AMCHAM Post-budget review, Union Budget 2022-23

Union Budget 2022-23 Post-budget presentation February 2021

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Joining you today

Neeru Ahuja Chairperson - Taxation, Tariff & Regulatory Affairs Committee, AMCHAM AND Partner, Global Business Tax, Deloitte India

Sumeet Hemkar

Naveen Aggarwal

Anshul Aggarwal

Partner, Global Business Tax, Deloitte India

Co-Chairman - Taxation, Tariff & Regulatory Affairs Committee, AMCHAM AND Partner, International Tax Partner in Charge, US Corridor, KPMG in India

Partner, Indirect Tax, KPMG in India

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Table of content Macroeconomic overview

Key direct tax proposals

Key indirect tax proposals

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Macroeconomic overview - India story

Economy: A quick snapshot of the current status GDP growth Growth is estimated at 9.2 percent for FY22.

Gross value add in agriculture and industry is estimated to grow by 3.9 percent and 11.8 percent, respectively. Gross investment and exports will be the bigger growth drivers.

What to expect in FY23 Growth may increase between 8.0 percent and 8.5 percent. Rapid pace of vaccination and longterm benefits of supply-side reforms in the pipeline will aid growth.

Inflation In Dec 2021, the CPI inflation increased to a fivemonth high of 5.6 percent with core inflation remaining high at 6.1 percent.

What to expect in FY23 India does need to be wary of imported inflation, especially from elevated global energy prices and supply-chain disruptions.

Government’s 10year security yields

Rupee

Yields have risen to 6.4 percent in Dec 2021, due to inflation and rising government borrowings.

The tapering of assets by the US Federal Reserve has also led to an increase in yields.

Indian rupee depreciated by 3.4 percent in December 2021 over March 2021. However, the rupee exhibited movements in both directions against US dollar during this period.

What to expect in FY23 Yields may remain volatile with downside risks amidst a rising fiscal deficit and uncertainty around global liquidity.

What to expect in FY23 The rupee may remain volatile amidst pandemicrelated uncertainties, inflation, a rising fiscal deficit, and US Federal Reserve’s tapering of asset purchases.

Credit growth**

Fiscal deficit

Domestic credit growth was 9.8 percent in Q3 FY22 against 8.5 percent in FY21. Credit growth to the industry sector improved but yet to recover in the services sector.

The fiscal deficit reached 46.2 percent of the full year target during April−Nov 2021, amidst a rise in tax collections. The deficit for FY22 is expected to be -6.9 percent.

What to expect in FY23 Demand for credit growth may pick up gradually as economic activity returns to normalcy. Banks are well capitalised; reduced NPAs may improve their willingness to lend.

What to expect in FY23 The government finances to witness consolidation in FY22, after uptick in deficit and debt indicators in FY2021. The deficit is expected to be –6.4 percent in FY23.

Current account deficit

FDI

Current account recorded a deficit of 0.2 percent of GDP in H1 FY22, led by a rising trade deficit.

Net FDI inflows amounted to US$ 24.7 billion for April-November 2021, 29.5 percent lower than April-November 2020.

What to expect in FY23 The current account may remain in deficit as imports rise with the economic recovery.

Stronger exports may keep the deficit in check.

What to expect in FY23 FDI is expected to remain volatile due to global uncertainties associated with the spread of the infection and the pace of monetary policy tightening in advanced countries.

Note: **Domestic credit is summation of net bank credit to government and bank credit to commercial sector. Growth is measured on year-on-year basis on real values, wherever applicable.

Sources: CMIE, RBI Weak outlook

Strong outlook

Neutral outlook

Economy is projected to grow by 9.2 percent in FY22; 8.0 - 8.5 percent in FY23 India’s recovery is getting a boost from rising infra spend, robust exports, strong capital flows, and an impressive vaccination rate.

Growth drivers India’s economic fundamentals have improved substantially. A rapid economic recovery in key industrial nations with strong trade ties have aided in strong export growth. India was amongst the few nations that witnessed strong FDI in 2020, and the momentum continued in 2021. Net FDI inflows amounted to US$ 24.7 billion from April-November 2021.

