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.
