Towards a stable and predictable tax system

Union budget 2022-23: this is a forward-looking and growth-oriented budget, with a massive increase in capital spending

Budget 2022 reinforces the government’s call for a stable and fair tax system. The focus is on simplifying the tax system, reducing litigation and promoting voluntary taxpayer compliance.

Here are some of the main proposed changes:

Introducing “Updated Returns”

To provide taxpayers with the opportunity to voluntarily correct omissions and errors in tax returns, the budget now introduced the concept of an “updated return” which can be filed within two years of the end of the tax return. tax year concerned on payment of additional taxes of 25%/50% depending on the date of filing of the updated declaration. This trusts taxpayers to voluntarily pay the correct taxes and avoid assessments and related penalty risks. It also shows the government’s confidence in the robustness of its data and intelligence collection mechanism.

Extended timeline for startups and new manufacturing entities

The government is proposing to extend the time limit for a start-up entity to claim tax exemption under Section 80-IAC by one year, i.e. until March 31, 2023. In addition, to encourage new investment, it is proposed to extend the period for the start of manufacturing or production, which provides for a preferential tax regime of 15% tax rate, by one year, i.e. i.e. from March 31, 2023 to March 31, 2024.

Taxation of virtual digital assets

Given the increase in transactions involving virtual digital assets, an important amendment that has been proposed is that any income derived from the transfer of virtual digital assets will be taxed at the rate of 30% without deduction of any expense or compensation other than the acquisition cost. . It is also proposed to tax donations of these virtual digital assets in the hands of the recipient. In addition, the loss resulting from the transfer of these virtual digital assets cannot be compensated by any other income, nor carried forward to the following years. Finally, TDS provisions have also been introduced.

Litigation management

In order to reduce unwanted litigation, it is proposed that in cases where questions of law are already pending at the High Jurisdictional Court/Supreme Court level, based on an opinion of the College, the filing of an appeal by the Department be suspended until this question of law is decided by the respective courts.

Reduction of tax rates and surtax

It is proposed to cap the surtax levied on the association of persons (AOP) and the surtax on long-term capital gains at the rate of 15% compared to the previous rate of 37%. It is proposed that dividends from foreign subsidiaries will be taxed at normal rates in the future.

Retrospective clarification on the “Cess for health and education” claimed as a business expense

To put an end to the controversy over a claim of this amount as a business expense, it is clarified that the ‘Health and Education Cess’ is a tax in the form of an additional surcharge for the taxpayer and therefore not an expense deductible for calculating business income.

No set-off and loss carryforward in case of search and seizure

It is proposed to provide that no set-off of any loss will be allowed on undisclosed income detected during search and investigation operations. The same should prevent people from abusing loss compensation provisions.

Other Changes

Amendments made to overcome previous Court rulings include applicability of denial of Section 14A even if there is no exempt income in a given year, denial of benefits/perquisites granted in violation of any law/rule/regulation (including foreign laws) and the extension of premium stripping provisions to securities. It is also proposed to replace the SEZ Act with new legislation and this is an area to watch for companies with SEZ units. In addition, a host of benefits have been offered to promote the IFSC.

Overall, a forward-looking, growth-oriented budget with a massive 35.4% increase in spending for capital spending will have a positive multiplier effect on the economy. Despite buoyant tax revenues, the budget deficit situation prevented the finance minister from introducing sweeping changes on the tax front and she followed the mantra: “If it ain’t broke, don’t fix it”.

The author is Tax Partner, EY. Views are personal.

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