Will Nirmala Sitharaman’s annual financial statements provide a reminder to taxpayers?

Union Budget 2022-23: All eyes are now on the Finance Minister in hopes that she will deliver a boost to the economy, particularly to sectors such as health, infrastructure, education and social regimes

Indian Union Budget 2022: File photo of Union Finance Minister Nirmala Sitharaman. PTI

On February 1, 2022, Finance Minister Nirmala Sitharaman will present her fourth Union budget amid the third wave of coronavirus, at a time when economic recovery has just touched pre-pandemic levels. In recent times, the government has made clear its intention to strengthen the economy and promote entrepreneurship through “Make in India” and PLI programs.

On the tax side, we have seen several tax reforms over the past few years, including reducing corporate tax rates, using technology to conduct assessments and appeals, ending the controversial retrospective law on indirect transfers, etc.

That said, there are quite a few business pain points that need addressing and industry is eagerly awaiting the Union budget announcements to address some of their concerns. We have summarized some of the main fiscal expectations of businesses from the EU budget below.

Mitigation of tax disputes

Considering the large number of cases stuck in litigation, the government introduced the Vivad Se Vishwas (VSV) scheme with the noble aim of settling the ongoing direct tax disputes. While VSV has helped reduce past tax disputes, now is the time to introduce a mediation system that will help resolve disputes in the future, allowing taxpayers and the taxman to settle the dispute out of court. This concept is widely used around the world and has helped to significantly reduce litigation in many countries.

Taxation of cryptocurrencies

The Indian cryptocurrency market has grown exponentially over the past few years. In this regard, a bill setting the specific regulatory framework for the processing of crypto-currencies is under deliberation. In light of the growing crypto investments in India, it would be useful for the Minister of Finance to introduce a specific scheme for the taxation of cryptocurrencies in India. This will help resolve contentious issues such as GST and tax implications of trading cryptocurrency, determining the applicable tax rate, claiming expenses, reporting requirements, and more.

Modifications to the BAR diet

In last year’s budget, the Advance Rulings Authority (which issued advance rulings to taxpayers) was replaced by an Advance Rulings Board (ARB). The BAR consists of two members, not below the rank of Chief Commissioner (CCIT). Also, unlike the AAR case, BAR orders are not binding and can be appealed to a high court.

To enable taxpayers to obtain fair and unbiased decisions, the BAR membership constitution should be amended and may instead include (i) an existing/retired Tribunal member as Chairperson, (ii) a the IRS, not below the rank of CCIT and (iii) scholar/expert in the field of international taxation. Also, as with the AAR regime, BAR orders must be final and not subject to appeal. This will help taxpayers gain certainty and not drag them into protracted litigation.

Merger of companies

In the event of a merger of companies, the losses of the merging company can only be carried over to the merged company to a certain category of companies. Section 72A of the Income Tax Act should be amended to allow the benefit of loss carryforward to all corporations, regardless of the nature of their business.

Exemption of foreign shareholders in the event of a merger

Express tax exemption is available for gains made on the transfer of shares of an Indian company in a merger of two foreign companies. However, a corresponding exemption is not available to shareholders of the merging foreign company, where such company derives substantial value from India. This appears to be an unintended loophole in the law and it would help multinationals enormously if this loophole were closed in this budget.

Look forward

Over the past year, the finance minister has unveiled a bold and aggressive budget giving a massive boost to a spending plan to lift India’s economy out of a pandemic-induced slump. As the uncertainties around COVID-19 continue this year as well, all eyes are now on the finance minister in the hope that she will provide a boost to the economy, especially sectors such as health, infrastructure, education and social systems. Overall, we hope that the Union Budget 2022-23 will put the economy back on a high growth trajectory in line with India’s ambition to fast-track towards a 5 trillion economy. of dollars.

Himanshu Parekh is Partner, Tax, KPMG in India; and Ravish Kotadia, Chartered Accountant

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Marianne R. Winn