India's Union Budget 2022–23: A summary of significant changes

According to Dhruva Advisors' Ranjeet Mahtani, Saurabh Shah, and Meetika Baghel, there were a number of significant changes made in the Indian Union Budget that will have an impact on taxpayers.

The 2022 Union Budget was anticipated to bring about economic growth and recovery in the face of the pandemic. The country of India has been independent for 75 years. The Finance Minister presented the Union Budget for the fiscal year 2022–23 with the intention of guiding the Indian economy over the next 25 years—from India at 75 to India at 100—while the economy was rebounding in the midst of a COVID–19 omicron wave.

The Amrit Kaal, the term used by Prime Minister Narendra Modi to describe his 25-year road map for India, and revitalizing the economy through trust-based governance were major areas of focus for this udget.

The Budget is in line with the goal of making India a digital powerhouse and self-sufficient. In order to ensure that the advantages of digital banking are available throughout the entire nation and to commemorate the 75th anniversary of India's independence, the Budget announced the opening of 75 new digital banking units in 75 districts. Additionally, it is proposed to launch a blockchain-based digital rupee in 2022–2033, which will give digital payments a major boost.

The Budget also included provisions for infrastructure investment and capital expenditures, including those related to Prime Minister Modi's Gati Shakti initiative (a plan to create a digital platform connecting 16 government ministries). There is an inclusive, futuristic vision for the country.

ITC rule modifications

Some tax proposals, however, are meant to promote stricter tax administration and governance. Increased GST collections in January 2022 were lauded and provided the foundation for the introduction of much stricter restrictions on input tax credit (ITC). As a result, it falls more on the recipient of the supply to verify the veracity of a transaction made by the supplier.

The development of the GST reporting system has received a lot of attention recently in order to help recipient taxpayers and government agencies identify dishonest taxpayers. This process included the introduction of the GSTR-2A and GSTR-2B forms, which detail the tax paid on transactions between a supplier and a recipient.

The purpose of GSTR-2B, which will contain specific time-stamped information, is to streamline the procedure and make it possible for the recipient of a supply to access ITC, it was explained during the 39th GST Council meeting.

Section 43A of the 2017 Central Goods and Service Tax Act gave the government the authority to limit ITC access to only those transactions where tax had been paid by the supplier from the beginning of the GST regime (CSGT Act). However, because it was inextricably linked to the return filing system, which was unable to be implemented due to a number of issues, this section was never put into effect.

Due to this, even though replacement systems like the GSTR-2A and GSTR-2B were implemented, they did not have the necessary legal and practical support to uphold the government's intended scheme of matching. The government made an effort to simplify things for taxpayers in the 2022 Budget by laying the groundwork for a recipient taxpayer to claim ITC.

Form GSTR-2B, which now has a legal foundation under the modified Section 38 of the CGST Act and mandates an automatically generated statement, details precisely which ITC will be offered to recipient taxpayers.

Access limitations to ITC

However, recipient taxpayers will not be eligible for ITC if any of the following apply: 

- Supplies were made within a certain time frame after registering; 

- The supplier is in default on tax payments and the default continues for a set amount of time; 

- The tax payable declared by the supplier in Form GSTR-1 (a monthly return disclosing outward supplies) exceeds the tax paid by them in Form GSTR-3B (a monthly return for payments made)

However, recipient taxpayers will not be eligible for ITC if any of the following apply:  - The ITC availed by the supplier exceeds the eligible ITC by a prescribed limit and during a prescribed period;

- A supplier has defaulted in discharging their tax liability by utilising the credit balance in excess of a prescribed limit (the limit will be introduced for a specific registered person);

This suggests that the government is becoming more restrictive regarding taxpayers' access to ITC. The recipient taxpayers would not receive the ITC if the supplier violated the law by failing to disclose or pay their tax liability. If the recipient taxpayer's ITC is reversed, the reversed amount must be accompanied by interest. However, after the supplier has paid the tax, the recipient may reclaim the ITC.

The supplier may experience immediate registration cancellation as well as limitations on filing returns for the subsequent and upcoming tax periods if they do not file their returns on time.

