Union Budget 2023 factors various contours, including supporting small and micro enterprises (SMEs), focusing on tax dispute resolutions, providing relief to startups, reiterating focus on governance and making India as an attractive jurisdiction for investors.
Here are some of the key takeaways from the Budget that can impact businesses.
Payment due to SMEs will be disallowed if not paid on time and until actually paid: Payments made towards SMEs will be allowed as a deduction only on the actual payment in case there is a delay in payment beyond 45 days. This comes as an additional layer of support for the SME sector, in addition to the MSMED Act, which focuses on safeguarding the MSME sector’s interest.
Indian firms to pay tax on super premium received on issue of shares to non-residents: The relevant section before the amendment was restricted to resident investor(s), wherein any super premium paid by India resident investors, beyond the fair valuation of shares, was taxable in the hands of the issuing Indian company. Now, the scope is further extended to non-resident investors, as well, which means that any super premium beyond the valuation received by an Indian company from non-resident investors would be subject to tax in India. This may put a business perspective to valuation at the centre of all tax and regulatory filings. The interplay of valuation requirements under the Indian Income-tax law and foreign exchange regulations will need to be evaluated alongside (including applicable valuation methodologies).
Extra diligence may be required in declaring inventory value: To assess potential undervaluation of inventories, it is proposed that the tax officer may direct the taxpayer to get the inventory valued by an independent cost accountant nominated by the Commissioner or Principal Commissioner of Income-tax. This proposal indirectly communicates the need for appropriate diligence to be demonstrated as used in the valuation of inventories.
Where tax authorities trigger this, it may increase the compliance burden of taxpayers who are, otherwise, not statutorily required to undertake audit of inventory and cost records. Additionally, given that such verification is proposed to be undertaken at the time of assessment proceedings, practical aspects on data availability, manner of performing audit, etc., will need to be appropriately factored.
Relief to startups as carry forward of loss allowed for 10 years instead of seven: The three-year tax rebate is now available for startups incorporated up to 31 March 2024. Further, the time allowed to carry forward the loss for startups has been extended from seven to 10 years from the date of incorporation. This aspect aligns with the practice followed by other developed countries, where an extended loss carry forward is allowed for startups. This will help India, which is, presently, one of the largest ecosystems for startups globally gain a competitive edge.
Adjustments of tax refunds, without providing the opportunity of being heard: The adjustment of refunds against tax due between assessment years required an opportunity to be provided to the assessee to contest. However, under the proposed Finance Bill, a mere intimation of such adjustment by the tax authorities is deemed sufficient and the requirement to provide an opportunity to the taxpayer has been done away with. This will impact the taxpayers who have had cases under litigation for multiple assessment years and which are pending disposal at higher appellate forums (even where similar issues are decided favourably to the assessee by other forums).
GST paid on CSR expense to be a part of the business cost: Input GST credit will not be available for any goods or services used or intended to be used for CSR purposes. For certain business who may have utilised the GST credit on CSR expenses in the past, it may be relevant to evaluate If the past position should change because of this specific clarification in the law.
Custom duty rejigged on several items, specifically relating to electronics industry: The custom duty for several items, which may be used by the electronics industry, has been substantially reduced, and, in some cases, it is reduced to zero. This change would significantly support cost competitiveness of the Indian manufacturing industry, particularly where several electronic multi-nationals, specifically from Taiwan, are evaluating India as the global manufacturing hub and moving operations from China.
The changes that have been discussed in the Union Budget will provide avenues to break the bottleneck of dispute resolution by the initiation of an additional authority. The widening timelines for tax assessment and narrowing the same for transfer pricing will require a stronger governance in organisations and will also aid in quicker resolution of disputes.
The overall goal of tax changes appears to support bolstering economic growth by tapping the potential of the SME and startup ecosystem, while plugging in some of the existing loopholes in the tax structure. These amendments are in tune with the Honourable Finance Minister’s intent and objective of Amrit Kaal, if they are implemented as per intent.
N Madhan, Partner – Price Waterhouse & Co LLP