On 1 February 2022, Finance Minister Nirmala Sitharaman will present her fourth Union Budget amid the third wave of coronavirus, at a time when the economic recovery has just touched the pre-pandemic levels. In recent times, the government has shown its clear intent to strengthen the economy and promote entrepreneurship through ‘Make in India’ and PLI schemes.
On the taxation front, we have witnessed several tax reforms in recent years, including reduction of corporate tax rates, use of technology for conducting assessments and appeals, ending the contentious retrospective indirect transfer tax law, etc.
Having said that, there are quite a few pain points of corporates that need to be addressed and the industry is waiting with bated breath for the Union Budget announcements to address some of their concerns. We have summarised below some of the key expectations of corporates on the tax front from the Union Budget.
Mitigating tax disputes
Considering the large chunk of cases that are stuck up in litigation, the government had introduced the Vivad Se Vishwas (VSV) scheme with the noble objective of settling the pending direct tax disputes. While VSV has helped curtail the past tax litigations, it is now time to introduce a mediation scheme that will help resolve disputes going forward, by allowing the taxpayers and the tax department to settle the dispute in an amicable manner. This concept is widely prevalent globally and has been instrumental in significantly curbing litigation in many countries.
Taxation of cryptocurrencies
India’s cryptocurrency market has seen exponential growth over the past few years. In this regard, a Bill laying down the specific regulatory framework in dealing with cryptocurrencies is under deliberation. In light of the growing crypto investments in India, it would be helpful if the finance minister introduces a specific regime for the taxation of cryptocurrencies in India. This will help put to rest contentious issues like GST and income tax implications of dealing in cryptocurrencies, determination of the applicable rate of tax, claim of expenses, reporting requirements, etc.
Amendments to BAR regime
In last year’s Budget, the Authority for Advance Rulings (which used to issue advance rulings to taxpayers) was replaced by a Board for Advance Rulings (BAR). The BAR consists of two members, not below the rank of Chief Commissioner (CCIT). Further, unlike in the case of AAR, the orders of the BAR are not binding and are appealable in a high court.
To enable taxpayers to get fair and impartial rulings, the constitution of the BAR members ought to be changed and it may instead comprise of (i) existing/retired Tribunal Member as the Chairman, (ii) IRS officer, not below the rank of CCIT and (iii) academician/expert in the field of international tax. Also, as in the case of AAR regime, orders of BAR should be made final and non-appealable. This will help taxpayers in obtaining certainty and not drag them into protracted litigation.
Amalgamation of companies
In the case of amalgamation of companies, losses of the amalgamating company are allowed to be carried forward to the amalgamated company only to a certain class of companies. Section 72A of the Income-tax Act should be amended to allow the benefit of carrying forward of losses to all companies, irrespective of their nature of business.
Exemption to foreign shareholders in case of amalgamation
An express tax exemption is available for gains earned on the transfer of shares of an Indian company as part of a merger of two foreign companies. However, a corresponding exemption is not available to the shareholders of the amalgamating foreign company, where such a company derives substantial value from India. This seems to be an unintended lacuna in the law and it would immensely help MNCs if this lacuna is addressed in this Budget.
Looking ahead
In the last year, the finance minister unravelled a bold and dynamic Budget by giving a boost to a humungous spending plan to dig out the Indian economy from a pandemic-induced slump. As the uncertainties around COVID-19 continue this year as well, all eyes are now on the finance minister with the hope that she will provide the booster dose to the economy, especially to sectors such as healthcare, infrastructure, education, and welfare schemes. All in all, we hope that Union Budget 2022-23 puts the economy back on the high growth trajectory in line with the ambition of India fast-forwarding towards becoming a $5 trillion economy.
Himanshu Parekh is Partner, Tax, KPMG in India; and Ravish Kotadia, Chartered Accountant