India’s budget looks to tax cryptocurrencies, extending India’s tax base
India’s Union budget announced on February 1 carries key tax amendments affecting multinationals doing business in India.
In response to the increasing popularity of digital assets, the budget introduced a special tax regime for this class of assets. Gains on the transfer of cryptocurrency will be taxed at the rate of 30 percent (increased by applicable surcharge and levies). However, any losses arising from the sale of such transactions cannot be offset or carried forward.
Further, to track such transactions, the budget introduced a withholding tax provision, for the transfer of such assets at 1 percent of the sales consideration. The withholding provision will apply even if the consideration is settled by exchange of virtual digital assets or partly in cash. Gifting crypto assets will attract tax in the hands of the recipient.
The option of filing a revised tax return was introduced for the payment of additional taxes within a three-year period from the end of the financial year. The aim being additional revenue mobilisation and the option of revision of income on the expiration of timelines. An additional tax of 25 percent must be paid if such a return is filed within 24 months of the end of the financial year. In other cases, the tax would be 50 percent.
Continuing with the past trend, several modifications were introduced in the income tax act are in line with recent court rulings in favor of taxpayers. As an example, in various judgments, Indian courts have held that if an assessment is made on a predecessor entity, which loses its existence following a sale or merger, it will be considered illegal. As a result, a law has been proposed to make such assessments valid by deeming it to have been made on the successor entity. This will apply prospectively. Pursuant to rulings in favor of the taxpayer, an amended law has been proposed to provide that the surcharge and levy paid on income tax should no longer be a deductible business expense. This change is retrospective. In another example, several courts had held that conversion of outstanding interest to debentures will be treated as payment of interest and will be tax-deductible—the proposed law has been amended so that from now on such conversions will not be tax-deductible payments.
To boost domestic manufacturing, a concessional corporate tax rate of 15 percent was introduced in an August 2019 ordinance along with a condition that manufacturing or production must start before March 31, 2023. This time frame has now been extended to March 31, 2024.
Further, to promote start-up culture in India, the law which provided 100% exemption of profits for three out of 10 years for incorporation before March 31, 2022, has been extended for incorporation up to March 31, 2023.
The budget also continues the government’s attempt to promote investment in the offshore financial services sector. It has proposed to expand exemptions by allowing the exemption of: Nonresident income on the transfer of offshore derivative instruments and over-the-counter derivative transactions with an offshore banking unit located in an international financial services centre; royalty and interest income to nonresidents on the lease of a ship (ocean vessel) paid by a unit of an international financial services centre; income from portfolio investments and financial products, managed or administered by portfolio managers maintained with an offshore banking unit, in an international financial services centre, earned by a nonresident.
The domestic law contained anti-abuse measures to curb the practice of dividend stripping on stocks and units of a mutual fund. The law has been amended to include other forms of securities. Further, such anti-abuse measures would be made applicable to business trusts, such as infrastructure investment trusts, real estate investment trusts, and alternative investment funds.
The concessional tax rate of 15 percent on dividends an Indian company receives (from a foreign company) has now been withdrawn.
To curtail tax disputes, a new provision to curb the practice of filing repetitive appeals by the tax authorities where a similar matter is awaiting determination by the High Court or Supreme Court on questions of law has been introduced. As appeals entail mixed questions of law and fact, it remains to be seen how the new law will be administered in practice.
In conclusion, the focus of the 2022 budget proposals from a tax perspective seems reformative, plugging loopholes and widening India’stax base. The budget has largely adhered to India’s declared policy to remain a stable and predictable regime. The vision is to establish a trust-based regime to simplify the system, promote voluntary taxpayer compliance, penalize tax evaders, and reduce litigation. The budget proposals could have taken more steps in the direction of tax litigation management. With the introduction of laws such as the taxation of cryptocurrency and provisions to widen the scope of past assessments, litigation could, however, increase.
Mukesh Butani and Seema Kejriwal are partners at BMR Legal Advocates in New Delhi.