Union Budget 2023-24

1. Rationalisation of SHR

• Safe Harbour Rules (SHR) should be revised to rationalise the current margins, increase or remove turnover thresholds and reduce the number of service classifications. Learnings from the Advance Pricing Agreement program and Income-tax Appellate Tribunal or court rulings can be leveraged in this regard.
• SHR maybe augmented to cover other forms of business activity such as marketing support and distribution activity and extended to cover contract R&D in relation to all activities (not just limited to software development services and generic pharmaceuticals).
• The rationalisation of SHR would substantially reduce transfer pricing (TP) litigation in India.

2. Introduction of block assessment for TP assessments

• A block assessment of three to five years should be considered for TP cases in line with the global best practices followed by many developed countries such as the US, Germany and Australia.
• The frequency of the assessment cycle and the number of years to be covered in the block may be determined based on the past compliance behaviour of the taxpayer and risk assessment parameters.
• Introduction of block assessments would go a long way in freeing up the time and resources of the tax department, improve the quality of TP audits and reduce potential litigation.

3. Self-declaration of international transactions by taxpayers

• The TP provisions should be suitably amended to provide for self-declaration of international transactions by the taxpayer and dispense with the need for the accountant’s report in Form 3CEB.
• The requirement of an accountant’s report creates an additional burden on the taxpayer and increases the cost of compliance. Accordingly, dispensation of the filing of an accountant’s report will be in line with the government’s approach to encourage trust building and improve ‘Ease of Doing Business’.

1. GST

• Clarification on taxability
  • A circular should be issued clarifying the taxability in the case of expatriates deputed or seconded to India for the purpose of Indian companies’ business. The reimbursement of salaries paid by the foreign company, payment of salaries directly to the expats by the Indian entities should not be treated as consideration for ‘Manpower Supply’ service as long as the expats are wholly engaged by the Indian company during the period of secondment and are on the payroll as employees of the Indian entity. Moreover, relief by way of allowing service tax paid as transitional credit and waiver of interest should also be provided.
    
  • Crypto currencies should be classified as ‘securities’ and accordingly be exempt from taxability.
  • The Budget on indirect tax should provide clarity on the taxability of ‘online gaming’ transactions on the applicable rate of tax and the non-inclusion of prize money in the value of service.
    
  • Clarification to be provided on the taxability of discounts, incentives, voucher and reward point transactions.
  • Clarification should be provided regarding the scope of activities provided by a person (other than individuals) to its members or constituents that are taxable under sub-section (aa) to section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act).
• Ease of doing business
  • Clarity on the applicability of cross charge and ISD mechanism
  • In cases where favourable circulars have been issued, it needs to be clarified that the earlier negative AARs issued on the subject should not be binding and that the circulars prevail over the AARs and are binding on the officers.  
  • Section 2(6)(v) should be deleted, and Circular No. 161/17/2021-GST dated 20 September 2021 should be modified to provide that any services supplied by an establishment in India to its establishment outside India should be accorded export status.
  • Petroleum products and electricity may also be brought under GST at an early date so as to allow input tax credit (ITC) thereon without a break in the chain of credit.
  • ITC restrictions on regular business expenditures such as CSR activities and health insurance should be removed. 
  • Clarification should be issued to allow ITC credit on demo cars.
  • The order of utilisation prescribed in the GST law should be eliminated to allow free utilisation of ITC from any head (except utilisation of CGST for the payment of SGST and vice versa).
  • Deemed credit (ITC allowed up to a permissible capping, say 98%) on all business expenditure can be introduced to eliminate the consequences of blocked credit under section 17(5) of the CGST Act.
• Refund-related aspects
  • Cash refund of the credit in balance at the time of closure of the unit or surrender of registration to be allowed.
  • GST law to be amended to include the refund of input services under the ambit of the inverted duty structure refund.
  • Section 142(8) of the CGST Act, which disallows credit of taxes recovered pursuant to proceedings, to be either deleted or amended so as to allow refund of such taxes paid under RCM but confirmed after the introduction of GST.
  • A clarification on the ‘relevant date’ for the purpose of section 54 of the CGST Act on account of any refund arising pursuant to an Advance Ruling should also be provided.
  • The accumulated balances at the end of each year may be refunded or carried forward at the option of the taxpayer.
  • Exporters to be entitled to refund all input taxes paid, even if the credit thereof is ineligible, and suitable clarification to be issued. This would be in line with the government’s objective not to export taxes.
• Compliances
  • Once the condition of reporting outward supplies in Form GSTR-1 to avail ITC is fulfilled (section 16(2)(aa) of the CGST Act), there should not be another requirement to fulfil whether the supplier has paid the tax to the government or not (section 16(2)(c) of the CGST Act) since it is highly impossible for the recipient to trace the same.
  • It should be clarified that if the credit is reflected in Form GSTR-2B, the recipient can avail such credit in any later month before the expiry of the prescribed period (30 November of the following FY).
  • Guidelines should be issued to direct the Revenue authorities to exercise the powers of blocking the electronic credit ledger (rule 86A of the Central Goods and Services Tax Rules, 2017) only where there is proper reason to believe that fraudulent or ineligible credit has been availed, by recording reasons and providing opportunity of hearing.
  • Given the adequate penal and anti-abuse provisions within the GST legislative framework, offences under GST should be decriminalised.
• Others
  • Amnesty schemes should be extended to provide relief by way of waiver of interest arising in the case of genuine interpretational and operational issues remaining unsettled and awaiting finality before High Courts and the Supreme Court.
  • A general GST amnesty scheme may also be introduced considering that the law is new and interpretative. This can help in reducing litigation.
  • An appellate remedy from the rulings passed by the AAAR should be provided.
  • A notification should be issued with respect to the constitution of the GST Appellate Tribunal.