Robust foreign investment inflows also resulted in a strong growth of the capital market. The current account balance is healthy and adequate foreign exchange reserves provide a cushion against unforeseen external shocks.

Downside economic risks One of the biggest downside risks to the outlook is the possible surge in infections and the consequent return of mobility restrictions.

Rising inflation on account of global supply chain disruptions, travel restrictions, concerns around higher oil prices, and potential inability of businesses to ramp up to meet the surge in demand are other potential risks.

Higher fiscal deficit and borrowing are likely to affect public debt, which can erode investors’ confidence and raise borrowing costs for India.

% YoY 70 50

10 -10 -30 -50 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022

Despite policy support, bank credit growth has remained subdued.

The service industry’s gross non-performing assets (GNPAs) have increased and lending to MSMEs remains low. That said, banks are well-capitalised and overall GNPAs have declined this year.

46000

Gains from supply-side reforms and easing of regulations may also boost growth. The government’s emphasis on infrastructure spending, reforms, various supportive schemes (such as PLI,) and digitalisation are expected to boost investment and kickstart the virtuous cycle of investment, employment, income, and demand.

Poor employment growth has affected household demand and poses a long-term risk to the effective use of demographic dividend.

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Availability of fiscal space to ramp up capital spending, easing supply-chain constraints, and synchronised global growth (resulting in strong exports) will further boost the growth momentum.

Deloitte expects the economy to grow between 8.7 percent and 9.4 percent in FY22, followed by equally strong growth of 9 percent and 7.5 percent in FY23 and FY24, respectively.

Government consumption Exports, goods & services

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Accelerated rates of vaccination and substantially reduced mobility restrictions have improved consumer and business confidence.

Consumers’ pent-up demand is expected to rebound strongly, signaling businesses to ramp up spending.

Tapering of balance sheets and a possible policy rate hikes by central banks in advanced countries can trigger capital outflows, thereby leading to currency depreciation and imbalance in the capital account balance. It may also result in a tighter monetary policy stance in India.

The four growth engines of real GDP Private consumption Total fixed investment

INR billion

Deloitte’s real GDP projection (seasonally adj, level values) Scenario 1: Optimistic Scenario 1: Optimistic Scenario 2: Pessimistic

No-COVID growth

36000 31000 26000

Nation-wide lockdown

Second wave

Forecasts

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 FY18-19 FY19-20 FY20-21 FY21-22 FY22-23 FY23-24

Note: Economic projections were done in early Dec 2021. Projections don’t account for the latest GDP revision of the past year Source: CMIE, RBI, Deloitte Insights

The FM unveils the Bahi-Khata: A blueprint from India @75 to India @100 Focus on four priorities: PM Gati Shakti; inclusive development; productivity enhancement and investment, sunrise opportunities, energy transition and climate action; and financing of investments 1. Infrastructure investment Deloitte’s views: Revenue buoyance and fiscal space allowed the government to focus on public investment. The major emphasis was on the seven engines of PM’s Gati Shakti as well as on social infrastructure, education, and digitisation.

Efficient and timely execution will be key.

Social infrastructure • Allocating INR 600 billion for 38 million households to get piped water • Upgrading 200,000 anganwadis to focus on child health • Covering villages with optical fibre under the BharatNet project through a PPP model by 2025 Education • Resilient mechanism for education delivery • Quality content for education through digital means Physical infrastructure • The national highway network will be expanded by 25,000 km in 22-23.

• Four multi-modal logistics park contracts will be awarded in FY23.

• About 100 new cargo terminals will be developed in three years.

• Initiatives to provide boost to railways, affordable housing under PM Awas Yojana, urban sector development, and a vibrant-village programme were announced.

• A data centre and energy storage system will be given infrastructure status; it will be moved to provide easy financing.

Digitisation and technology Deloitte’s views: From the digital rupee to a digital university, Budget 2022 saw an unprecedented push for digitisation.

