Budget 2022: Robust policy changes with muted tax proposal

Could we have been more innovative in addressing the challenges in our tax policy?

Union Budget 2022 was presented amidst high expectations from taxpayers looking for relief for coping with yet another wave of the pandemic. However, this Budget accorded little importance to tax proposals, while addressing only some expectations; benefits such as income-based deductions for eligible startups, and lower tax rate (15 per cent) for domestic manufacturers, have been extended by one more year, in order to attract investment, create jobs and trigger overall economic growth which was impacted by the pandemic.

Climate action

‘Environment, Sustainability and Governance’ (ESG) has been rapidly gaining traction globally in recent years. India is playing catch-up by addressing Climate Action in this Budget. Policy measures such as issuance of Green Bonds, promoting usage of public transport and electric vehicles (‘EV’), battery swapping policy, etc., have found a mention.

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However, to drive ESG-awareness at a grassroot level, the tax policy could have played an instrumental role in enabling accelerated and concrete action, by providing tax benefits to encourage large corporate ESG investment. Benefits such as weighted deduction for R&D in green assets, extension of EV-loan interest deduction to corporates, additional depreciation on EVs, were some of the expectations this Budget failed to deliver.

These initiatives could have been small but meaningful steps for a developing country, which may not be in a position to introduce other measures such as Carbon Tax like its Western counterparts, as it could lead to snowballing inflation in a heavily carbon-dependent nation.

Dividend tax

The withdrawal of Section 115BBD which provided concessional tax rate for foreign dividends is likely to discourage repatriation of profits back into India. The intent to maintain parity between domestic and foreign dividends does not help with this objective. This will now discourage foreign companies from declaring dividends, leading to accumulation of wealth abroad and denying India its much-required share of forex inflow.

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Digital currency

With virtual digital assets (crypto, NFTs, etc.) rapidly gaining popularity, the Indian government lost no time in bringing the same within the tax net. This Budget proposes to levy capital gains tax on transfer of any such digital assets at a whopping 30 per cent, without the benefit of any expense deduction (other than cost of acquisition) or setting off any losses against such gains.

Retroactive amendments

Despite the then FM’s assurance in 2014, retroactive amendments continue to plague our tax laws in almost every Budget. The disallowance of “cess” as a business expenditure under Section 40, and disallowance under Section 14A for expenses relating to exempt income which are not even accrued / received during the year, are two such instances of retroactive amendments in this Budget, in the name of providing “clarity” on positions taken by courts in favour of the taxpayer.

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Litigation management

Budget 2022 has kept up the trend of reducing pending litigation by proposing to reduce or defer the number of appeals filed by the Tax Department. As per the proposed provision, the Department has to defer the filing of its appeal, if an identical ‘question of law’ for that or any other taxpayer is pending before jurisdictional High Court / Supreme Court, until such identical matter is settled. This may help prevent filing of frivolous appeals by the Department.

Conclusion

While the expected GDP growth of 9.2 per cent for FY22 looks encouraging, it is important to bear in mind that this growth is measured on a lower base (7.7 per cent de-growth in previous year). To keep up the momentum and achieve the lofty target of 8-8.5 per cent GDP growth in the next year, steps to revive spending and recovery would have been well-received.

However, expectation of higher disposable income by way of revised slab rates or increase in basic exemption remained unaddressed, much to the chagrin of the salaried class.

Overall, tax proposals in the Budget are quite muted. It begs the question whether we could have been more innovative in addressing the challenges in our tax policy.

(Rajesh Srinivasan is Partner, Deloitte India, and Supraja Srinivasan is Deputy Manager, Deloitte India)

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