Recap of Budget 2022 and Pre-Budget 2023

Introduction

Budget 2023 is fast approaching, so it’s time to take a look back at Budget 2022 and see what’s in store for the upcoming budget. Everyone is eagerly anticipating the incoming 2023 budget with high expectations. In its pre-budget memorandum 2023, the ICAI made numerous recommendations to the government concerning the budget 2023.

Here, we will discuss the highlights of direct tax in Budget 2022 and ICAI recommendations for the approaching budget (2023).

Recap- Budget 2022

The Honorable Finance Minister, Mrs. Nirmala Sitharaman, presented the Budget 2022 with an emphasis on digital India and the development of sectors including infrastructure, fitness, training, and e-offerings. This blueprint lays the foundation for a strong economy over Amrit Kal for the next 25 years. The minister’s budget focuses on developing key sectors that will help in making India a global powerhouse. As stated by the FM, “Sabka Prayas” will keep growing strongly.

Budget 2022 Direct Tax (Income Tax) Highlights

• • An updated return has been introduced for taxpayers who want to update a previous return to include omitted income. The updated return must be filed within 2 years from the end of the relevant assessment year, and additional taxes must be paid.

• • Reduction of corporate surcharge from 12% to 7%.

• • Taxation of Virtual Digital Assets (Section 115BBH) @30% plus applicable surcharge and cess and TDS u/s 194S @1% on income from transfer of such assets above threshold. (For detailed discussion click here.)

• • Deduction of TDS u/s 194IA @1% of stamp duty value or consideration paid, whichever is higher, instead of the current practice of deducting TDS @1% if the consideration paid is equal to /above 50 Lakhs.

• • Alternative Minimum Tax (AMT) to be reduced to 15% for cooperative societies.

• • Insertion of New TDS section 194R for deduction of TDS @10% on the benefit of perquisite in respect of business or profession.

• • Non-allowance of any surcharge or cess on income and profits as business expenditure.

• • Brought forward losses can’t be set off against undisclosed income detected during any survey or search.

• • One-year extension for startups under section 80-IAC of the Income Tax Act. Eligible startups will now get tax benefits till March 31, 2023.

• • An increase in the threshold of employers’ contribution to the National Pension Scheme (NPS) Tier-I accounts from 10% to 14% in order to bring parity between Central and state government employees.

• • Parents or guardians of differently-abled persons can claim a tax deduction on payments made as an annuity or lump sum during their lifetime, once they have reached the age of 60.

• • The last date for commencement of manufacturing or production under section 115BAB is extended by one year from 31st March 2023 to 31st March 2024.

• • Section 272A of the Income Tax Act has been amended to increase the daily penalty for failing to answer questions, sign statements, or allow inspections from Rs.100 to Rs.500.

• • From AY 23-24, it is proposed to include LTCG 112 as well, so the maximum surcharge limit of 15% will apply to all types of LTCG.

• • It is proposed that the conversion of interest payable by the issuance of debentures shall not be treated as actual payment under Section 43B, in order to override the M.M. Aqua Technology judgment that the issue of debenture for payment of interest is treated as an actual payment.

• • It is proposed to disallow expenditure incurred on tax-free investments even if exempt income is accrued or received or not during the year, in order to overrule judicial decisions.

• • The proposed changes will also cover InvITs, REITs, and AIFs for the purposes of bonus or dividend stripping. Additionally, the non-allowance of loss incurred through bonus tripping will also be applied to securities.

Pre-Budget 2023 Recommendations

ICAI: Highlights

Salaries

• • Notice period pay by the employee for better job opportunities to the ex-employer should be treated as income in the hands of the ex-employer and deduction of the same to the employee unless reimbursed by the employer.

• • Increment of Standard Deduction from Rs.50000 to Rs.100000.

• • Expenses such as furniture and other set-up costs incurred due to COVID19/lockdown/Work from home may be exempted.

• • Deduction of Pre-EMI interest for House property in the year of payment of interest.

• • Increment of time limit for construction of house under sections 54 and 54F from 3 to 5 years.

• • To facilitate consolidations and mergers, the real estate industry should be given permission to set off unabsorbed losses and unabsorbed depreciation.

PGBP

• • Clarity on the treatment of payment of non-competent fees as expenditure in the hands of the payer.

• •  Deferment of tax payment on business income from conversion of stock to capital assets till the final disposal of such capital asset to avoid the hardship of tax payment on unrealized gain.

• • Reconsideration of goodwill (at least purchased) for depreciation.