For the citizens • E-passports • National digital health, including tele-mental health centres For education • Digital ecosystem (e-Vidya and digital university) for skilling and livelihood to be launched; aiming at reskilling and upskilling through online training • A digital ecosystem for skilling and a livelihood portal, DESH-stack, to be launched For agriculture • Use of Kisan drones for crop assessment, digitisation of land records, and spraying of insecticides​ Banking • RBI-led digital rupee using blockchain to be launched in FY23 • About 75 digital banking units in 75 districts by SCBs For ministries • Launch paperless e-bills for procurements For MSMEs • MSMEs portals, such as Udyam, e-shram, NCS, and ASEEM to be inter-linked

2. Demand generation and employment Deloitte’s views: Direct payments and higher capital expenditure allocations in public schemes are likely to create income and job opportunities.

Demand generation measures • INR 2.37 trillion worth of MSP direct payments through farm procurement to farmers can boost rural demand.

Employment • PLI schemes in 14 sectors with potential to create 6 million new jobs, and additional new production of INR 30 trillion • Financial support to the MSME sector, infrastructure, energy transition strategies; public capital expenditure and sunrise opportunities will create jobs.

• National capital goods policy, 2016 (launched with the intention of doubling the production of capital goods by 2025) can create employment opportunities.

The FM unveils the Bahi-Khata: A blueprint from India @75 to India @100 3. Business environment and ecosystem Deloitte’s views: Measures such as swift payments, resolution of disputes and arbitration, and improved logistical efficiencies are likely to enhance the ease of doing business and boost investors’ confidence.

• One nation-one registration to ensure uniform process of registration • Amendment to the bankruptcy code for faster dispute resolution • Centre for processing accelerated voluntary corporate exits and reduce winding up of companies from 2 years to 6 months • Faster processing of government payment for various procurements through a paperless and end-to-end e-bill system • SEZ act to go, new law to allow states to collaborate to enhance export performance • Unified logistics interface platform ‒ Reduce logistics costs and time ‒ Eliminate tedious documentation ‒ Ensure just-in-time management and efficient movement of goods • International arbitration centre at GIFT City • Use of surety bonds (instead of bank guarantees) to reduce indirect costs for suppliers

4. Climate change and sustainability Deloitte’s views: The government’s thrust on mindful and deliberate use of resources was visible as the FM proposed long-term and short-term actions towards a sustainable development.

• Focus on renewable power ‒ Facilitating domestic manufacturing for solar PV modules manufacturing through additional allocation of INR 195 billion as part of the PLI ‒ INR 14 billion allocated for 27 MW solar power generation and 123 MW hydro projects in FY23 • Four pilot projects for coal gasification and conversion into industrial chemicals to be set up • Sovereign green bonds for green infrastructure • A push for electric vehicles: ‒ A battery-swapping policy to be brought out with interoperability standards to boost the EV ecosystem ‒ Encouraging the private sector to promote an efficient EV ecosystem ‒ Use of clean tech and governance solutions to promote a shift to use public transport in urban areas • GIFT City to facilitate services for global capital for sustainable and climate finance • Focus on cross-cutting issues for 10 sectors with the support of public policies to promote a circular economy

The FM unveils the Bahi-Khata: A blueprint from India @75 to India @100 5. Central deficit and state finances Deloitte’s views: The fiscal deficit for the year is expected to be 6.9 percent of the GDP, close to the budgeted estimate of 6.8 percent announced last year. The deficit is expected to fall to 6.4 percent in FY23, which is consistent with the broad path of fiscal consolidation announced last year to reach a fiscal deficit level below 4.5 percent by FY26.

Centre The RE for revenue receipts has been upped to INR 20.8 trillion from the budget estimate of INR 17.9 trillion in FY22. Higher revenues have helped the government expand the capex target by 35.4 percent from INR 5.54 trillion to INR 7.50 trillion. For FY23, effective capex will be INR 10.7 trillion.

Total expenditure in FY23 is estimated at INR 39.45 trillion; total resources mobilisation will be at INR 22.84 trillion other than borrowings.

State • In FY23, states will be allowed a fiscal deficit of up to 4 percent of GSDP. • INR 1 trillion financial assistance will be provided to states in FY23 to catalyze investments.

