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V. Lakshmikumaran

Founder and Managing Partner, Lakshmikumaran & Sridharan

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V. Lakshmikumaran On Budget 2023: Bringing Certainty On Interpretational issues Under Tax Law Is Crucial

It is high time to re-introduce an objective Advance Ruling mechanism for Income Tax, at least, to have tax certainty on high-value commercial transactions says top tax lawyer V. Lakshmikumaran, Founder and Managing Partner, Lakshmikumaran and Sridharan

There are several political, economic and social factors at play which may have an influence on the Union Budget 2023-24. This is the last full budget to be presented by this Government before the general elections in 2024. This budget also comes at a time when the world economy is witnessing a slowdown and is standing at the precipice of recession. Though India may not escape unscathed, the outlook for Indian economy remains mostly positive, with IMF and World Bank referring to India as a bright spot in the global economy. This budget would seek to ensure that our economy is able to withstand these global issues and come out stronger. 

One of the primary objectives for this budget would be to promote and maintain a favourable environment for business and investment in India. 

Of late, the Government’s focus has been on creating an Atmanirbhar Bharat by incentivising and promoting Make in India. In line with this objective, it is expected that the peak rate of import duty will increase across various goods and the import of goods under the PLI Scheme will be promoted by granting exemptions. Further, it is being anticipated that exports will be under pressure in the foreseeable future, and this could also trigger an increase in the import duty rate. This budget may also see an extension of PLI schemes to a few more sector like textiles, electronic components, furniture, toys etc.

Considering India’s commitment under COP26 and COP27, it can be expected that the Budget may tweak the import duty rates in favour of import of electric vehicles (EVs) in knocked-down condition or parts of EVs as well as resolve the ambiguity related to classification on account of the judicial decisions. Changes are also likely to be introduced to resolve the operational difficulties in the MOOWR scheme.  

In the recent past, India has entered into Free Trade Agreements (FTAs) with Australia and UAE. The Government is also currently negotiating the FTAs with Europe and UK. To make FTAs with India more attractive, the Government may make amendments in the CAROTAR to reduce the compliance burden on the importers and make them less stringent.

Also, while corporate tax rates under Income Tax have been significantly slashed in the earlier budgets, similar benefits have not been extended to other business organization. For example, partnership firm and individual businessmen are still liable to a high rate of tax on their profits, which may be twice as that of corporate taxes.  This budget is expected to bring some rationality in the rate of taxation of business profits.  

Bringing certainty on interpretational issues and de-criminalizing offences under the Tax laws

Decriminalizing minor lapses on part of the taxpayers would go a long way towards creating a positive environment and encouraging business. To this end, the 48th GST council has already recommended certain measures like the increasing threshold for prosecution and reduction of the compounding amount to the range of 25% to 100% (from 50% to 150%), which will be implemented by announcing the amendments in the upcoming budget. Similar changes for decriminalizing certain offences may also be brought about in Income Tax. 

Another important aspect of promoting Ease of Doing Business is to bring about certainty on interpretational issues under the complicated tax laws in India. 

Currently, under the Income Tax law there are hardly any avenues for taxpayers to seek the advance opinion of the tax authorities on any issues. This is causing unwarranted litigation and uncertainties, more so when foreign entities are involved.  It is therefore high time to re-introduce an objective Advance Ruling mechanism for Income Tax, at least to have tax certainty on high value commercial transactions. 

A robust adjudication and appeals mechanism are also a must for any tax law. We are in the 6th year of GST and the GST Appellate Tribunals are yet to be established. This is a matter of significant concern since the taxpayers must either wait to file appeals against adverse orders till the Tribunals are constituted or approach the already burdened High Courts. The Council had constituted a Group of Ministers (GoM) to address various concerns raised by the States in relation to the constitution of GST Appellate Tribunal and make recommendations for appropriate amendments in CGST Act. The recommendations of the GoM were to be considered in the 48th GST council, however, was not taken up due to paucity of time. In this background, it remains to be seen whether any announcement would be made in this regard in this budget.

Amnesty schemes for reducing in Tax litigation

With the objective of reducing litigation, the Government is likely to introduce amnesty or settlement schemes under Income Tax, Customs and GST laws. It remains to be seen whether the schemes will extend only to small and procedural errors with monetary cap on tax and interest demand or would be all-encompassing like the Sabka Vishwas Scheme under the erstwhile service tax and excise law. 

Also, keeping in mind the huge pendency of cases before the judicial forums, the Government may consider increasing the monetary limit for filing tax appeals by the Department.

Tax implication on Commercial Dispute Resolutions

The Insolvency and Bankruptcy Code, 2016 has come a long way in assisting recovery of long outstanding loan has boosted the Indian financial sector.  However, the tax implications of such resolutions – including debts waived, assets transferred in the course of settlement, damages incurred in dispute resolutions, etc., is still unclear.  It is expected of this budget to throw some light on taxation aspects of transactions undertaken in the course of Court monitored Commercial Dispute Resolutions.

Emphasis on the Digital sector

The digital sectors like Cryptocurrency, Non-fungible tokens (NFTs) and online gaming have seen significant growth in the recent years. As announced in the previous budget, the Government is keen on developing the AVGC sector (Animation, Visual, Effects, Gaming, and Comic). The industry is hoping to get some clarity on a number of issues plaguing these sectors like taxability, valuation mechanism, TDS deduction threshold for gaming sector etc. It is essential to bring about certainty and clarity on these legal issues to ensure that this sector keeps growing. 

Thus, despite the not-so-favourable global economic and geopolitical environment, the country is looking forward to positive changes in the tax and regulatory regime to boost and ring-fence economic growth in the country. 



Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house


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