Union Budget 2022-23: To tide over difficult times, India Inc. expects the Budget to provide them with the tools to cover lost ground and to take advantage of the opportunities that lie ahead
With direct taxes contributing nearly half of the government’s revenue streams, expectations from the taxpayers are aplenty. The government, too, has reciprocated in the past by announcing a reduction in corporate tax rates to 15 percent for new manufacturing units, providing an exemption from filing tax returns in certain cases, and doing away with dividend distribution tax.
Buoyed by the trail of economic recovery from the impact of COVID-19, the top priority items being voiced by India Inc. are:
Deduction pertaining to COVID-related expenditure
Corporates have incurred an enhanced amount in the form of vaccination of employees and their family members, provision of medical supplies, and arranging for doctor consultations. However, there seems to be a lack of clarity on the tax deductibility of the said expenses, and it is an ask from the corporate community that the same be allowed as a deductible expenditure while computing taxable income. Related to this point is also the request that CSR expenditure incurred in fighting the pandemic be treated as a deductible business expenditure while computing the tax liability.
Interplay of Equalisation Levy with BEPS 2.0
Equalisation Levy 2.0 (introduced in Budget 2020 and effective from 1 April, 2020) applies to non-resident e-commerce operators with digital or e-commerce facilities or platforms for the online sale of goods and/or online provision of services. With India being an active participant and having consented to OECD’s Two Pillar framework, clarity regarding the sunset of Equalisation Levy is sought. To build confidence, public consultation should be sought by the government on the implementation fallouts required under Pillar 1 and Pillar 2 of BEPS 2.0.
Depreciation on goodwill
The business community feels that the provision pertaining to denying tax depreciation on goodwill on a retroactive basis has left them hard done. As an alternative, it is prayed that the said amendment be made prospective, and a grandfathering option is made available for pre-existing goodwill as of April 1, 2020. At the very least, allowing depreciation on goodwill arising from taxable transactions like slump sale is the requirement of the hour.
Rationalise tax rate for foreign firms
As a fallout of the well-appreciated measure of reducing the headline corporate tax rate for domestic companies from 30 percent to 22 percent, the gap in tax rates between the domestic companies and foreign companies including bank branches, which are subject to a corporate tax rate of 40 percent, has considerably widened. With the erstwhile regime of dividend distribution tax being in force, there was an argument that since the domestic companies were eligible to pay tax while distributing dividends, the gap in tax rates seemed wider than it actually was. However, with dividends now being taxed in the hands of the shareholders, the debate has again flared up. There appears to be a need to rationalise the tax rate for foreign companies with the vision to enhance India’s image as a favourable investment destination.
There have also been representations requesting the Government to reduce the tax rate on Partnership Firms/ Limited Liability Partnerships (LLPs) and bring their taxation at par with the rates applicable to corporates.
Transfer pricing laws should be in sync with global laws
A ‘safe harbour’ in a transfer pricing regime, as defined by the OECD, is a provision that applies to a selected category of taxpayers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a country’s general transfer pricing rules.
Rationalisation of safe harbour provisions continues to be a long-standing demand. Enhancing the turnover thresholds will expand its coverage and reducing the rates will increase in popularity, both of which can help to project Safe Harbour as a suitable alternate dispute resolution to the Advance Pricing Agreement (APA) programme.
Considering the global nature of Transfer Pricing laws, the arm’s length range of 35th to 65th percentile should be expanded to be in sync with the globally accepted range of 25th to 75th percentile. This will create harmony with the global Transfer Pricing laws.
Waive off transfer pricing compliance for foreign firms
As a measure to scale up its rank in ease of doing business, the government may consider waiving off Transfer Pricing compliance requirement for foreign companies receiving royalties, interest, and service fees that are subject to withholding tax and have an exemption from filing tax returns. Similarly, exclusion of dividend from the rigors of Transfer Pricing being distribution/appropriation of profits, whether received by an Indian headquarter or paid by an Indian company to an overseas parent would be a welcome move. The premise in both the above-mentioned cases is that since there is no base erosion, dilution of applicability of Transfer Pricing provisions should be considered.
Dividend income exemption
Under the erstwhile dividend taxation scheme, where the onus of discharging tax was on the dividend payor, companies operating in IFSC were exempt from the applicability of dividend distribution tax (DDT). However, post-change in the regime, taxation of dividend income has again been shifted in the hands of the recipient, which warrants that to restore the status quo, an exemption be extended to the dividend income in the case where the dividend has been declared by a company operating in IFSC.
To tide over difficult times, India Inc. expects the Budget to provide them with the tools to cover lost ground and to take advantage of the opportunities that lie ahead. Introducing amendments to the legislation to simplify compliances, provide incentives, and to institutionalise a transparent dispute redressal mechanism, is the booster dose required to propel India Inc.’s progression.
The author is Tax Partner, EY India. Husein Zaki, Senior Tax Professional with EY also contributed to this article. Views expressed are personal.