Direct Tax Proposals – Budget 2023

The finance minister has made several announcements in Budget 2023 regarding personal income tax amendments, including an increase in the tax rebate limit, an increase in the tax-exempt income slab, an increase in the tax-exempt leave encashment limit, and so on. The Union Minister for Finance and Corporate Affairs, Smt Nirmala Sitharaman announced several Direct Tax proposals with an aim to maintain continuity and stability of taxation, further simplify and rationalize various provisions to reduce the compliance burden, promote the entrepreneurial spirit and provide tax relief to citizens.

Introduction

On 01 February 2023, the Hon’ble Finance Minister of India presented a ‘no surprise’ Union Budget for 2023-24, laying a positive framework for sustainable growth. This is the last full Budget of the current ruling government, with the Union Elections due in May 2024. The budget has boldly proposed a steep increase in capital investment outlay by 33% to USD 125 billion, aiming to enhance growth, increase job creation, and counter the global headwinds. As regards the tax proposals, there is an attempt to increase exports, deepen domestic manufacturing, generate more value addition in the economy and incentivize green through simplification of indirect taxes. The direct tax proposals focus on reducing compliance burden, promoting entrepreneurial spirit as well as rationalizing/ clarifying certain existing provisions.

Direct Tax Proposals

Smt Nirmala Sitharaman announced several Direct Tax proposals with an aim to maintain continuity and stability of taxation, further simplify and rationalize various provisions to reduce the compliance burden, promote the entrepreneurial spirit and provide tax relief to citizens.

Personal Tax

• The Finance Act 2020 had proposed a new tax regime (optional) for individuals and HUF taxpayers wherein the income was taxable at lower tax rates but without allowing any deductions from the taxable income.
• With the aim to encourage taxpayers to adopt the new tax regime, certain changes have been proposed to the tax slab rates:
  • 0 to ₹3 lakhs – nil;
  • ₹3 to 6 lakhs – 5%;
  • ₹6 to 9 Lakhs – 10%;
  • ₹9 to 12 Lakhs – 15%;
  • ₹12 to 15 Lakhs – 20%; and
  • Above 15 Lakhs – 30%
• In the new tax system, the government wants to lower the maximum surcharge rate from 37% to 25%.
• The new tax regime will be the default regime and the taxpayer will be required to expressly opt for the old tax regime for claiming deductions.
• The benefit of lower rates under the new tax regime is now being extended to Association of Persons (other than a cooperative society), Body of Individuals, and Artificial Juridical Persons.
• The income limit for availing rebate (i.e., benefit of no-tax) has been increased from INR 500,000 to INR 7,00,000.
• The peak rate of surcharge is proposed to be capped at 25% for taxpayers under the new tax regime whose income exceeds INR 5,00,00,000. Currently the peak rate of surcharge is 37%. Consequent to this proposal, the effective tax rate will reduce from 42.75% to 39%.
• Benefit of Standard Deduction of INR 50,000 is extended to the new tax regime.
• Maturity receipts from Life Insurance Policies issued after 01 April 2023 (other than ULIPs) will be taxable for those policies where the aggregate annual premium exceeds INR 5 lacs (per policy).
• Gifts by residents to a not ordinarily resident will now be taxable; currently, only ‘non-residents’ were liable to tax.
• Interest on capital borrowed for acquisition/ improvement of house property will not be included in the cost of acquisition for capital gains purposes, if a deduction was claimed on such interest earlier.

Start-ups

• Last date for incorporation to claim a ‘tax holiday’ now extended to 01 April 2024
• Benefit for carry forward and set off of losses extended to 10 years (currently 7 years)

MSMEs and Professionals

• Smt Sitharaman said that micro enterprises with turnover up to Rs 2 crore and certain professionals with turnover of up to Rs 50 lakh can avail the benefit of presumptive taxation.
• It was proposed to provide enhanced limits of Rs 3 crore and Rs 75 lakh respectively, to the tax payers whose cash receipts are no more than 5%.
• She also proposed to allow deduction for expenditure incurred on payments made to MSMEs so as to support them in timely receipt of payments.
• She proposed to include payments made to such enterprises within the ambit of section 43B of the Micro, Small and Medium Enterprises Development Act. It will be allowed on accrual basis only if the payment is within the time mandated under the Act.

Capital Gains

• Gains on Market Linked Debentures are proposed to be taxable as short-term gains irrespective of the period of holding.
• Exemption is restricted to INR 10 crores on long term gains generated on sale of capital assets where investment is made in a residential property for claiming an exemption.

Electronic Commerce Operator

• Person supplying goods through an electronic commerce operator are now permitted to opt for the composition scheme.
• Penalty of INR 10,000 or the tax involved, whichever is higher, is proposed on electronic commerce operators in the following cases:
  • Allowing supply of goods or services by unregistered persons
  • Allowing inter-state goods or services by ineligible persons
  • Failure to furnish statement of outward supplies

Better Targeting of Tax Concessions

For better targeting of tax concessions and exemptions, Smt Sitharaman proposed to cap deduction from capital gains on investment in residential house under sections 54 and 54F to Rs 10 crore.

Improving Compliance and Tax Administration

The finance minister proposed to reduce the minimum time period required to be provided by the transfer pricing officer to assessee for production of documents and information from 30 days to 10 days. She also proposed to amend the time period for filing of appeal against the order of the Adjudicating authority under Benami Act within a period of 45 days from the date when such order is received by the Initiating Officer or the aggrieved person.

Rationalization

• The finance minister announced a number of proposals relating to rationalization and simplification. She stated that Income of authorities, boards and commissions set up by statutes of the Union or State for the purpose of housing, development of cities, towns and villages, and regulating, or regulating and developing an activity or matter, was proposed to be exempted from income tax.
• Other major measures proposed by the Union Minister in this direction were: Removing the minimum threshold of Rs 10,000/- for TDS & clarifying taxability relating to online gaming; Not treating conversion of gold into electronic gold receipt and vice versa as capital gain
• Reducing the TDS rate from 30% to 20% on taxable portion of EPF withdrawal in non-PAN cases; and Taxation on income from Market Linked Debentures.

Co-operatives & Other Government Bodies

• Extending 15% corporate tax benefit to new cooperatives, commencing manufacturing till 31st March 2024.
• Higher limit of rupees 2,00,000 per member for deposit and loans in cash by PACS and PCARDBs.
• Higher limit of rupees three crore for TDS on cash withdrawal for cooperative societies.

Others

• Smt Sitharaman also announced other major proposals in the Finance Bill which related to the Extension of period of tax benefits to funds relocating to IFSC, GIFT City till 31.03.2025
• Decriminalization under section 276A of the Income Tax Act.
• Allowing carry forward of losses on strategic disinvestment including that of IDBI Bank.
• Providing EEE status to Agniveer Fund.

Conclusion

The direct tax proposals focus on reducing compliance burden, promoting entrepreneurial spirit as well as rationalizing/ clarifying certain existing provisions. On 01 February 2023, the Hon’ble Finance Minister of India presented Union Budget for 2023-24, laying a positive framework for sustainable growth. The budget has proposed a steep increase in capital investment outlay by 33% to USD 125 billion, aiming to enhance growth, increase job creation, and counter the global headwinds.