Budget 2022: Key Tax Expectations - KPMG Survey
Sustaining India's fledgling economic recovery, tackling rising inflation and creating jobs are some of the challenges and opportunities that Finance Minister Nirmala Sitharaman will have to address through Union Budget 2022-23, which will be presented on Feb. 1, 2022.
That's according to a pre-budget report by KPMG, which said on one hand, the momentum of India’s promising but fledgling economic recovery and buoyant tax collections must be sustained. On the other, urgent measures to spur demand, create jobs and tackle inflation are needed, even as the country deals with the ongoing third wave of the Covid-19 pandemic.
KPMG conducted a pre-budget survey in January 2022 seeking the views of key stakeholders on tax-related aspects of the upcoming Budget. Its key findings are summarised below:
Tax Rates, Reliefs And Other Incentives
On the individual tax front, most respondents expect the government to enhance the basic income tax exemption limit of Rs 2.5 Lakh.
Further, 29% of the respondents also support an upward revision in the top income slab of Rs 10 lakh and above, and 36% support an increase in the existing Section 80C deduction limit of Rs 1.5 lakh.
Currently, Indian branches of foreign companies are subject to corporate tax at 40%. The government starting from financial year 2019-20 reduced headline corporate tax rate for domestic companies from 30% to 22%, following which the gap between the rates applicable to foreign companies and domestic companies widened. A majority of respondents think there's a need to reduce the rate applicable to Indian branches in line with the 2019 rate cuts, for India to remain a globally competitive investment jurisdiction.
GST Tax Slabs
With GST revenue on the rise, respondents also felt the government shouldn't change the existing slabs of the indirect tax.
The KPMG survey also found significant support for the government’s production-linked incentives for telecom, pharmaceuticals, steel, textiles, food processing, white goods, IT hardware and solar sectors. Most respondents felt this scheme would help India become a key manufacturing hub, and 83% of the respondents favoured an expansion of this scheme to other sectors.
Measures To Rationalise Corporate Tax
New Manufacturing Companies
The concessional corporate tax rate of 15% for new manufacturing companies comes with a condition that manufacturing or production should commence before March 31, 2023. Given the Covid-19 pandemic and the resultant economic disruptions, a majority of the respondents expect the government to extend the timeline for commencement of manufacturing or production beyond March 31, 2023.
To boost job creation, a majority of respondents also felt that the government should increase the emoluments’ threshold for the deduction under Section 80JJA of the Income Tax Act from the existing Rs 25,000 per month.
Depreciation On Goodwill
The availability of depreciation on goodwill has been a highly controversial matter. Amendments made last year sought to put an end to this controversy by putting in a blanket ban on claiming depreciation regardless of whether the goodwill arose through tax-neutral transactions like mergers or demergers or through taxable transactions like slump sales or non-tax neutral reorganisations.
Most respondents however felt that this should be reconsidered, and a carve-out permitting depreciation on goodwill arising from taxable transactions should be announced.
Cross-Border Taxation and Transfer Pricing
Global consensus on the OECD’s Two Pillar framework has now been achieved and several countries including India have committed to withdraw unilateral measures like Equalisation Levy. However, the lack of certainty as to the withdrawal is reflected in the responses, with 40% of respondents expecting a repeal and over 42% being unsure.
A significant majority of respondents expect the safe-harbour regulations to be rationalised in order to provide tax certainty to both taxpayers and tax administrators. Up to 73% of respondents also said the government should come up with detailed guidance on highly litigious transfer pricing issues like marketing intangibles, cost contribution arrangements, benchmarking of loans/guarantees, IP restructuring etc.
Respondents also said the current arm’s length range of 35th to 65th percentile should be broadened to the interquartile range of 25th to 75th percentile, in line with global norms.
Boosting Credit And Investment
To provide a level playing field for REIT/InvIT investors, 53% of respondents said the holding period of REIT/InvIT units should be reduced to two years to qualify as long-term capital assets. Such a move is expected to boost participation in REIT/InvITs.
Similarly, 63% of respondents said there should be parity in the tax treatment for Indian rupee-denominated ECBs and foreign currency ECBs, and that the budget should extend the reduced tax rate of 5% to rupee-denominated ECBs.