UNION BUDGET 2022 – Crypto taxes, New Digital Currency, Tax Holiday for Startups – Key Highlights

 

The Finance Minister #NirmalaSitharaman presented the Union Budget today. Overall, the budget is being acclaimed as a pro-investment, progressive, balanced, futuristic, and rational one. The Budget has tried to touch upon multiple major sectors and has aimed to provide for more infrastructure, more investment, more growth, and more jobs. 

Here are some key highlights of the budget 2022-

For Startups & SMEs:

  • Eligible startups established before 31.03.2022 had been provided with a tax incentive for three consecutive years out of ten years from its incorporation. Given the COVID pandemic, the Finance Minister proposed extending the period of incorporation of the eligible startup by one more year, i.e., up to 31.03.2023, to provide such a tax incentive.

  • Defense R&D will be opened up for startups, industry, and academia with 25% of the defense R&D budget earmarked.

  • A fund with blended capital will be facilitated through NABARD, raised under the co-investment model to finance startups for agriculture and rural enterprises relevant to the farm produce value chain. The activities for these startups will include machinery for farmers on a rental basis at the farm level, support for FPOs, and technology, including IT-based support.
  • The startups will be promoted to facilitate ‘Drone Shakti’ through varied applications for Drone-As-A-Service (DrAAS). In this regard, the required courses for skilling will commence in select ITIs in all states.
  • The government had introduced a concessional tax regime of 15% tax for newly incorporated domestic manufacturing companies to establish a globally competitive business environment. The finance minister proposed extending the last date for commencement of production or manufacturing under Section 115BAB by one year, i.e. from 31.03.2023 to 31.03.2024.

    Venture capital investors and startup founders are likely to benefit from this tax tweak. This addresses a long-standing demand of new-age companies, which wanted share sales of unlisted firms to be taxed at par with those of listed ones. To be sure, only the surcharge levied on unlisted share sales has been reduced – from 37.5% to 15%.

    The tax rate remains unchanged at 20%. This would not only cover employee stock option sales but all transactions by privately-funded startups, reducing their tax burden by around 16%.

  • An expert committee would be set up to examine and suggest appropriate measures to boost venture capital and private equity investments in startups. Venture capital and private equity invested more than Rs 5.5 lakh crore last year, facilitating one of the largest startup ecosystems. Scaling this investment requires a holistic examination of regulatory and other compliances.
  • The next phase of ease of doing business and living will be launched
  • E-vehicles – A battery-swapping policy to be brought out with interoperability standards to boost the EV ecosystem. FM announces Rs 19,500 crore allocation in PLI for solar modules.
  • To support sectors disproportionately affected by the pandemic, FM announces extension of ECLGS till Mar-23. Given that nearly 95% of ECLGS borrowers are MSMEs, this measure will ensure the continued handholding of MSMEs and the services sector. The services sector, which accounts for more than 60% of India’s GDP, remains an important engine of economic growth, job creation, income generation and livelihood support. The extension of ECLG will provide a boon to lending to the MSME sector. Simultaneously, the revamp of CGTSME will be an added incentive for banks to extend lending.
  • The Udyam, NCS, e-Shram, and ASEEM portals will be interlinked, and their scope will be widened to perform as portals containing live, organic databases providing B2C, G2C and B2B services. These services will relate to skilling, credit facilitation and recruitment to further formalise the economy and enhance entrepreneurial opportunities for all.

Direct Tax –

Taxes on Virtual Digital Assets

  • Special Tax rate- To be taxed at the rate of 30% under section 115BBH of the IT Act

  • No expenses other than cost of purchase can be claimed against the booking of income on transfer of cryptocurrency
  • No loss can be set off against this income
  • Loss from the transfer of cryptocurrency can be used to set off against any other income nor it can be carried forward.
  • Section 194S- TDS at the rate of 1% on the entire sum payable (not gain on transfer) is applicable when paid to the resident. Threshold limit for the said TDS- Rs. 10,000/- during the year. Threshold limit, for individual or HUF not having income under the ‘PGBP’ or having income from business up to Rs. 1 cr. and from profession up to Rs. 50 lacs- is Rs. 50,000/-

    Clarifications-

    1. In the case of non-monetary consideration, it has to be ensured that tax is paid on such consideration.

    2. where both section 194- and section 194S is applicable for TDS, TDS has to be deducted under section 194S

    Virtual Digital Asset has been included within the scope of section 56(2)(x) of the IT Act- transfer of crypto currency without or inadequate consideration shall also be taxable in the hand of the recipient under the head ‘income from other sources’- w.e.f 01-4-2023.

    Note- Indian Currency and Foreign Currency have been specifically excluded from the scope.

    Impact:

    Since there had been lots of ambiguity in the taxation of transfers made through cryptocurrency in terms of whether it is taxable under the Income Tax or not, people had been doing the transaction tremendously till now. However, after the introduction of clarity in taxation of transfer of cryptocurrency and that too at the flat rate of 30% may lead to a bit slow down in the crypto market in India.

