID-19 omicron wave, the Finance Minister tabled the Union Budget for the fiscal year 2022-23 with the aim of steering the Indian economy over the next 25 years – from India at 75 to India at 100.

The focus of this Budget was largely centred on governing the digital economy and reviving the economy through trust-based governance during the Amrit Kaal, which is a term used by Prime Minister Narendra Modi to refer to his 25-year road map for India.

The Budget is in line with the vision to make India self-reliant and a digital giant. Marking the 75th year of an independent India coupled with the motive of furthering digitisation, the Budget announced 75 new digital banking units in 75 districts to ensure that the benefits of digital banking reach every corner of country. Further, it is proposed to introduce a digital rupee using blockchain technology in 2022-23, which will provide a big push to digital payments.

In addition, the Budget provided for capital expenditures and investment in infrastructure, including on Prime Minister Modi’s Gati Shakti initiative (a plan to create a digital platform connecting 16 government ministries). There is a futuristic and inclusive vision for the nation.

Changes to ITC rules

However, some tax proposals are directed at stricter governance and tax administration. Increasing GST collections in January 2022 were praised and formed the backdrop against which much more stringent conditions on input tax credit (ITC) could be introduced. This places a greater onus on the recipient of supply to establish the authenticity of a transaction undertaken by the supplier.

In recent years, there has been a lot of emphasis on developing the GST reporting system to enable government agencies, as well as recipient taxpayers, to identify duplicitous taxpayers. The introduction of the forms GSTR-2A and GSTR-2B, which provide details of the tax paid on transactions between a supplier and a recipient, were a part of this process.

In the 39th GST Council meeting, it was explained that GSTR-2B is being introduced to simplify the process and enable the recipient of a supply to access ITC, since the form will contain specific time-stamped details.

From the inception of the GST regime, the power of the government to restrict ITC access to only those transactions where tax has been paid by the supplier arose from Section 43A of the 2017 Central Goods and Service Tax Act (CSGT Act). However, this section was never brought into operation as it was intrinsically linked to the return filing system, which due to various challenges could not be brought into force.

Given this, even though substitute systems like the GSTR-2A and GSTR-2B were put in place, these mechanisms still lacked the legal and substantive backing to uphold the scheme of matching envisaged by the government. In the 2022 Budget, the government has sought to make things easier for taxpayers by providing a foundation for a recipient taxpayer to claim ITC.

Form GSTR-2B, now with a legal basis under the amended Section 38 of the CGST Act, which prescribes an auto-generated statement, provides the details of exactly which ITC will be available to the recipient taxpayers.

Restrictions on access to ITC

However, ITC will be wholly or partially unavailable to recipient taxpayers in the following circumstances:

  • When supplies have been made within a specified period of taking registration;

  • When the supplier has defaulted on tax payments and the default continues for a prescribed period;

  • When the tax payable declared by the supplier in Form GSTR-1 (a monthly return disclosing outward supplies) exceeds the tax paid by them in Form GSTR-3B (a monthly return for payment of taxes on outward supplies disclosed in Form GSTR-1) by a prescribed limit;

  • When the ITC availed by the supplier exceeds the eligible ITC by a prescribed limit and during a prescribed period;

  • When a supplier has defaulted in discharging their tax liability by utilising the credit balance in excess of a prescribed limit (the limit will be introduced for a specific registered person);

This indicates that the government is being stricter when it comes to taxpayers being able to access ITC. Any default by the supplier in not disclosing or paying their tax liability as prescribed under law would result in a denial of the ITC to the recipient taxpayers. Where ITC availed by the recipient taxpayer is to be reversed, then this reversal is to be accompanied with interest. However, ITC can be re-availed by the recipient once the tax is paid by the supplier.

At the supplier’s end, the possible repercussions of not filing returns include a prompt cancellation of registration, and restrictions on filing returns for the subsequent and upcoming tax period.

Other changes in the Budget

Simultaneously, the government has extended the time limit for (a) accessing ITC relating to an invoice and debit note pertaining to a previous financial year, (b) rectifying returns and issuance, and (c) the declaration of credit notes, to enable downward revision of tax payments. The time limit has been extended to November 30 of the following financial year. Before this change, the time limit was the date of filing of returns for the month of September of the following financial year.