2. Customs

• MOOWR
  • Conversion of EOU(s) to Manufacturing and other Operations in Warehouse Regulations, 2019 (MOOWR) Scheme may be considered.
  • Benefit of depreciation may be provided for duty payment at the time of removal of capital goods.
  • Authorised Economic Operator (AEO) certificate holders (Tier 2 and 3 status holders) may be given priority in granting MOOWR licenses, with a time bound approval in 30 days.
  • Clear guidelines or procedure and compliances may be laid out vis-à-vis specified operations that may be allowed.
• RoDTEP scheme
  • Inclusion of EOUs and SEZs under the RoDTEP Scheme.
• SEIS
  • New scheme to replace Service Export from India Scheme (SEIS), or any other scheme designed for service exporters as extended to the manufacturing sector under sector-specific PLI schemes may be introduced.
  • SEIS benefit for some services such as management consultancy services, services related to management consulting, technical testing and analysis services and cargo handling services may be continued after inviting comments from stakeholders.
• AEO Scheme
  • Legal compliances for obtaining AEO certification may be diluted.
  • Process for renewal of AEO status may be simplified.
  • Duty deferment benefit presently available for a fortnight to AEO Tier 2 and Tier 3 may be extended to AEO Tier 1. Alternatively, for AEO Tier 2 and Tier 3, option to have a ledger may be considered where duty payable can be offset against refunds, rebates or scrips admissible to them.
  • Customs duty refund, re-export drawback and band rate fixation may be fast tracked from processing of application to grant of refund and should be granted in 30 days with provisional grant within 15 days subject to the submission of a complete application.
  • Amendments to shipping document may be allowed without any fee or concessional fee and to be completed within a maximum of 24 hours of filing the request.
  • Interest-free period for storage of goods in bonded warehouse may be increased from 90 days to 180 days.
  • No confiscation or seizure of goods in case of investigation unless approved by the AEO Programme Manager in consultation with the Chief Commissioner.
• Section 17 of the Customs Act, 1962
  • Clarification may be provided to treat self-assessed bill of entry as an assessment order.
• Section 149 of the Customs Act, 1962
  • Amendment on common portal through customs automated system which has been permitted to be operationalised.
  • Refund of excess duty paid as a consequence of amendment to bill of entry to be allowed suo motto subject to compliances.
  • Supplementary export benefits in case of amendment of FOB value etc.
  • In case of requirement to pay incremental customs duty with interest due to amendment to bill of entry, credit of IGST should be permitted on the incremental duty paid, for which the procedure and specific document may be prescribed.
  • No Show Cause Notice or Pre-Consultation Notice should be issued where amendment to the bill of entry request is resulting in refund of duty, claim of exemption, etc.
• Classification and consequent claim of exemption on IT or electronic goods
  • Matter should be technically examined vis-à-vis past guidance and suitable clarification and guidance should be issued to field formations, including on the demand notices or consultative letters issued.
• Advance Rulings and amnesty scheme
  • Advance Ruling now has a validity of three years unless there is a change in law or in the facts based on which it is pronounced. However, no guidance on modalities is laid down on the fate of the ruling where there is no change in the law or facts – guidelines and process e.g. a self-declaration by the applicant seeking extension of the ruling for a specified period can be considered and can be further extendable at the option of the importer if there is no material change with the timelines for filing such request.
  • An amnesty scheme can be introduced under customs for providing opportunity to taxpayers to clear past baggage and reduce litigation.

