Budget 2023: Top Five Direct Tax Changes
On the corporate tax front, there may not be substantial amendments, but personal taxation was a key focus in this budget.
The much-awaited Budget 2023 is out, and it can be said that it is focused towards growth and continues on its path of boosting capital spending, which would in turn lead to job creation and give a push to the much-needed infra.
On the corporate tax front, there may not be substantial amendments, but personal taxation was a key focus in this budget.
Some of the key budget amendments on the direct tax side are as follows:
Personal Tax Regime
As we are aware, a new income tax regime for Individuals and HUF was introduced a couple of years ago. Even though the tax slabs were better than the old regime, this scheme was not a success as no deductions were allowed under the scheme.
To make the scheme attractive and ensure maximum participation, certain steps are proposed in the Budget only for new tax regime:
The overall slabs have been restructured from earlier seven to now six.
Basic exemption limit is hiked from Rs 3 lakh to Rs 2.5 lakh.
Rebate under section 87A has been hiked from Rs 5 lakh to Rs 7 lakh (applicable for individuals having income up to Rs 7 lakh).
Standard deduction introduced in new tax regime for salaried and pensioners.
Further, the new income tax regime becomes default tax regime. However, the individuals will have an option to continue with the old income tax regime.
Highest rate of surcharge reduced from 37% to 25% in the new regime. Accordingly, highest tax rate for incomes above Rs 5 crore would now be 39% instead of 42.73% earlier. Thus, even HNIs would also find the new tax regime attractive.
All in all, it seems that the government is looking to discourage old regime and may even dismantle it in a couple of years.
Capping Of Deduction For Investment In House Property
According to the existing tax regime, any long-term capital gains earned by an individual or HUF from sale of property or specified long-term capital asset was exempt if the net capital gains amount or the net sale consideration was invested in a new residential property. There was no monetary limit for such deduction.
It is now proposed that such deduction would be restricted to an amount of Rs 100 million (Rs 10 crore). This will have an impact on HNIs and UHNIs who have high-value residential property and were looking to swap it for new property. These provisions would be applicable from FY24 onwards.
StartUp Reliefs
According to existing tax laws, eligible startups were granted a deduction of 100% of the profits for any three consecutive tax years out of 10 years from the year of incorporation.
One of the key conditions to claim this deduction was that the start-up should be incorporated on or before April 1, 2023. To further the development of start-ups ecosystem in India, the period for incorporation has been extended from April 1, 2023 to April 1, 2024.
Additionally, in order to claim set-off of losses, there is a condition under the law which requires at least 51% shareholders, who were holding shares in the year of loss, should continue to hold the shares in the year when such losses are set off.
Start-ups were provided a relaxation in respect of non-applicability of such condition if the loss was incurred in the first seven years of operation. This period has now been extended to 10 years, which provides further relief to start-ups.
Increase In Tax Collection As Source Rates
A couple of years ago, provisions of TCS were introduced on certain foreign remittances like Liberalized Remittance Scheme, Overseas Tour Package, education loan, etc. The purpose of introduction of TCS was to track the LRS and bring it in the reporting net.
It is now proposed to increase the TCS rates from 5% to 20% for Overseas Tour Package and Liberalised Remittance Scheme. These provisions would apply from July 1, 2023. While this would not affect the overall costs since the TCS is creditable like TDS against your taxes, this would affect the cash flow of the individual.
Taxation Of Market-Linked Debentures
Many hybrid securities which combined the features of debt securities and exchange traded derivatives were currently taxed as 10% without indexation. This was mainly the case with market linked debentures.
Given that these are like derivative instrument, to align the taxation with derivative products, it is proposed to treat capital gains from redemption or transfer of such Market Linked Debentures as Short-Term Capital Gains @30%++. Further, Market Linked Debentures have been defined very widely to include any security by whatever name called which has an underlying principal component in form of a debt and returns are linked to market returns on other underlying securities or indices and include any securities classified or regulated as a market linked debenture by SEBI.
Correspondingly, amendment has also been brought under the withholding tax provisions wherein earlier relaxation from withholding was provided in case of interest earned from listed securities. Such relaxation has now been removed and interest on all kinds of securities would be liable to withholding tax at 10% (plus applicable cess and surcharge).
Closing Remarks
On an overall basis, this Budget seems to have more in store from a direct tax perspective for individual taxpayers rather than corporates. One of the major reliefs that one can consider is no change in taxation of capital gains regime as was widely speculated.
On the corporate tax side, few of the expectations such as extending the period for starting manufacturing activities for new manufacturing companies, proposals on minimum corporate tax rate in line with OECDs Pillar 2 project, reducing the compliance burden on account of TDS and TCS were conspicuously absent.
Maulik Doshi is Deputy Managing Director-Direct Tax and Transfer Pricing Services at Nexdigm (SKP).
The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.