In addition, taxpayers’ ability to transfer any amount of tax, interest, penalty, fee or any other amount from the electronic cash ledger of the taxpayer to the electronic cash ledger of other tax heads within the same state or other states (in other words, distinct persons with same PAN) is now subject to clearing any unpaid GST liability.

Interest provisions will be retrospectively amended, so that interest at the rate of 18% per annum would be applicable where ITC is availed and utilised for the payment of taxes. Therefore, where a taxpayer accesses ITC that they are not entitled to, and maintains the amount in the credit ledger, interest cannot be demanded or levied on it.

Customs: government opposes Supreme Court judgment

Changes in the customs law are primarily linked to blunting the Supreme Court’s judgment in the case of Canon India Private Limited v. Commissioner of Customs (Civil Appeal No.1827 of 2018). The ruling in this case held that the officers of the Directorate of Revenue Intelligence (DRI) are not “proper officers” under the provisions of the 1962 Customs Act (Customs Act).

According to the judgment, a DRI officer is not equipped with the power under the Customs Act to issue demand notices or raise a customs duty demand on an importer. The judgment invalidated all proceedings and actions taken by customs authorities in the past on the basis of a demand raised by the DRI, and it also brought ongoing proceedings to a standstill.

The government filed for this judgment to be reviewed but also, in parallel, introduced retrospective amendments (through a validation clause) in the 2022 Budget, to counter the judgment. This included categorising officers of the DRI Preventive and Audit branch (“specified officers”) as officers of customs. In addition, the government enhanced the powers of the Revenue Board to assign such functions to any officers of customs as it deems fit.

Provisions have also been introduced to transfer records of the investigation to the jurisdictional officers to enable them to take future action. Therefore, while the review of the judgment in Cannon India is pending, the government has fortified itself against potential challenges by retrospectively amending the provisions of the customs law.

Customs: other changes

The other changes in the customs law relate to:

  • Phasing out various import benefits (including project imports) to give impetus to local manufacturing;

  • Increasing the powers of the CBIC to place greater onus and introduce additional obligations on importers with respect to imported goods whose value has not been declared correctly;

  • Revising various provisions of advance ruling to introduce provisions for withdrawal of applications, among other things; and

  • Limiting the applicability of any rulings issued by the authorities to a period of three years.

In addition, to enhance data security, provisions have been introduced to prohibit the public publishing of any information relating to the value, classification, or quantity of imported or exported goods, or details of the exporter or importer of such goods. Contravening these provisions can attract a maximum fine of INR 50,000 ($641) and/or imprisonment which may extend up to six months.

Direct taxes

1. Virtual digital assets

As far as corporate and direct taxes are concerned, several significant amendments have been brought in. First, new provisions have been introduced for taxing virtual digital assets (VDA) such as cryptocurrencies, non-fungible tokens, and so on. The new provisions provide for the way in which tax can be computed on the transfer of VDAs.

The transfer of any VDA shall be taxable at a flat rate of 30% without any deduction (except cost of acquisition) or loss off-setting. In addition, any gift of a VDA is also made taxable in the hands of the recipient, subject to certain exceptions.

In order to establish a trail of transactions in VDA, it is now provided that any payment made to an Indian resident in relation to VDA transfer shall be subject to withholding tax at 1%.

2. Updated tax returns

Second, as a step towards ending protracted litigation and achieving tax certainty, new provisions have been introduced to enable the taxpayer to file an updated tax return, subject to certain conditions.

The updated tax return can be filed irrespective of whether the original tax return has been provided or not. This opportunity is available only once for a particular year. The taxpayer can file an updated return at any time within two years from the end of the relevant year, along with the payment of the additional tax as prescribed.

The additional tax liability is either 25% or 50% of the incremental tax as per the updated return, depending on how soon the updated tax return is furnished. For example, if the updated return is provided within one year, the additional tax payable would be 25%. If not, it would be 50%.

However, it may be noted that the updated return cannot be a return of loss. Also, the updated return cannot be filed in situations where it results in a refund, increases the refund due, or decreases the total tax liability determined in the original return. Non-residents or foreign companies that wish to update their tax return may explore whether the additional taxes are creditable in their home jurisdiction.