• The outlay of the ‘Scheme for Financial Assistance to States for Capital Investment’ will be enhanced from INR 100 billion to INR 150 billion.

6. Sector-specific announcements Deloitte’s views: The FM announced targeted policies for specific sectors to support their recovery and boost growth in sectors with opportunities. This will help improve productivity, reduce fragmented growth, and create job opportunities.

MSMEs • ECLGS to be extended up to March 2023 • Guarantee cover to be increased by INR 500 billion to INR 5 trillion​ • Interlinking and expanding the scope of MSME portals for facilitating credit and enhancing entrepreneurial opportunities Hospitality sector • Additional ECLGS amount earmarked for the hospitality sector Sunrise sectors • The government to back thematic funds for blended finance, along with private funds Start-ups • Support in agriculture and rural enterprises for farm produce value chain • Tax exemption extended to March 2023 • Facilitate “drone shakti” through varied applications and for Drone-As-A-Service (DrAAS) Banking sector • 100 percent of 1.5 lakh post offices to come under the core banking system, enabling financial inclusion and interoperability Manufacturing sector • A concessional tax regime of 15 percent provided to manufacturing companies to commence production has been extended to 31 March 2024 Telecom • Spectrum auctions to roll out 5G services in FY23 • Inclusion of design-led initiatives for 5G and other technologies in the PLI scheme

Key direct tax proposals

Corporate tax rates – A snapshot Particulars

Base rate

Effective rate

 Registered on or after 1 Oct 2019, commenced manufacturing on or before 31 March 2024 and opts for lower tax regime1

15%

17.16%

 Total income computed without claiming specified deductions/ incentives, exemptions and additional depreciation and opts for lower tax regime 1

22%

25.17%

DOMESTIC COMPANY

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Manufacturing company not claiming deduction as specified in the relevant provisions and opts lower tax regime on or after 1 March 2016 2

25%

29.12%



Turnover or gross receipts < INR 4 Bn. in FY 2019-20 2

25%

29.12%



Any other domestic company2

30%

34.94%

40%

43.68%

30%

34.94%

FOREIGN COMPANY 

Taxable income3

LIMITED LIABILITY PARTNERSHIP 

Taxable income2

No change in corporate tax rates 1. Surcharge applicable at 10% (plus cess at 4%) 2. Where total income exceeds INR 10 Mn. but less than INR 100 Mn., surcharge applicable at 7%; where total income exceeds INR 100 Mn., surcharge applicable at 12% (plus cess at 4%) 3. Where total income exceeds INR 10 Mn. but less than INR 100 Mn., surcharge applicable at 2%; where total income exceeds INR 100 Mn., surcharge applicable at 5% (plus cess at 4%)

Taxation of virtual digital assets Virtual digital assets • Income from the transfer of any virtual digital asset to be taxed at 30 percent, with effect from FY22-23 • No deduction allowed on any expenditure (other than cost of acquisition) or allowance or in setting off-of any loss • Set-off of losses incurred on transfer of virtual digital asset against any other income is not permitted. Carry forward of such losses to subsequent years is also not permitted Tax to be deducted at source (TDS) • Payment of consideration to a resident on the transfer of virtual digital assets shall be subject to TDS at one percent from 1 July 2022.

• Certain exceptions have been provided Definition of virtual digital assets - Virtual digital assets have been defined to include cryptocurrency, nonfungible tokens.

Other digital assets to be notified by the central government Taxation of Gift - Gift of virtual digital assets is taxable

Other key direct tax proposals (1/8) Corporate Tax deductions

Treatment of cess and surcharge - With retrospective effect from FY 2004-05 - “tax” includes surcharge or cess and is not an allowable business expenditure Expenditure incurred in relation to exempt income - Provisions for disallowance of expenditure related to exempt income will apply, even in cases where no exempt income has accrued or arisen or been received during a year Conversion of interest payable into debenture or any other instrument - Not to be construed as actual payment and thus not to considered as eligible for deduction Expenditure incurred for a purpose that is an offence under any law - Deduction will not be allowed for expenditure incurred for a purpose that is an offence under any law; or for compounding of an offence under any law; or for providing any benefit or perquisite to a person where acceptance of such benefit or perquisite violates any law

