Budget 2022 includes rules on tax treatment of crypto-currency
India’s Union Budget 2022, presented by the Finance Minister on 1 February 2022, focuses on growth and recovery following two years dealing with the COVID-19 pandemic and endeavours to provide a predictable tax regime that encourages voluntary compliance and reduces tax litigation. The tax measures included in the budget evidence the maturity of India’s tax law in that there are fewer changes overall than in previous years and more measures that clarify existing rules. Significantly, no changes were announced to company income tax rates. Unless otherwise noted, the proposed measures would apply as from fiscal year 2022-23. The budget still must be approved by both houses of the Indian Parliament and assented to by the President.
This article highlights the budget proposals that affect foreign investors and multinationals, the most important of which may be the measures relating to the tax treatment of crypto-currency.
Taxation of virtual digital assets (VDA)
To address the exponential increase in crypto-currency transactions, the budget proposes the introduction of a specific regime to regulate the tax treatment of income arising from VDA (i.e., crypto-currencies and non-fungible tokens). The following measures are proposed:
- Gains from the transfer of VDA—including by gift—would be taxed at a flat rate of 30% (plus the applicable surcharge and cess). Where VDA are gifted, tax incidence would be on the recipient.
- No deductions for expenses relating to the transfer would be allowed, except for expenses related to the cost of acquisition of the VDA. Further, losses incurred on a transfer of VDA would not be available for set off against other income or carried forward to subsequent fiscal years for offset. A 1% withholding tax would be levied on payments for the transfer of VDA to an Indian resident taxpayer where the value or aggregate value of the consideration is at least INR 10,000. The withholding obligation would apply as from 1 July 2022.
It is likely that some of the proposed measures may require further clarification.
Dividend and bonus stripping
The budget would extend the anti-avoidance rules relating to dividend and bonus stripping to apply to units of an Infrastructure Investment Trust (InvIT), Real Estate Investment Trust (REIT) and Alternative Investment Fund (AIF).
In addition, the concessional tax rate of 15% that applies to dividends received by Indian companies from shareholdings in certain foreign companies would be repealed to provide parity in the tax treatment of dividends received from Indian companies and from foreign companies (the dividend distribution tax that applied to domestic distributions was abolished in Finance Act, 2020). Foreign dividends would be subject to the shareholder’s tax rate from 1 April 2022.
International Financial Services Centre (IFSC)
In 2015, the government announced that IFSCs would be set up in India starting with Gujarat’s GIFT city and has introduced measures to support the development of a world class Fin-Tech hub. To attract more investment and further promote Gujarat GIFT city, tax exemptions have been proposed on the following types of income derived by nonresidents:
- Income earned on the transfer of offshore derivative instruments or over-the-counter derivatives to an offshore banking unit in IFSC;
- Income from a portfolio of securities or financial products or funds, managed or administered by a portfolio manager on behalf of a nonresident in an account maintained with an eligible Offshore Banking Unit in an IFSC, subject to certain conditions; and
- Interest and royalty income paid by an eligible unit in the IFSC to a nonresident on a ship lease (an exemption already applies to the leasing of aircraft).
Tax incentives and start-ups
- The stimulus measures announced under the “Make in India” initiative for new domestic manufacturing companies would be extended. Under current law, a new domestic manufacturing company that was set up and commences commercial production on or before 31 March 2023 is eligible for a 15% tax rate, provided the company does not benefit from specified incentives or deductions. The COVID-19 pandemic has created delays in the setting up of such companies and the commencement of operations, so the budget contains a measure that would extend the commercial production commencement threshold for another year, to 31 March 2024. This measure would apply as from fiscal year 2021-22.
- To facilitate the development of start-ups in India and provide a competitive platform for new businesses to thrive, a tax holiday introduced in 2016 allows eligible start-ups to deduct 100% of the profits and gains derived during any three consecutive years out of 10 years beginning from the year of incorporation. One of the requirements to benefit from the tax holiday is that the start-up be incorporated on or after 1 April 2016 but before 1 April 2022. As there have been delays in establishing start-ups due to the pandemic, it is proposed to extend the outer deadline for incorporation for an additional year, to 31 March 2023. This measure would apply as from fiscal year 2021-22.
- Taxpayers would be permitted to file an updated income tax return within three years from the end of the tax year (currently, amended tax returns are allowed only up to nine months from the end of the tax year). However, the taxpayer would be required to pay fees and interest on any additional income reported under the updated return (which does not apply in the case of an amended return filed within nine months from the end of the tax year). An updated return would not be permitted if it decreases tax liability or increases the amount of a refund, or if the taxpayer is under investigation or audit (these restrictions do not apply to a tax return amended within nine months from the end of tax year). This measure is expected to result in additional tax revenue to the government, promote taxpayer compliance and ease compliance obligations The option to file updated tax returns would be available for tax returns for tax years as from 2019-20.
- Currently, orders of a transfer pricing officer may not be revised by the Commissioner. It is now proposed to grant powers to the Commissioner to revise an erroneous assessment order or cancel the order and issue a new order that is prejudicial to the interests of the tax authorities. This measure would be effective from fiscal year 2021-22.
- Transfer pricing and international tax issues would be brought within the scope of “faceless audits” by 31 March 2024 (a one-year extension) and the government intends to further streamline the process and eliminate operational difficulties and implementation concerns.
- The filing of appeals by the tax authorities would be deferred where an identical question of law is pending before a higher court (e.g., the High Court or Supreme Court), regardless of whether the pending case involves the relevant taxpayer or another taxpayer.
- Currently, any amount incurred on an activity prohibited under Indian law is not tax deductible. It is now proposed to extend the nondeductibility rule to apply to expenses incurred on an activity that is prohibited under any foreign law.