Further, interesting questions may arise on whether the total taxes payable on the additional income need to be restricted to the treaty rate.

3. Foreign-sourced dividends lose their concessional rate

Thirdly, the concessional tax rate of 15% on foreign-sourced dividends received by an Indian company has been withdrawn, and these will now be taxable at normal tax rates as applicable to a company.

This amendment brings parity to dividend income taxation, whether it be domestic or foreign dividends. However, it is pertinent to note that dividends distributed to shareholders are allowed as a deduction in the computation of total income, subject to certain conditions being satisfied.

4. Tax exemptions for some income from derivatives

Fourthly, the Budget has announced tax exemptions for non-residents earning income from the transfer of offshore derivative instruments or over-the-counter derivatives entered with an Offshore Banking Unit in an International Financial Services Centre (IFSC).

In addition, tax exemptions have also been provided to non-residents earning royalties or interest income from leasing ships to an IFSC unit (which has commenced operations on or before March 31 2024).

Also, non-residents are exempt from tax on income from a portfolio of securities or funds, managed in an account maintained with an Offshore Banking Unit in IFSC. This exemption is on the income that accrues or arises outside India, and which is not deemed to accrue or arise in India.

5. Surcharge reduction and reopening tax assessments

Another important amendment is the reduction in the surcharge on long-term capital gains for individuals. This is now restricted to 15% as against the peak rate of 37%. Previously, this restriction was applicable only to listed securities.

The next set of provisions relates to the reopening of tax assessments under Section 148 of the Income Tax Act 1961. Until the last Budget, tax assessments could be reopened for six years unless overseas assets were involved. This was truncated to three years generally and 10 years in exceptional cases.

While the reduction to three years was welcomed generally, it was feared that the exceptional 10 years will become the norm. Those fears seem to be coming true. It is now provided that tax assessments can be reopened on account of audit objections, and to take into account expenditure and book entries. This will result in tax assessments going away and the threat of reopening up to 10 years becoming real.

Trend towards retrospective amendments

Last but not the least is the revival of the trend of retrospective amendments, something which we have been repeatedly assured that this government will not resort to.

One retrospective amendment is not allowing the deduction of the Education Cess with effect from the assessment year (AY) 2005-06. Leaving aside the merits of the matter (this cess is not tax, is meant for promoting education, and is not credited to the Consolidated Fund of India), this tendency of retrospective amendments to overturn judicial decisions should be curbed. Once it starts, taxpayers are going to see this as an ongoing process which will impact India’s credibility.

There are also two other amendments that have been made with effect from AY 2022-23 (this again is a new trend to make amendments effective from the beginning of the year and make it retrospective by a year). Yet these have been made as clarificatory amendments, meaning that the government is claiming that the law always meant what the amendment now says!

The first of these two changes relate to the deductibility of interest under Section 14A where there is no tax-free income. The second links to Section 37 and relates to the deductibility of payments made for the violation of overseas laws, for compounding of offences, and to people who are receiving the payments against the law, regulations, or policies applicable to them.

This is expedited to particularly impact payments made, or expenditure incurred, between pharmaceutical companies and doctors. It is interesting that such payments have been held to be tax-deductible by several courts, but now the law is amended to clarify that it always meant that such payments are not tax-deductible.

This back-door attempt at retrospective amendments (making it prospective but drafting it as a clarificatory amendment that applies since the regulation’s inception) may not pass muster with the courts. The government is well within its rights to decide what is tax-deductible and what is not. However, trying to clarify a law already interpreted by the courts (like in the Vodafone case) must be avoided.

It may be noted that the amendment to Section 37 may lead to controversies with regard to the payment of compounding fees where no offence is admitted, the deductibility of payments made overseas to settle disputes over intellectual property (IP) rights, and so on.

In general, the provisions are very much welcome. However, the government needs to iron out a few issues, including taxpayers’ fear of amendments being applied retrospectively. This will help the government to avoid any unintended litigation and provide certainty to taxpayers, which is the intended consequence of Indian tax reform over the years.

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