Budget 2023: Tax Incentives That Will End This Fiscal Unless...

Various stakeholders are eagerly awaiting announcements on new tax incentive announcements, considering that this will be the last major union budget before the general elections scheduled for mid-2024.

While the government, on the one hand, has been consistent in providing a stable tax regime, it has also not introduced any significant tax benefits or exemptions, and many tax incentives introduced earlier have been grandfathered over the last few years.

A few tax incentives, which were either introduced or extended to give an impetus to specific sectors of the economy, may fade into the sunset by the end of this fiscal. Though these will continue to operate for those who have already met the requisite conditions, they may no longer be available to new entrants unless the government considers an extension.

The benefit of a 100% tax holiday on the profits earned from ‘eligible businesses’ for a period of three consecutive years, which was available to eligible start-ups, will now not be available to any start-up incorporated after March 2023. 

This benefit was originally introduced with the intent of providing impetus to start-ups and to facilitate their growth in the initial phase of their business in India.

As per reports, India has more than 80,000 registered startups, and this number could double by 2025, with the potential to generate more than 3 million job opportunities in the country. Given the rate at which start-ups are projected to rise in India, not extending this benefit could weaken the projected growth.

The sunset clause under this benefit has been extended several times in the past. However, while presenting the last budget, Finance Minister Nirmala Sitharaman cited in her speech that the extension is provided for one more year since there were delays in setting up start-up units owing to the Covid-19 pandemic.

Considering the huge potential of start-ups in creating job opportunities and their contribution to the economy, it is likely that the government will look at extending this incentive.

(Reference: Section 80IAC of the Income-Tax Act, 1961)

Another benefit, which provided a lower rate of tax on interest payments to non-residents at 5% on certain notified debt instruments, has paved the way for Indian taxpayers to explore and avail significant overseas funding at low cost for long-term projects. This benefit of a lower rate of tax on interest income will no longer be available for debt instruments issued after July 2023.

Globally, interest rates on sovereign bonds issued by developed countries have risen over the last year due to various economic headwinds and are already impacting the flow of foreign funds into Indian markets.

It will therefore be crucial for the government to ensure that Indian debt markets are equally attractive to foreign investors, and this regime of a lower rate of tax could well allow Indian taxpayers to tap overseas markets for long-term debt requirements.

(Reference: Sections 194LC and 194LD of the Income Tax Act, 1961)

To promote the use of electric vehicles in India, a deduction of Rs 1,50,000 was allowed on interest payable on loans availed for the purchase of such vehicles by individual taxpayers. The benefit was allowed on loans availed up to March 31, 2023.

The incentive was introduced with a view to helping the environment by reducing vehicular pollution. Given that the market for electric vehicles is growing, an extension to the above tax incentive can be expected in the upcoming budget.

(Reference: Section 80EEB of the Income Tax Act, 1961)

In order to make setting up shop at the IFSC more attractive, the government had exempted capital gains received by non-residents on account of transfers of shares of an Indian company from a fund registered outside India to a fund established or incorporated in India up to Mar. 31, 2023.

To continue to make the IFSC an attractive investment hub for non-resident investors, it is likely that the government will extend the above benefits in the upcoming budget.

The above tax benefits, which have been available for several years now, have had a positive impact in the past with limited litigation, unlike several other tax holiday benefits introduced in the past. The government can look favourably at continuing with the above benefits and herald a new dawn!

The article has been authored by S. Anantha Padmanabhan, Partner, and Vishal S. Kumar, Senior Manager, Deloitte Haskins & Sells LLP India.

The views expressed here are those of the author and do not necessarily represent those of BQ Prime or its editorial team.