Other key direct tax proposals (2/8) TDS provisions TDS/TCS on non-filers of return at higher rates – • Finance Act 2021 introduced provisions for higher rate of TDS/TCS for a specified person, i.e., non filers of tax returns for 2 years • Proposed that only preceding year’s return filing relevant for applicability of higher TDS/TCS rates in case of non-filers Refund of tax withholding under net of tax contracts • Application for refund of tax withheld on payment to non-residents (in case of net of tax contracts where tax is borne by the payer) and paid to the government on or after 1 April 2022, to be made to the AO instead of an appeal to CIT (appeals) • An order passed by the AO, pursuant to the above, can be appealed to CIT (appeals)

Other key direct tax proposals (3/8) Provisions enabling procedure for filing of updated return of income –

Procedural amendments (1/4) • Effective 1 April 2022, an updated

return of income can be furnished within two years from the end of the

relevant AY regardless of whether a return of income was filed previously or not • Additional income tax payable of 25 percent of ‘aggregate tax and interest’, if updated return is filed after the expiry of time limit to file belated/revised return but within one year from the end of the relevant AY and 50 percent thereafter. The payment must be made before filing of the updated return.

• The updated return is not permissible in specified cases, such as loss return or case of decrease of tax liability/refund or cases where assessment/reassessment is pending Amendment in penalty/prosecution provisions • Effective 1 April 2022, the penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc., has been enhanced from INR 100 per day to INR 500 per day • The prosecution provisions for second and subsequent offences for failure to pay TDS has been proposed to be extended

Other key direct tax proposals (4/8) Procedural amendments (2/4) Amendments to re-assessment provisions • The requirement to seek fresh approval from a “specified authority” before issuing a notice for the return of income or providing the opportunity to be heard has been proposed for certain scenarios • The scope of information suggesting that income chargeable to tax has escaped assessment has been enhanced to include the following: o

Any audit objection, or

o

Any information received from a foreign jurisdiction under an agreement

o

Information collected under faceless scheme notified for specified provisions

o

Information that requires action in consequence of an order of a tribunal or court

• Reassessment scope after three years up to 10 years has been expanded to cases where AO has books and documents that reveal income escaping assessment is represented in the form of: o

An asset; or

o

Expenditure with respect to a transaction/event or occasion, or

o

An entry in books amounting to INR 5 million or more

Other key direct tax proposals (5/8) Procedural amendments (3/4)

Scheme for faceless proceedings •

The date for issuing direction for faceless proceedings before DRP and the tribunal has been deferred to 31 March 2024

•

The Faceless Assessment scheme is proposed to be revamped, owing to challenges faced by the administration and taxpayers.

Key changes to the scheme include the following: o Any audit objection, or o Regional Faceless Assessment Centre removed o Re-assessments included within the scope of faceless proceedings o Functions of the technical unit to include determination of arm’s-length price, valuation of property, technical assistance relating to double tax treaty provisions, etc. o Addition of the review of income determination proposal specifically to the functions of review units

•

Erstwhile provision, which operated to vitiate assessments in case the prescribed procedure under the scheme was not followed, has been proposed to be omitted.

This amendment is to take effect retrospectively from 1 April 2021.

Other key direct tax proposals (6/8) Procedural amendments (4/4) Promoting voluntary tax compliance and reducing litigation • Effective 1 April 2022 - Revenue’s appeal deferred until identical question of law is decided by the jurisdictional High Court or the Supreme Court • Acceptance of taxpayer that question of law pending is identical is a prerequisite

Clarificatory amendments Goodwill and block of assets - Reduction of goodwill from block of assets to be treated as transfer for purpose of capital gains Slump sale - Definition of ‘slump sale’ amended to substitute the word ‘sales’ with ‘transfer’ Both amendments are proposed to be effective from FY 2020−21 Liability of directors of a private company - Presently was restricted to only liquidation cases- has now been extended to all cases

