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Raghavan Ramabadran, Bharathi Krishnaprasad and Sahana Rajkumar of tax specialist law firm Lakshmikumaran & Sridharan discuss the significant amendments proposed in the budget

Apart from laying out the broad plans of the government in respect of policies and financial outlay allocated to different sectors, the budget also proposes significant amendments to tax laws. The budget for 2023-24 was presented by Finance Minister Nirmala Sitharaman on 1 February 2023.

Personal taxation

The tax relief measures for the common man have always been an expectation in every budget. In 2020, individual taxpayers were granted an option to choose between two tax regimes: a default tax regime, which offered certain deductions that could be claimed (the old regime), and an optional tax regime that provides for reduced rates of taxes while however denying the deductions (the new regime).

The present budget proposes a further reduction in the rates and an increased tax rebate in the new regime, while making the new regime the default one and granting an option to choose the old regime.

The proposals are in line with the intent expressed by the government to eventually phase out exemptions and deductions, and build a simpler framework of tax law. The increased tax rebate would effectively mean that any taxpayer under employment with a gross income of up to INR750,000 (USD9,000) will now not be required to pay taxes.

Taxation of online gaming

Raghavan Ramabadran
Raghavan Ramabadran
Executive partner
Lakshmikumaran and Sridharan.

Another significant amendment proposed in the budget concerns taxability of winnings from online gaming. Under the present legal provisions, winnings from lotteries, online games, races, cards and other games of any sort are taxed at the highest rate of 30%.

There also exists a tax deduction obligation on the person paying such winnings when the same exceeds a threshold (INR10,000). The present budget proposes carving out a separate taxing mechanism for net winnings from online gaming. These winnings would continue to be taxed at the highest rate of 30%, and a separate mechanism for withholding of taxes is also proposed to be introduced.

The manner of computing net winnings would be notified in due course. It is pertinent to note that the proposed tax withholding provisions, if enacted, would require taxes to be withheld irrespective of the quantum of the net winnings, as opposed to the threshold-based deduction obligation that was earlier provided.

Relief to small business

The budget also proposes to strengthen the government’s initiatives to protect the interests of micro and small enterprises (enterprises classifiable as “medium” are not covered). Claiming business expenditures as a deduction on an accrual basis in calculating income is permitted in law.

Bharathi Krishnaprasad
Associate director
Lakshmikumaran and Sridharan

However, over time, based on socioeconomic or other significant factors, certain deductions were permitted only when the cash outflow is incurred in respect of the expenditure. The expenditures in respect of which the payments are to be made to a micro or small enterprise are also proposed to be brought into this ambit, to ensure that timely payments are made by such entities.

Startups in India are incentivised with a deduction of 100% of the business profits for a period of three consecutive tax years out of the first 10 tax years from its incorporation. This benefit was available to startups that were incorporated on or before 1 April, 2023. The benefit is now proposed to be extended to startups that are incorporated on or before 1 April, 2024.

Tax withholding, collection

Sahana Rajkumar
Sahana Rajkumar
Principal associate
Lakshmikumaran and Sridharan

An issue surrounding withholding of taxes relates to whether beneficial rates available in the tax treaties can be applied to tax withholding. A decision of the Supreme Court in India had held that where a specified rate is mentioned relating to tax withholding in the domestic tax law in India, that rate ought to be applied as opposed to any lower rate that may be present in the tax treaty.

When a higher withholding is made, the recipient of income can claim any refund only by filing a valid tax return in India. Recognising that such a higher withholding can act as a disincentive to investment, the budget proposes to extend treaty benefits to tax withholding on payouts made in respect of mutual fund holdings to a non-resident.

Deduction and collection of taxes at source has served not only as a collection mechanism, but also as a ready source of information to tax authorities concerning transactions between different parties. The present budget proposes to increase the rate of tax collection on remittances made in respect of overseas tour packages and other foreign remittances (other than remittances for the purpose of education or medical treatment) from 5% to 20%.

Applying for lower tax withholding

The tax law in India provides a requirement to deduct tax at source, at specified rates, in respect of different categories of payments made. Taking cognisance of the fact that in certain cases such a tax deduction may cause hardship to the recipient of income (for example, in a scenario where such income is exempt or where a person is already incurring losses and consequently not liable to pay any tax), the law permits such a person to apply for a tax deduction at a lower or NIL rate.

This benefit to make an application was applicable only to certain provisions of tax deduction. This benefit is now proposed to be extended to payments made by a business trust (a real estate investment trust or infrastructure investment trust) to unit holders. This amendment has been proposed taking specific cognisance of sovereign wealth funds and pension funds that enjoy an exemption under the tax law.

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Raghavan Ramabadran is an executive partner, Bharathi Krishnaprasad is an associate director and Sahana Rajkumar is a principal associate at leading tax firm Lakshmikumaran & Sridharan. The views expressed in this article are personal.

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