    Also, since RBI has still not given a nod for its legality in India, although introduced in the IT Act, would lead to a contradictory opinion on its legality and further clarification may be needed.

    Additional Tax Incentives to International Financial Services Centre

    (IFSC):

    Certain benefits have been extended to be claimed exempt income earned by non-residents paid by International Financial Services Centre (IFSC) such as :

    Income from transfer of offshore derivative instruments or over-the- counter derivatives entered into with an Offshore Banking Unit of an
    IFSC

    Income from royalty or interest from the lease of a ship

Other key announcements:

1. No more concessional tax rate of 15 percent on foreign-sourced dividends w.e.f. April 1, 2022 – Amendment to bring in parity on taxation of Indian- sourced dividends & foreign-sourced dividends – Additional tax outflow for Indian HQ MNEs

2. Expenses incurred in providing various benefits in violation of the provisions of IMC (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible – Statutory overruling of several HC & Tax Tribunal rulings

3. Various Tribunals (including ITAT Mumbai in the case of Macleods Pharmaceuticals in ITA Nos 5168 & 5169/Mum/2018) have held allowability of deduction under Section 37 of the Act, of expenditure incurred by a taxpayer, incurred in violation of IMC guidelines, which was also prohibited by CBDT by way of an earlier circular

4. No deduction of expenses incurred for a purpose which is an offence under foreign law or for compounding of an offence for violation of foreign law – Statutory overruling of several Tax Tribunal rulings

5. Clarification on slump sale -Definition of slump sale under Section 2(42C), which was previously revised to include all forms of transfer under slump sale is now proposed to be amended by providing for inclusion of the word “transfer” as against “sales” to give effect to the intention of Slump Sale provisions as amended by Finance Act 2021. Both proposals to come into effect from April 1, 2021

6. New Section 239A inserted – Where under an agreement/ arrangement, tax deductible on any income, other than interest, under Section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government claims that no tax was required to be deducted on such income, may, within a period of 30 days from the date of payment of such tax, file an application before the AO for refund of  such tax – Order to be passed within 6 months from the end of the month in which the application is received

Tax Compliances

  • Taxpayer can file an updated return of income whether a return was previously filed or not (Optional) – Condition of offering additional income and payment of additional tax & fee payable (computed on the tax including surcharge, cess & interest due arising from additional income) under Section 140B

    -25 percent if the updated return is filed within 12 months from the end of the relevant AY

-50 percent if the updated return is filed beyond 12 months from the end of the relevant AY

  • Non-qualifying cases – Search/ Survey, completion of assessment/ re-assessment or re-computation/ revision of income within the regular
  • Updated return cannot be filed if assessment is pending – Whether the avenue is beneficial given the shortening of assessment timelines

    Indirect Tax Proposals-


    Customs-

  • Change in Custom duty rates – There is a change in Basic Customs Duty rates in specified goods
  • Anti-dumping duty in respect of Straight Length Bars and Rods of alloy-steel, High-Speed Steel of Non-Cobalt Grade, Flat-rolled product of steel, plated or coated with an alloy of Aluminum or Zinc is proposed to be deleted

  • Countervailing duty imposed on imports of “Certain Hot Rolled and Cold Rolled Stainless Steel Flat Products” originating in or exported from China PR proposed to be deleted

  • Graded BCD structure proposed for wearable devices and its parts, sub-parts and sub-assembly, hearable devices and its parts, sub-parts and sub-assembly and smart meters and its parts, sub-parts and sub-assembly

  • Omission of redundant exemptions and tariff entries

  • Tariffisation of various rate notifications

    GST

  • An important amendment to the Central Goods and Services Tax Act is in Sections 16, 34, 37, 39 and 52. The last date to make amendments, corrections, upload missed sales invoices or notes or to claim any missed Input Tax Credit or ITC of one financial year is extended from September the following year to November the following year.
  • Amendments have been made so as to scrap the two-way communication between supplier/vendor thereby restricting the ITC to the amount appearing in GSTR2B.
  • A proposed amendment in 49 of the CGST Act –

    – Allowing transfer of amount available in electronic cash ledger of a registered person to the electronic cash ledger of a distinct person

    – this section is also being amended for prescribing restrictions for utilizing the amount available in the electronic credit ledger – so as to provide for prescribing the maximum proportion of output tax liability which may be discharged through the electronic credit ledger

  • Retrospective amendment with effect from the 1st July 2017 so as to provide for levy of interest on input tax credit wrongly availed and utilized. This was not there in the previous law.
  • If a composition taxable person fails to file an annual return for three months beyond the due date of 30th April of the following year, his GST registration can get canceled. Likewise, for any other taxpayer, the six months consecutive default in return filing is replaced with consecutive tax period default as may be prescribed.
  • Explicit refund claim of any balance lying in Electronic Cash ledger under Section 54 – Time limit of 2 years provided for claiming tax refund on inward supplies of both goods or services u/s 55, from last day of the quarter in which said supply was received.

    Download the pdf here.

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