As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2023-24 on February 1, 2023, expectations abound, especially as this will be the last budget before the 2024 general elections.
The Indian economy has recovered well post-COVID-19 but global headwinds are not encouraging. The IMF has projected that one-third of the global economy will be in recession in the year 2023. The US and the EU are facing economic slowdowns, the Russia-Ukraine war is not waning, and all these factors will have some ripple effects on India.
Against this background, corporate and individual taxpayers expect and deserve some relief in the upcoming Budget.
Tax Deduction at Source
1) Benefits or perquisites
Many interpretational issues have emerged on TDS provisions on benefits or perquisite since their introduction in the Finance Act 2022. The government had provided some clarifications to address these challenges, but many issues remain unaddressed.
* The term “benefit or perquisite” is not defined
* There is no detailed guidance on valuation methodology
* Very low threshold limit of INR 20,000
* No option for lower withholding tax certificate
Some clarity on these matters will obviate unwarranted litigation and provide some relief to taxpayers.
2) Professional Services Vs Technical Services
The applicable rate of TDS for Fees for Technical Services (FTS) is 2 per cent whereas the TDS rate for Fees for Professional Services (FPS) is 10 per cent. However, the definitions of FTS and FPS under the Income Tax Act are wide enough to create an overlap between the two, which leads to interpretational ambiguities. Appropriate clarifications would be welcome to avoid unnecessary litigation.
3) TDS Obligation On Employee Stock Option Plan (ESOP)
With a view to address the cash flow of employees receiving ESOPS, the Finance Act 2020 provided for deferment of TDS obligations on ESOPs offered by eligible start-ups to its employees. However, such deferment is available for only four assessment years, it is suggested that TDS obligation should only arise on sale of such shares.
Virtual Digital Assets (VDA)
The Finance Act 2022 introduced tax on transfer of VDA. The tax regime on such assets is understandably harsh but a couple of aspects need to be looked at urgently. Firstly, the definition of VDA is extremely wide and in its current form, may include any digital or online asset that may or may not be generated by way of cryptographic means. Secondly, while computing capital gains, only cost of acquisition is allowed as deduction. However, there may be various other direct expenses like cost of set-up for performing mining operations.
Some clarity on both these issues is desirable.
Minimum Alternate Tax (MAT)
There is conflicting jurisprudence available on transfer of MAT credit to the resulting company in case of demerger. Clarifications on this issue will save the taxpayer from the anxiety of uncertainty.
1) Home Office Allowance
Under the new normal of hybrid working models, employees are constrained to set up home offices. Many employers reimburse some of these expenses but the reimbursement becomes taxable in the hands of the employee leading to financial hardship. The reimbursement amount would generally would have been tax deductible in the hands of the employer if the expense had been directly incurred, hence a deduction in the hands of the employee would be a step in the interest of justice.
2) The Optional Tax Regime for Individual/ HUF
The optional tax regime does not permit Section 80C deductions. Hence, it has unintended consequences of dis-incentivising savings/investment. Section 80C deductions should also be made available even to taxpayers exercising the optional tax regime.
The finance minister is aware that the expectations of various stakeholders run high this budget season. It might be difficult to balance the challenges of current inflation, the geopolitical situation, the never-ending pandemic, and announced economic focus areas while keeping in mind the taxpayers’ expectations!
(The author is partner-tax of Grant Thornton Bharat. He authored this article with inputs from Sameer Shah)
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