Other budgetary changes

In order to allow for a downward revision of tax payments, the government simultaneously extended the deadlines for (a) accessing ITC related to an invoice and debit note from a prior financial year, (b) rectifying returns and issuance, and (c) the declaration of credit notes. It has been decided to extend the deadline until November 30 of the following fiscal year. Prior to this modification, the deadline was the date on which returns were due for the month of September of the succeeding fiscal year.

The ability of taxpayers to transfer any amount of tax, interest, penalty, fee, or other amount from the taxpayer's electronic cash ledger to the electronic cash ledger of other tax heads within the same state or other states (in other words, different persons with the same PAN) is now contingent upon paying any outstanding GST liabilities.

Interest provisions will be retroactively changed so that they will now apply when ITC is used to pay taxes and interest at the rate of 18% per year. As a result, interest cannot be demanded or assessed against a taxpayer who accesses ITC to which they are not entitled and keeps the amount in the credit ledger.

Government contests the Supreme Court's ruling on customs

The primary reason for changes to the customs law is to temper the Supreme Court's decision in the case of Canon India Private Limited v. Commissioner of Customs (Civil Appeal No.1827 of 2018). According to the decision in this case, the employees of the Directorate of Revenue Intelligence (DRI) are not "proper officers" as defined by the 1962 Customs Act (Customs Act).

In accordance with the ruling, a DRI officer lacks the authority granted by the Customs Act to issue demand notices or make a demand for customs duties from an importer. The judgment halted ongoing proceedings and invalidated all previous proceedings and actions taken by customs authorities in response to a demand made by the DRI.

The government requested a review of this decision, but concurrently introduced retroactive amendments (through a validation clause) in the 2022 Budget to challenge the decision. This included classifying employees of the DRI Preventive and Audit branch as customs officers (referred to as "specified officers"). The government also strengthened the Revenue Board's authority to delegate these duties to any customs officers it sees fit.

Additionally, provisions have been made to transfer investigation records to the jurisdictional officers so they can act later. As a result, the government has strengthened itself against potential challenges while the review of the Cannon India judgment is still pending by retroactively amending the provisions o

f the customs law.

Changes to customs

The other modifications to the customs law include: 

- Phasing out various import benefits (including project imports) to encourage domestic manufacturing; 

- Increasing the authority of the CBIC to put more responsibility and additional obligations on importers with regard to imported goods whose value has not been accurately declared; 

- Revising various advance ruling provisions to introduce provisions for withdrawal of applications, among other things; and 

- Limiting the applicability of any rulings issued by the authorities to a period of three years.

Provisions that forbid the public publication of any information relating to the value, classification, or quantity of imported or exported goods, as well as information about the exporter or importer of such goods, have also been introduced to improve data security. A maximum fine of INR 50,000 ($641) and/or up to six months in jail may be imposed for violating these rules.

Explicit taxes

1. Digital virtual resources

A number of important changes have been made in terms of corporate and direct taxes. The first is the addition of new taxation provisions for virtual digital assets (VDA), such as cryptocurrencies, non-fungible tokens, and so forth. The new provisions outline how tax on the transfer of VDAs can be calculated.

Any VDA transfer is subject to a flat 30 percent tax rate, with no other exceptions (cost of acquisition) or loss offsetting. In addition, with some exceptions, any gift of a VDA is also made taxable in the recipient's hands.

Any payment made to an Indian resident in connection with a VDA transfer is now stipulated to be subject to withholding tax at a rate of 1% in order to establish a trail of transactions in VDA.

2. Revised tax returns

Second, new provisions have been introduced to allow the taxpayer to file an updated tax return, subject to certain conditions, in an effort to put an end to protracted litigation and achieve tax certainty.

Whether or not the original tax return is available, the updated tax return may still be submitted. For a specific year, there is only one opportunity available. In addition to paying the prescribed additional tax, the taxpayer may submit an updated return at any time during the two years following the end of the applicable year.

Depending on how quickly the updated tax return is provided, the additional tax obligation is either 25% or 50% of the incremental tax as per the updated return. For instance, if the updated return is submitted within a year, an additional 25% in tax will be due. If not, the percentage would be 50%.

