The global economy has struggled in the past two years as a result of the COVID-19 pandemic. Repeated waves of pandemic, supply-chain disruptions, and, more lately, inflation have made policy shaping a challenging task. When confronted, India’s first response was a slew of safety nets designed to cushion the impact on disadvantaged segments of society and to small and medium enterprises. However, India’s capital markets, like many other global markets, have performed admirably, allowing Indian firms to raise record capital, promote a wider ecosystem for start-ups etc. More importantly, the financial sector is adequately capitalised, and the overhang of Non-Performing Assets appears to have improved materially, despite the pandemic’s delayed effects. All of this has clearly delayed India’s ambition for becoming a 5 trillion-dollar economy.

Macro Aspects of the Budget

Budget 2022-23 at first glance seems to be growth-oriented, with a sharp focus on capital-spending and a conservative fiscal deficit of 6.4 per cent coupled with measures to minimise regulatory costs and enhance ease of doing business. Given the magnitude and interconnectedness of the Union budget, infrastructure expenditure has been a major focus in line with previous Budgets. Overall expansion and development of the infrastructure sector would assist in creating a multiplier effect besides the focus on healthcare services to marginalised citizens.

The National Digital Health Ecosystem will aid in the development of a strong platform for managing all health information and providing universal access to records. Given the Covid-19 pandemic, the budget has also prioritised Telemental Health, which is a positive move forward to cover a wider population.

With the PM Gatti Shakti plan, the government’s continuous commitment on national transportation infrastructure will aid improve multimodal connectivity allowing smooth freight movement while lowering logistics and transaction cost. For the MSMEs, the Budget has incorporated measures to boost specified sectors (such as hospitality and related enterprises) and to become more resilient, competitive and efficient.

Direct Tax Measures

Key reforms include the option to file an “updated” return; incentives to start-ups, cooperative societies, GIFT city; widening the scope of taxation on transfer of virtual digital assets; litigation management for repetitive appeals filed by the Tax Department and a new provision for non-residents to claim refunds by denying tax liability.

With an aim to promote Voluntary Compliance and build a robust framework of reporting of taxpayers’ transactions, the Budget has proposed to provide an opportunity to correct errors including situations of under-reporting on payment of additional tax. Such revisions can be filed within two years from the end of the relevant assessment year, as opposed to the present one year limit for revision of return.

In recent years, virtual digital assets have grown in popularity, and the volume of trade in such digital assets has expanded significantly. Furthermore, a market is forming in which payment for the transfer of a virtual digital asset can be done using another virtual digital asset. As a result, a new mechanism for taxing such virtual digital assets has been proposed.

With an aim for litigation management to avoid repetitive appeals by the tax administration, the Budget has proposed that where an issue in the case of a taxpayer is identical and pending in appeal before the jurisdictional High Court or the Supreme Court, filing of repetitive appeal shall be deferred until such issue is decided by the courts. This will help to reduce repeated litigation between taxpayers and unclog litigation machinery.

For a non-resident disputing tax liability, the Budget has proposed a new provision to allow filing for a tax refund and challenging withholding tax order. Where the department rejects the application, such non-resident can now file an appeal before the Commissioner (Appeals).

Under the Indian Tax law, income tax paid is not an allowable expenditure. The ‘Health and Education Cess’ levied on taxpayers to finance certain government social initiatives. Some courts, however, have permitted ‘Health and education ‘cess’ as business expenditure, which is contrary to the legislative intent. To emphasise the legislative meaning, the Budget has proposed to clarify that any surcharge or cess on income and profits is not allowable as business expense.

Overall, macroeconomic stability indicators indicate that the economy is well positioned to meet the challenges and deliver decent growth. Rather than a strict reaction in advance, the Government of India chose to utilise safety nets for vulnerable parts of the economy, while responding iteratively based on Bayesian-updating of information. Another differentiating element of Budget response has been a focus on supply-side reforms rather than reliance on demand control. These supply-side changes include deregulation of multiple industries, process simplification, elimination of legacy difficulties such as “retrospective taxation,” privatisation, production-linked incentives, and so on. The government’s substantial rise in capital investment may be viewed as a demand and supply boosting reaction, as it builds infrastructural capacity for future development.

The Budget’s overarching theme has been trust-based governance in order to establish Atmanirbhar Bharat and repose faith in taxpayers, entrepreneurs, and investors. With a change in narrative with a 25-year vision, the goal is to establish an open, digital, and inclusive India. The budget will help India become self-sufficient and set the groundwork for a new India in its centenary year of independence.

(Mukesh Butani is Managing Partner and Shreyash Shah is Managing Associate at BMR Legal Advocates)