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Budget 2022 – Blueprint for India’s Growth

article • Investment Management
Vishal Yeole
07 February 2022 | 3 Minutes

Bold and Emphatic are the two words that come to mind for this year's budget; ‘Bold’ given that the Honourable Finance Minister (‘FM’) surprised everybody with a massive 35% jump in capex layout (from ~5.5 lakhs crores in the current year to 7.5 lakhs crores in FY 2022-23) and ‘Emphatic’ given that the government has audaciously gambled high inflation for growth. With visible thrust on infrastructure, multi-nodal logistics, electric vehicles ecosystem, in some sense, it’s a version 2.0 of the previous budget, taking it next level. The FM has projected India's GDP growth at 9.2% in FY22 and about 8.5% in FY23.

The Budget dealt with specific areas of start-ups, related ecosystems, and the digital economy with a prudent focus. With the rapidly evolving digital space, it would be fair to say that we are in the ‘decade of the digital’.  Spearheading this space is the world of cryptocurrencies and as per one report, Indians are the third-largest investors in this asset class.

It was thus, apt for the government to provide for a base level clarity and framework for such asset class. The budget has defined the term ‘virtual digital asset’ categorically. It is proposed that any income from the transfer of any ‘virtual digital asset’ shall be taxable as a separate block of an asset at 30%. Only the cost of acquisition shall be allowed as an eligible deduction, all other expenses shall be non-deductible. Further, very importantly, there is no specific holding period specified with respect to such assets for them to classify as short-term or long-term. Thus, on sale of a ‘virtual digital asset’, say, a cryptocurrency, held even for one day or one year or two years would be chargeable to tax at 30%. Further, it is proposed that the loss on the transfer of such ‘virtual digital asset’ can neither be set off against any other income nor it can be carried forward to subsequent years for set-off. Given such a high tax regime, it could eventually lead the early adopters of crypto to return to equities. Further, these provisions are applicable starting 1 April 2022. Thus, investors wanting to exit in the interim to avoid the higher taxes could lead to an abnormal supply of such cryptocurrencies which in turn, will likely impact the likes of Bitcoin, etc. which are down considerably from the peaks of November 2021.    

Gifting of virtual digital assets is taxable in the hands of the recipients at the same rate i.e  30%. The typical exemption of gifting between ‘relatives’ should be available.

The Government has proposed tax deduction at source (TDS) @1% on payments to residents, to enable them to track these transactions. These provisions are applicable from 1 July, 2022.

The FM has made it clear, that the aforesaid tax framework neither makes these assets legal or brings them under any regulatory framework. The policymakers are working on a possible regulation and process of public consultation is ongoing. With respect to ‘digital currency’ she categorically stated that, it’s only RBI’s prerogative to issue currency and that RBI shall soon introduce ‘Digital Rupee’ using Blockchain and other technologies.

With respect to the key gating items for the start-up industry, the government has over the last couple of months deliberated with the stake holders viz; PE, VC’s, Indian Venture and Alternate Capital Association (IVCA) etc. The government has duly noted the concerns especially with respect to disparity in the long term capital gains tax rate and its unintended consequences including flight of entrepreneurs, capital and structures overseas.

Consequently, this year’s budget now proposes to address one of their longstanding demands to bring in parity vis-à-vis the long-term capital gains tax rate. Thus, the surcharge applicable on the long-term capital gains tax rate on sale of unlisted shares and other assets (real estate, debentures, debt-oriented mutual funds etc.)  has been revised downward from a maximum of 37% to 15%. While the base capital gains tax rate remains same, the reduction in surcharge results in reducing the effective tax rate in case of residents from 28.5% to 23.92%. This reduction of ~4.5% is significant. This augurs well for start-up founders, investors and shareholders of new-age companies including ESOP holders. Likewise, the effective LTCG tax rate incase of non-residents, reduces from 14.25% to 11.96%, a reduction of 2.29%.

The Budget has also proposed to extend the start-up tax holiday scheme period by one year. It shall now be available for all start-ups incorporated till 31 March, 2023. The start-up community believes that India is on the cusp of start-up revolution and for India to really reap the benefits, such schemes ought to be more long-term.

Amongst other industry representations, the FM has agreed to form an expert committee to study and address the complex inter-ministerial and regulatory issues for the VC, PE, and AIF space. Broadly the government is keen to iron out tax and regulatory hurdles for this ecosystem, the process will be an evolving one. This measure, though is an encouraging step in the right direction.

Lastly, amongst other notable tax changes; the Budget has proposed amendments to provisions of bonus stripping to include listed stocks and units of InvIT, REIT, and AIF’s. Further, with respect to dividend stripping, units of InvIT, REIT, and AIF’s have been covered. Essentially, these are anti-abuse sections within the Income-tax Act and they have been further strengthened to cover an additional class of securities/assets.

In a nutshell, the Budget appears to be a well conceptualized plan for India’s growth for the next 15 years. It will be imperative from here on to ensure that the planned initiatives are effectively and efficiently implemented. It shall only be then, that one would be able to measure the success of such an aspiring blueprint.

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Offices
Mumbai
+91-22-66210700

142, 14th Floor, Maker Chambers VI, Nariman Point, Mumbai - 400021

SEBI Office: Plot No. C4-A, 'G' Block, Bandra-Kurla Complex, Bandra(East), Mumbai - 400051

Noida
+91-88-60824008

18B106, 18th Floor, Berger Delhi One, Sector 16B, Noida - 201301

SEBI Office: NBCC Complex, Office Tower-1, 8th Floor, Plate B, East Kidwai Nagar, New Delhi – 110023

Bengaluru
+91-80-67433089

815, 8th Floor, The Estate, Regus Business Centre, Dickenson Road, Bengaluru - 560042

SEBI Office: 2nd Floor, Jeevan Mangal Building, No.4, Residency Road, Bengaluru - 560025

Chennai
+91-44-66385532

Workafella No.10, Uthamar Gandhi Salai, Nungambakkam High Road, Nungambakam, Chennai - 600034

SEBI Office: 7th Floor, 756-L, Anna Salai, Chennai - 600002

Kochi
+91-484-4148112

Centre A, 8th Floor, Alapatt Heritage Building, MG Road, Kochi - 682035

SEBI Office: 6th Floor, Finance Tower, Kaloor, Kochi - 682017

Goa
+91-99-23191607

603A, 6th Floor, Dempo Trade Centre, Patto, Panjim, Goa - 403001

SEBI Office: 6th Floor, EDC House, Atmaram Borkar Road, Panaji - 403001, Goa

Hyderabad
+91-81-06712344

WeWork Krishe Emerald – 03B104, Kondapur Main Road, Laxmi Cyber City,

Whitefields, Kondapur, Hyderabad, Telangana 500081