• • Reconsideration of the disallowance towards PF/ESIC in respect of Employee contribution paid after the due date under the Respective Act i.e.
    • To enhance the due date under Respective Acts from mid of month to the end of the month; or
    • To consider the due date as the due date of filing of income tax return instead of the due date under the Respective Acts under the said provisions; or
    • Reasonable disallowance on a proportionate basis of the delay in no. of days (period). 

• • 100% allowance of CSR expenditure as business expenses strictly related to charitable and social causes.

• • Specific guidelines for the manner of deduction of ESOP expenses to the assessee being the issuer of ESOPs.

• • To increase the limit for allowable remuneration for each working partner and section 40(b)(iv) may be amended so as to raise the allowable rate of interest @ 12% p.a. keeping in mind the increase in bank rates.

• • Following are suggested in respect of Section 44AB (Tax Audit):

1. Reduction of threshold limit of Rs. 10 crores for tax audit based on the current tax audit report format. For higher thresholds, the tax department must devise ways of detecting said non-compliance in electronic assessments.
2. Clarification regarding what receipts and payments need to be considered for 5% cash payment/receipt determination should be clarified with either legislative amendments or respective instructions.
3. Furthermore, to make things easier for assessees when furnishing proof of compliance with conditions in regard to cash receipts and payments being less than 5%, a suitable mechanism should be provided.
4. An anomaly in regards to section 44AB application to individuals/ HUFs/Firms with turnover below or above Rs 2 crores should be addressed appropriately.
5. Clarification regarding the applicability of tax audit on the person having turnover from business less than Rs. 1 Crore and declares profit less than eight/six percent and has never exercised the option to declare profit on a presumptive basis as mentioned u/s 44AD.

• • Following are suggested regarding Presumptive Taxation:

44AD	44ADA	44AE
Reduction in rate from 6% to 5% for certain specified contractors and the turnover ceiling may be increased to Rs.5 Crores for Infrastructure Industry.	Raise in threshold limit from Rs. 50 lakhs to at least Rs.1 Crores.	Prescription of a fixed monthly rate of Rs 15,000/- per month per heavy goods vehicle instead of the current calculation prescribed under section 44AE.
Applicability of  Sec 44AD for LLP assessees.	Reduction in the estimated rate of income @ 50% of the total gross receipts may be reduced appropriately (say to 30%)	–
Allowing salary and interest payments as deductions from presumptive incomes u/s 44AD and 44ADA.	–

Capital Gain

• • To promote the housing sector and address the issue of housing shortage, restrictions on investment in one residential house in India may be expanded to include more than one house.

• • Section 54EC should be changed to allow investments in certain bonds up until the deadline for ITR filing.

• • The limit of Rs. 50 lakhs under Section 54EC (Investment in Specified Bonds) may be raised to Rs. 1 Crore.

Others Sources

• • In the event that the recipient of property other than immovable property explains the inadequate consideration in relation to the fair market value as determined by prescribed procedures, section 56(2)(x) may be amended and the provisions of the said section shall not apply to the transaction if the assessing officer finds the explanation to be satisfactory.

• • It is recommended that the following transactions be specifically excluded from the scope of section 56(2)(x):
    • Buy-Back of Shares;
    • Slump Sale;
    • Issue of share under ESOPs;
    • Right Issue;
    • Conversion of preference share/debentures.

Deductions

Section 80/80AC/139(3)	Said sections should be amended appropriately to disallow deductions and carryovers of losses proportionately (in installments) based on the number of days the return of income was late in being furnished.
Section 80C	PPF contribution limits and deduction caps under Section 80CCF (deductions for investing in infrastructure and tax-saving bonds) should be raised from 1.5 lakhs to 3 lakhs. To encourage public savings, the section 80C deduction amount should be increased from Rs. 1,50,000 to Rs. 2,50,000. The purview of Section 80C should be widened to allow policyholders to deduct expenses for payments made in connection with personal accident, home, and travel insurance policies.
Section 80TTA	Interest earned on all sorts of deposits may also be included within the scope of section 80TTA. It is recommended to enhance the limit of Rs. 10000.

Others

• • Recommendation to increase the limit for set off of house property losses against any other source of income from Rs.2 Lakhs to Rs. 5 Lakhs.

• • For assessees choosing to pay tax under the terms of section 115BAA or section 115BAB, it is advised to include donations eligible for deductions under section 80G.

ICAI Pre-Budget Memorandum 2023 can be read by clicking here.