February 4, 2022
India releases Union Budget 2022
The Finance Minister of India presented the Union Budget 2022 (the Budget) on 1 February 2022. The Budget includes positive proposals such as the extension of deadlines to commence manufacturing for new companies electing a concessional tax rate regime, the extension of deadlines for incorporation of start-ups claiming tax holiday benefits, the reduction of the peak surcharge rate for long-term capital gains, and the ability to file updated tax returns with extended deadlines.
This Alert summarizes the key budget proposals.
Corporate tax rates
- The corporate tax rates (including Minimum Alternate Tax (MAT) rates) for Indian companies and partnerships (including Limited Liability Partnerships) are proposed to remain unchanged.
Key tax proposals
- The deadline for commencement of manufacturing or production by new manufacturing companies electing the lower corporate tax rate of 15%1 is proposed to be extended by one year, i.e., from 31 March 2023 to 31 March 2024.
- The deadline for incorporation of start-ups claiming tax holiday benefits is proposed to be extended by one year, i.e., from 31 March 2022 for to 31 March 2023.
- The surcharge on long-term capital gains is proposed to be capped at 15% for individuals and certain non-corporate entities (such as Association of Persons) for all capital assets.2 The current rate is graded and goes up to 37%.
- The Budget proposes to grant the following additional exemptions:
- For nonresidents dealing with International Financial Service Center (IFSC) units:
- Income from the transfer of offshore derivative instruments or over-the-counter derivatives entered into with an offshore banking unit set-up in an IFSC.
- Royalty or interest income received from a unit set up in an IFSC on lease of ships (in addition to existing exemption on lease of aircraft).
- Income of a non-resident from a portfolio of securities, financial products or funds maintained with the offshore banking unit set up in an IFSC, subject to conditions.
- For IFSC units:
- Premium on issue of shares to a specified fund set up in an IFSC, in excess of fair value of such shares.
- Gains from the transfer of a ship leased by a unit set up in an IFSC.
- The Budget proposes to withdraw the lower tax rate of 15% (plus surcharge and cess) on dividend income received by an Indian company from a specified foreign company (i.e., such dividend income is proposed to be taxed at regular tax rates).
- The Budget proposes to allow taxpayers to file an updated tax return within three years from end of the tax year, subject to payment of additional taxes (i.e., 25% of the tax and interest due on the additional income reported, if the updated return is filed within two years from the tax year; or 50% of such tax and interest, if the updated return is filed after two years but before three years from the tax year). However, such updated tax return cannot be filed in specified circumstances such as an update resulting in a refund of tax, audit proceedings already commenced by tax authorities, etc.
- The Budget proposes the following clarificatory amendments:
- Expenditures relating to earning exempt income will not be tax deductible even if the exempt income is not earned during the tax year.
- Health and education cess levied on income tax will not be tax deductible as a business expenditure with effect from tax year 2004-05.
- In cases of business reorganizations, the Budget proposes to permit successors of the business to file a modified tax return for the period between the effective date of the business reorganization and the date of the order of the approving authority.
- A new regime has been proposed to tax the transfer of virtual digital assets (VDA) such as cryptocurrency and non-fungible tokens at the rate of 30% (plus applicable surcharge and cess) with effect from 1 April 2022. Withholding tax at 1% (with effect from 1 July 2022) and gift tax provisions on VDA are also proposed.
- The Budget proposes the introduction of dividend stripping and bonus stripping provisions for units of Infrastructure Investment Trust (InvIT), Real Estate Investment Trust (REIT) and Alternative Investment Fund (AIF) and extension of bonus stripping provisions to other securities (including stocks and shares).
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India)
Ernst & Young LLP (United States), Indian Tax Desk, New York
Ernst & Young LLP (United States), Indian Tax Desk, San Jose
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
1 Effective tax rate of 17.16% (with 10% surcharge and 4% cess).
2 Except virtual digital assets for which separate tax regime is proposed.