India releases Union Budget 2023

Executive summary

The Finance Minister of India presented the Union Budget 2023 (the Budget) on 1 February 2023. The Budget includes positive proposals such as:

• The extension of deadlines for tax neutral relocation of a fund to an International Financial Service Center (IFSC)

• The extension of deadlines for incorporation of start-ups claiming tax holiday benefits

• Non-applicability of thin capitalization rules to Non-Banking Financial Institutions (NBFC)

• Rationalizing certain withholding tax provisions

• Several measures for ease of compliance activities

This Alert summarizes the key budget proposals.

Detailed discussion

Key direct tax proposals

Corporate tax rates

• No changes are proposed to the tax rates for Indian companies, partnerships (including Limited Liability Partnerships) and nonresident corporate taxpayers.

Tax holiday and exemptions

• Apart from a single window information technology system proposed in the Budget for registrations and approvals under various regulations, the following additional tax incentives are proposed for IFSCs:

  • Extension of the deadline for tax neutral relocation of a fund to an IFSC to 31 March 2025.

  • Exemption for nonresidents on income received from offshore derivative instruments issued by IFSC Banking Units subject to fulfillment of prescribed conditions.

• The deadline for incorporation of start-ups claiming tax holiday benefits is proposed to be extended by one year, i.e., from 31 March 2023 for to 31 March 2024. Also, an extension of the benefit of the carryforward of losses on the change of shareholding of eligible start-ups from 7 to 10 years from the year of incorporation is proposed.

• The Budget proposes the introduction of a specific timeframe within which export proceeds are to be realized in convertible foreign exchange by units in Special Economic Zones to avail tax holiday benefit.

Nonresident taxation

• Investments in shares of a closely held Indian company by nonresident investors are proposed to be subject to premium/angel taxation for the Indian company if the issuance of equity shares is at a value in excess of the fair value.

• Under existing law, nonresident taxpayers engaged in rendering services/facilities in connection with the extraction or production of mineral oil or in a turnkey power project construction business, are allowed to opt for a presumptive basis of taxation or offer income or claim losses under the regular provisions if books of accounts are maintained. It is proposed that where presumption taxation is opted, the taxpayer is not eligible to carry forward and set-off past operating losses, including past year depreciation in years when the taxpayer opts for presumption taxation.

• It is proposed to enable nonresident taxpayers to approach tax authorities for a nil/lower withholding tax certificate for any distribution from a business trust which is otherwise subject to 5% withholding in India.

Capital gains

• The Budget proposes a nil cost basis for intangible assets or any right, which is acquired without any consideration.

• Capital gains arising from the transfer, redemption or maturity of market linked listed debentures are proposed to be taxed as short-term capital gains taxable at ordinary rates.

Compliance and audits

• The Budget proposes the following changes with respect to business reorganizations:

  • The successor entity is now required to file a modified tax return within a specified timeframe to give effect to the business reorganization in the case of insolvency proceedings.

  • The tax authorities can audit and adjust the taxable income of the successor entity to give effect to the business reorganization.

• Taxpayers shall be required to furnish transfer pricing documentation within 10 days upon request from the authorities.

• The timeline for completion of audits is proposed to be increased from 9 months to 12 months.

• The Budget proposes that any refund due to a taxpayer may be withheld by the tax authorities, pending audit proceedings and where the authorities consider that the granting of refund may adversely affect the revenue authorities.

Other direct tax proposals

• Thin capitalization rules which were earlier relaxed for certain corporates in banking and insurance sectors, are proposed to be relaxed for specified NBFCs with respect to interest expense deductions.

• Vendor payments to Micro Small and Medium Enterprises (MSMEs) are proposed to be allowed as a business expenditure on a payment basis or within the timeline specified in MSME regulations.

• The Budget proposes to tax repayment of debt by a business trust (e.g., Real Estate Infrastructure Trusts and Infrastructure Investment Trusts) to investors as well as income from redemption of units in Business Trusts, as income from other sources.

• The Budget proposes the introduction of a withholding tax requirement on the payer of income representing winnings from online games, at a rate of 30% of net winnings either at the end of the fiscal year or at the time of withdrawal by the user.

Key indirect tax proposals

• The Budget proposes to expand the scope of Online Information and Database Access or Retrieval (OIDAR) services under the Goods and Services Tax (GST). The condition of essential automation and involvement of minimal human intervention is proposed to be removed from the definition of OIDAR services. Thus, emphasis will be placed only on information technology required to provide such service.

• The definition of non-taxable online recipient is also proposed to be amended to cover all cases irrespective of business or any other purpose.

• A penalty will be prescribed for e-commerce operators in the case of contravention of provisions relating to supplies of goods made through them by unregistered persons or composition taxpayers.

• Input Tax Credit will not be available with respect to goods or services which are used or intended to be used for activities relating to obligation under corporate social responsibility referred to in section 135 of Indian Companies Act, 2013.

Base Erosion and Profit Shifting Action Plan (Pillar Two)

There was an expectation that the Budget would propose a framework for the implementation of Pillar Two. The Budget is presently silent on the above, and it appears that there may be more public consultations before any announcement is made.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India)

• Pranav Sayta, National Leader, International Tax and Transaction Services

• Rajendra Nayak, National Leader, International Corporate Tax Advisory

Ernst & Young LLP (United States), Indian Tax Desk, New York

• Deep Shah

• Chintan Gala

• Arpita Khubani

Ernst & Young LLP (United States), Indian Tax Desk, San Jose

• Aditya Modani

Ernst & Young LLP (United States), Indian Tax Desk, Chicago

• Pratik Kamdar

Ernst & Young Solutions LLP, Indian Tax Desk, Singapore

• Gaurav Ashar

Ernst & Young LLP (United Kingdom), Indian Tax Desk, London

• Amit B Jain

• Gayatri Dutt

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

• Gagan Malik

• Dhara Sampat

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

• Pongpat Kitsanayothin

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.