1. Rate rationalisation

• Tax rate for resident investors may be harmonised at par with non-resident investors, i.e. at 10%, without indexation – at least on the transfer of unlisted shares issued by start-ups.
• Concessional tax regimes may be introduced for partnership firms and LLPs as well.
• The rate of minimum alternate tax for eligible start-ups may be reduced from the existing 15% to 9% (at par with IFSCs).

2. Providing tax certainties

• Carve out should be provided for intra-group reorganisations in section 79 of the Income-tax Act, 1961 (the Act), which otherwise impacts the carry forward and set-off of losses.

3. Ease of doing business

• Specific provisions along with relevant tax exemptions may be introduced for the merger of LLPs into companies.
• Appropriate amendments to be made in the Act to provide tax neutrality in relation to outbound mergers.
• Deduction for cost of goodwill under sections 50B and 55 of the Act to be allowed for acquisition through any mode and not restricted to acquisition through purchase.
• Similar to orders by the AAR, orders of the Board of Advance Ruling should also be made binding on the applicant and the tax department.
• Deferral of tax on the employee stock option plan under section 191 of the Act in the hands of the employees should not be restricted to the employees of start-ups referred to in section 80-IAC of the Act but should be extended to the employees of any start-up.
• To encourage rapid consolidation and growth and to make India a competitive country in the services sectors, the benefit under section 72A of the Act should be extended to service industries (non-industrial undertakings).

4. Going global

• Exemption should be provided to the shareholder in case of indirect transfer of shares of the Indian company resulting from merger or demerger of foreign companies.
• Clarity may be provided with respect to the overseas payments attracting equalisation levy and withholding taxes.

1. Tax certainty in relation to AIFs or other private equity funds

• The tax pass-through status currently available to Category I and Category II AIFs should be extended to Category III AIFs.
• Exemptions provided to sovereign wealth funds and notified pension funds for specified investments in the infrastructure sector should be extended to similar investments made by AIFs and other offshore private equity or venture capital funds.
• AIFs and its investors should be exempted from applicability of deemed income provisions such as sections 56(2)(x) and 50CA of the Income-tax Act, 1961 (the Act).
• Management fee paid to the investment manager or advisor from the date of investment to the date of its divestment should be allowed to be capitalised as ‘cost of improvement’ and allowed as a deduction while computing capital gains.

2. Rationalisation and simplification of capital gains tax

• Capital gains tax regime should be simplified and harmonised to remove complexities and inconsistencies in terms of the rate of tax and period of holding across investors, asset classes and investment vehicles regarding:
  • Period of holding for listed REITs and InVITs may be reduced to 12 months from 36 months.
  • Parity should be brought in for listed and unlisted securities both in terms of holding period to qualify as long-term asset and in terms of capital gains tax rate.
  • Holding period for long-term capital gains for direct investment in listed debt securities and zero-coupon bonds (listed or unlisted) and for investment through debt mutual funds could be harmonised and made uniform.
  • Surcharge rate may be capped at 15% in all cases.
  • Base year for computing indexation may be revisited.

3. Rationalisation and simplification of tax deduction or collection at source

• The term ‘goods’ may be amended to exclude shares and securities — both listed and unlisted, including units issued by pooled investment vehicles such as AIFs, securitisation trusts, REITs, InVITs and mutual funds.
• AIFs, securitisation trusts, REITs and InVITs should be excluded from the definition of ‘buyer’ and ‘seller’ to avoid unintended burden of tax deduction or collection.

4. IFSC tax

• Dividend paid by a company, being a unit in the IFSC, to its shareholders may be exempted from tax.
• Re-alignment of IFSCA fund management regime with various provisions of the Act should be undertaken to minimise ambiguities and remove anomalies.
• Withholding tax obligations for payments made to IFSC units may be removed.

5. Other key expectations

• To deepen and enhance the bond or debt market, the sunset clause under sections 194LC and 194LD of the Act should be extended.
• Deduction for provision for doubtful debts for NBFCs should be brought at par (i.e. at 5% of total income) with Indian banks.
• Clarification may be introduced that interest on NPAs should be taxed on receipt basis in the hands of NBFCs and HFCs adopting IndAS.
• Uniform corporate tax rate of 15% may be introduced for all companies.
• Buy-back tax on companies may be abolished and such tax liability would shift to the shareholders.
• Relevant amendments or provisions may be introduced to bring certainty on the taxation of virtual digital assets.