The updated return cannot, however, be a return of loss, it should be noted. Additionally, the updated return cannot be filed if it results in a refund, raises the amount of the refund due, or lowers the overall tax liability as determined by the initial return. If non-residents or foreign corporations want to update their tax returns, they can see if the extra taxes are deductible in their home country.

Interesting questions may also surface regarding the necessity of capping the total taxes owed on the additional income at the treaty rate.

3. The discounted rate for dividends sourced from abroad is lost.

Thirdly, the 15% tax rate that was previously applicable to foreign dividends received by Indian companies has been removed, and as a result, these dividends are now subject to the standard tax rates that apply to businesses.

With this amendment, the taxation of dividend income, whether it comes from domestic or foreign dividends, is equalized. However, it is important to remember that, provided certain requirements are met, dividends paid to shareholders are allowed as a deduction in the calculation of total income.

4. Some derivatives-related income is exempt from taxes

Fourth, tax exemptions for non-residents who receive income from the sale of offshore derivative instruments or over-the-counter derivatives entered into with an offshore banking unit in an international financial services center have been announced in the budget (IFSC).

Additionally, non-residents who receive royalties or interest income from renting ships to an IFSC unit have also been given tax exemptions (which has commenced operations on or before March 31 2024).

Additionally, income from a portfolio of securities or funds managed in an account maintained with an Offshore Banking Unit in IFSC is not subject to taxation for non-residents. This exemption applies to income that is earned or arises outside of India and is not considered to have done so there.

5. Reducing surcharges and opening tax assessments

The reduction of the surcharge on long-term capital gains for individuals is another significant change. As opposed to the peak rate of 37%, this is now limited to 15%. Previously, only listed securities were subject to this restriction.

The following set of rules relates to Section 148 of the Income Tax Act of 1961's reopening of tax assessments. Tax assessments could be reopened for six years prior to the most recent Budget, barring cases involving foreign assets. This was generally shortened to three years and, in rare circumstances, to ten years.

While most people welcomed the reduction to three years, there was concern that the exceptional 10 years would soon become the standard. Those worries appear to be coming to pass. Tax assessments may now be reopened in response to audit objections and to account for expenditures and book entries. Tax assessments will disappear as a result, and the possibility of reopening for a further 10 years will materialize.

A trend toward amending laws retroactively

Last but not least, the trend of retroactive amendments is returning, despite numerous assurances to the contrary from this government.

One retroactive change prevents the Education Cess deduction starting in the Assessment Year (AY) 2005–2006. Putting the merits of the situation aside (this cess is not a tax, is intended to promote education, and is not credited to the Consolidated Fund of India), it is important to stop retroactive amendments from overturning court decisions. Taxpayers will perceive this as an ongoing process once it begins, which will harm India's credibility.

Additionally, two additional changes have been made as of AY 2022–23. (this again is a new trend to make amendments effective from the beginning of the year and make it retrospective by a year). The government, however, claims that the law always meant what the amendment now says because these were made as clarifying amendments.

The first of these two modifications concerns the Section 14A deductibility of interest when there is no tax-free income. The second relates to Section 37 and concerns the deductibility of payments made for transgressions of foreign laws, for the aggravation of offenses, and for recipients of payments that are in contravention of the laws, rules, or policies that apply to them.

This has been accelerated to have a particular impact on payments made to or expenses incurred by pharmaceutical companies and physicians. It is interesting that while numerous courts have ruled that these payments are tax deductible, the law has now been changed to explicitly state that this was never the case.

The courts might reject this sneaky attempt at retrospective amendments (making it prospective but drafting it as a clarifying amendment that applies since the regulation's inception). What is and is not deductible for taxes is entirely up to the government. To avoid situations like the Vodafone case, it is best to avoid trying to interpret a law that has already been interpreted by the courts.

It should be noted that the change to Section 37 may result in disagreements over the payment of compounding fees when no crime is admitted, the deductibility of payments made abroad to resolve IP rights disputes, and other issues.

The provisions are generally very much appreciated. The government must address a few issues, such as taxpayers' concern over amendments being implemented retroactively. This will assist the government in preventing any unintended litigation and granting taxpayers with certainty, which is the intended outcome of India's ongoing tax reform.

By fLEXI tEAM