Before we get into the Direct Tax announcements that were made, let us first look at some of the expectations on the personal tax front that were not considered in Budget 2022. Firstly, there were demands for raising of tax slabs and standard deduction as a hedge against COVID. Secondly, there was a demand for higher exemptions under Section 80C for investments, Section 24 for home loans and Section 80D for medical insurance. Lastly, there were expectations that at least long term capital gains on equity would be scrapped. None of this was offered in the budget and to that extent, people found the budget disappointing at a disposable income level.
However, the budget was not entirely bereft of direct tax announcements. There have been a number of favourable announcements and in a way, the government has done the best it could under the circumstances. Let us look at some of the key direct tax highlights of Budget 2022 and how it could impact.
Budget introduces new “Updated Return”
This is more procedural in nature but it is likely to impact the ease of tax filing. Effective the new financial year, assessees can file Updated Return for any income missed out to be declared. This can be done by paying additional tax. The Budget has allowed such updated filings to be done within 2 years from the end of the relevant assessment year. That should reduce the number of notices that have to be issued and the consequent litigation.
Reduction of AMT for cooperative societies
To bring cooperatives at par with corporates, the Alternative Minimum Tax (AMT) for cooperatives has been reduced from 18.5% to 15%. Even the surcharge on cooperative societies has been reduced from 12% to 7%. However, the budget is silent on the differential tax treatment for MSME structured as proprietorships, partnerships or LLPs.
Rationalization of tax benefits on disabilities
Currently, in the case of persons with disabilities, the tax benefit on payment of annuity and lump-sum from insurance schemes is only allowed to the individual after the death of their parents/guardians. The budget has rationalized that provision and going ahead, the benefit will be available to the individual once parents attain the age of 60.
Extension of tax concessions for start-ups
This was a logical move with nearly two years lost on account of COVID syndrome. Currently, the concessional tax regime for start-ups is only available where the date of incorporation is prior to 31-March 2022. Now that scheme has been extended by one more year up to 31-March 2023. This will ensure that the start-ups that had put off plans due to the pandemic, don’t lose out on the tax benefits. The last date for commencement of manufacturing has also been extended by 1 year to 31-March 2024.
Taxation of income on virtual digital assets
The Cryptocurrency Bill may have been put off, but a start has been made. The Budget 2022 announced that all virtual assets will be brought under the tax ambit. In a way, this is a recognition that as an asset class these virtual assets are important and the government does not plan to ban virtual and crypto assets. Here are some highlights.
• Any income arising on transfer of virtual digital assets will be taxed at the rate of 30% of the gains. This will be a flat tax and no classification of long-term / short-term is done.
• However, the assessees receiving such income cannot set off any other incidental expense in the course of conducting the virtual digital asset business, other than cost.
• Any loss arising from the transfer of virtual digital asset cannot be set off against any other income, except gains from virtual digital assets.
• Virtual digital assets can be gifted, but such gifted assets will be treated as income in the hands of the recipient and taxed accordingly.
• Last, but not the least, to ensure audit trail, 1% TDS will be imposed on the consideration above a certain monetary threshold. This is purely for audit trail purposes.
Tax on long term capital gains
Currently, capital gains is classified as short-term or long-term asset based on different holding periods for different assets. In the case of long term capital gains, the Budget 2022 has clarified that all surcharge would be capped at 15% of the tax rate. For example, in the case of LTCG on equities / equity funds, the tax on LTCG is 10%. Hence the total tax even including surcharge cannot exceed 11.5%.
Three clarifications on direct taxes
Finally, the Budget 2022 has also provided 3 vital clarifications on issues that were open to debate. Here they have been summarized.
a) Firstly, there was dispute and even Supreme Court had upheld that the Health and Education Cess was allowable as an expense. However, Budget 2022 has clarified that it is a part of the total tax and hence any surcharge or cess is not available as deduction.
b) The second grey area was about setting off losses against undisclosed incomes. Budget 2022 has clarified that no set-off against undisclosed income detected during search and survey operations would be allowed for any loss, whatsoever.
c) On the subject of TDS on business promotion pay-outs to agents. Budget 2022 clarified that if the aggregate value of benefits to agents exceeded Rs20,000 per year, then TDS would be deductible.