Other key direct tax proposals (7/8) Miscellaneous (1/2) Business re-organization • Successor entity to be enabled to file modified return within six months from the end of the month of issuance of the order • Any proceedings made on predecessor during pendency of business re-organization to be deemed to be made on the successor The amendments are proposed benew effective from FY21−22 Extending the sunset clause to for manufacturing companies Period of commencement of manufacturing or production by eligible new manufacturing domestic companies extended by a year to 31 March 2024 Extending the scope of anti-avoidance measures • Proposal to extend the bonus and dividend stripping provisions to units of InvIT, REIT, and AIF with effect from FY22-23 • Bonus stripping provision also extended to securities

Other key direct tax proposals (8/8) Miscellaneous (2/2) from producers of cinematographic films expanded to persons Reporting requirement

engaged in

specified activities • Currently, producers of cinematographic films are required to furnish Form 52A for reporting payments over INR 50,000.

• It has been proposed to expand the reporting requirement under Form 52A to persons engaged in specified activities.

• “Specified activities” include event management, documentary production, production of programmes for broadcast over television, over the top platforms, or similar platforms, sports event management, other performing arts, or Withdrawal of concessional tax rate on dividend from specified foreign companies - With effect from any other activity as FY 22-23, concessional tax the central government may specify. rate of 15 percent on dividend received by Indian companies from specified foreign companies has been withdrawn

Personal taxation Proposed Proposed amendment amendment •

The tax rates for individuals remain unchanged except, surcharge on all Long term Capital Gain (LTCG) to be capped at 15 percent.

•

Exemption of COVID-19-related medical expenditure and ex-gratia:o

Any sum of money received by an individual, from any person (including the employer) towards COVID-19 medical treatment for self and/or family subject to certain conditions (as may be notified) o Any sum of money received by a member of the family of the deceased employee from the employer (without any limit) on account of COVID-19-related illness within 12 months from the date of death, subject to certain conditions (as may be notified) o Any sum of money received by a member of the family of the deceased individual from other persons up to INR 1 million on account of COVID-19-related illness within 12 months from the date of death, subject to certain conditions (as may be notified) (Amendment is proposed to be effective retrospectively from FY19-20) •

Provision of filing updated income tax return (as discussed previously) is applicable to individuals also

Key indirect tax proposals

Key proposals – GST 1

Input tax credit can be availed only once the supplier has deposited its GST liability

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Transfer of Balance in Cash Ledger (CGST and IGST) permitted between distinct persons

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Levy of interest to trigger only at wrong availment ‘and' utilization of credit. Rate revised to 18% (w.e.f. 01 July 2017)

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Time limit extended by 2 months from 30th September to 30th November for: (i) availment of ITC (ii) issuance of Credit Notes (iii) rectification of errors in returns and rectification/omission of TCS details Others procedural changes:

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- Levy of late fees prescribed for delayed furnishing of TCS return by e-commerce operators - Return shall not be allowed to be filed if the previous period tax return (GSTR 1 and/or GSTR 3B) has not been furnished - Registration of composition taxpayers to be cancelled, if return not filed within 3 months from due date of filing of annual return

Key proposals – Customs 1

Overhaul of SEZ laws, with SEZ Act to be replaced, along with changes in Customs administration and use of risk-based tools (w.e.f. 30 September 2022)

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Advance rulings to be valid for 3 years or till there is a change in law or facts

3 4 5

Tariffisation of unconditional exemption of BCD from 01 May 2022 (effective rates moved to tariff) − New exemptions/ concessional rates prescribed through notification are also being incorporated in Customs tariff − Automatic sunset clause for specified exemption notifications ranging from 31 March 2023 to 31 March 2024 Customs duty exemptions on Capital goods being gradually withdrawn − Concessional rates for Project Imports to phase out, and duty rate standardized to 7.5% (for projects registered post 30 September 2022) ‘Classes of officers of customs’ to specifically include officers of DRI, Customs (Preventive) and Audit − Past SCN issued by DRI and Audit officers regularized (retrospective amendment) − Reassessment or adjudication to be done by original assessing officer – for SCN issued after Finance Bill enacted

Thank You

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