A pragmatic and predictable tax regime, to help energise India’s growth ambition

New Delhi: Union Finance Minister Nirmala Sitharaman with Ministers of State for Finance Bhagwat Kishanrao Karad and Pankaj Chaudhary and officials during the ‘Halwa’ ceremony to mark the final stage of Union Budget 2023-24, in New Delhi, Thursday, Jan. 26, 2023.
| Photo Credit: PTI

By Gokul Chaudhri

What will be the defining theme for Budget 2023 in relation to taxation?

The preceding years successfully navigated the tax framework towards competitive rates, delivered on critical reforms such as introduction of the GST, dispute resolution schemes and in the elimination of distortions such as the dividend distribution tax. The outcome has been a better globally-aligned tax framework and a welcome tax buoyancy.

Two major tax direct changes are on the anvil — adoption of global minimum tax as proposed under Pillar 2 of the G20/ OECD proposals and the harmonization of the capital gains tax regime. The Union Budget needs to articulate their roll-out. In addition, it could propose tax initiatives for financing of India’s climate and sustainability goals and enabling efficiency for start-ups issuing stock options.

Tax certainty

The biggest change in international taxation is the G20/OECD sponsored proposal for a jurisdiction-by-jurisdiction global minimum tax of 15% on large multinational enterprises. As of now about 135 countries under the G20/OECD Inclusive Framework have been approved and the proposal is to be included in domestic tax legislation to be implemented from 2024. Already, the U.K., the Netherlands and Canada have released draft legislations or commenced stakeholder consultations. India, which currently has the G20 presidency, can take a lead in placing its proposed legislation for public consultation and outline the proposals in the Budget.

The government has stated its intention to revisit the capital gains tax regime to rationalise the plethora of differential holding periods, tax rates and asset classification. The Budget could roll out draft legislation and seek stakeholder inputs so that any major revamp is preceded by taxpayer engagement. This would underscore the theme of tax certainty and avoid any surprises for investors and taxpayers. Anxiety typically stems from unintended consequences when a complex legislation is tweaked, as illustrated by the discomfort of international investors on account of tax rate and implementation ambiguities when levy of long-term capital gains tax on sale of listed securities, was proposed in the Budget for 2018.

India has announced ambitious climate related targets for decarbonisation of its economy primarily through investments in renewable energy sources. Long term fund raising is essential to deliver energy transition and to achieve sustainable development goals. The RBI recently announced the issue of ₹160 billion sovereign green bonds. This initiative can be supplemented with private participation. To attract investments in green bonds issued by Indian issuers (including sovereign green bonds), interest during the period of holding the bonds and capital gains from the transfer of bonds, could be made exempt for investors. To incentivise issuers, accelerated tax depreciation can be provided on those assets acquired with the proceeds of green bonds, which meet the end-use requirements.

The Union Cabinet recently approved the National Green Hydrogen Mission to bring in Production-Linked Incentives for manufacture of green hydrogen and its key component electrolyser. Such domestic manufacture should be explicitly made eligible for concessional 15% corporate tax rate and also, the current sunset of March 31, 2024 for commencing production, should be extended by at least 3-5 years.

Incentive for start-ups

Budget 2020 deferred the tax liability on issue of ESOPs to employees of eligible start-ups. The exemption applies to start-ups whose turnover does not exceed ₹1 billion. This threshold should be removed, and the benefit of deferral be made available to all start-ups during first 10 years. Certification from Inter-Ministerial Board of Certification (IMB) could be replaced by a self-declaration.

Simplification, such as introduction of alternative tax regime for individual taxpayers and the proposal on a common income tax return form are certainly welcome. The government would also do well to incorporate more of the recommendations made in 2016 by the Income Tax Simplification Committee led by Justice R.V. Easwar. A specialised institution could be established to provide constant advice on simplification of tax laws.

To sum up, Budget 2023 should press forward India’s growth ambitions balanced with prudent fiscal policy with theme of transparency, certainty and predictability.

( Gokul Chaudhri is a Partner at Deloitte Touche Tohmatsu India LLP)