Expectations from Union Budget 2022-23

The upcoming budget for the financial year 2022-23 is going to be awaited. Individuals, corporates, small businesses and even other members of the society, regardless of their tax paying abilities, will look forward to the budget.

Introduction
 
India is currently going through a phase of economic crisis but is also steadily recovering from the downfall the economy saw during the coronavirus pandemic during 2020 and the lockdown periods of 2021. Thus, the upcoming budget for the financial year 2022-23 is going to be awaited. Individuals, corporates, small businesses and even other members of the society, regardless of their tax paying abilities, will look forward to the budget. Let’s see what it might have for everyone.
 
Taxation
 
1. Employee Stock Option Plans (ESOPS) have a complex taxation framework. As an employee, the tax liability on ESOP arises on two occasions. Firstly, as salary income when the shares are allotted and the difference between Fair Market Value of shares (computed as on the exercise date) & the exercise price is taxed as a prerequisite. Secondly, an employee receiving ESOPs from an eligible start-up need not pay tax in the year of exercising the option. The TDS on the ‘perquisite’ stands deferred to earlier of the following events:
 
  • Expiry of five years from the year of allotment of ESOPs
  • Date of sale of the ESOPs by the employee
  • Date of termination of employment
In the pandemic where there have been many cases of salary cuts, deferments and negligible increments, ESOP is being seen as a good option to remunerate and retain talented employees. It is hence desirable that the ambit of such benefits be widened for salaried class in general.
 
2. Due to COVID 19 restrictions, many people are forced to extend their stay which could result in a resident in multiple tax jurisdictions or a jurisdiction where they would not have been a resident otherwise. Many non-resident Indians (NRIs) were stuck in the country due to the pandemic. They couldn’t travel back to their places of residence due to travel restrictions. For taxation purposes, an individual is considered as a resident Indian if he stays in India for 182 days. Being a resident, the person needs to file returns and pay taxes. The Central Board of Direct Taxes (CBDT) had given relaxation to NRIs who were stuck in the country for FY20. But the same has not been done for FY21. With the rise in Covid cases abroad and the Delta variant, similar relaxation for NRIs will be a welcoming step.
 
3. The employees working in a jurisdiction other than their ordinary place of business of enterprise could result in a permanent establishment. The common tests which are normally used to determine the permanent establishment include a degree of permanency, disposal test and tie-breaker rule. The OECD guidance clarified that work from home under an extraordinary event or public health measures does not create the permanent establishment due to lack of permanency and not being at the employer's disposal. Furthermore, an agent working from home can become a permanent establishment in case such agent habitually exercises his authority to conclude the contract on the behalf of an enterprise. The OECD guidance clarified that work from home during the public health measures imposed by the government would not be considered as being performed habitually. The government should emulate the OECD recommendations in the domestic regulatory framework to provide flexibility and efficient pandemic management.
 
4. The amendment of section 194J by the Finance Act, 2020 with effect from 1st April 2020 reduced the TDS rate of fees for technical services (not being a professional service) to 2%. The definition of professional services under Section 194J and of technical services under Explanation 2 to clause (vii) of sub-section (1) of section 9 have many overlaps that create ambiguity and has given rise to a plethora of litigation. Clarity on these definitions along with the applicability of the tax rate in the upcoming budget would reduce litigation and further the ease of doing business.
 
Pandemic ensued necessities
 
1. The pandemic induced WFH created doubts over the continuation of income tax holiday extended to SEZs, specifically IT units as the current functioning of staff is akin to employees delivering services virtually from their home location and not from the SEZs. Considering the looming permanency of WFH arrangement and that the organizations have announced long-term plans on WFH, clarification over treatment of services rendered from work from home in case of IT companies in the upcoming budget is of utmost importance to avoid litigations in coming years
 
2. During the COVID period, conducting in-person Annual General Meetings as per Section 96 of the Companies Act, 2013 read with Companies (Management and Administration) Rules, 2014 remains difficult. The government vide General Circular No. 20 l2O2O allowed the companies to conduct their AGM through video conferencing (VC) or other audiovisual means (OAVM), during the calendar year 2020. The provision should be given a status of a permanent alternative, subject to certain conditions, to the in-person meeting by the inclusion of the same in the Companies Act and the rules thereunder.
 
3. Global and national supply chains are of paramount criticality in 2021 and beyond. Currently, there is a very high degree of compliance and paperwork which makes it difficult for technology companies to serve the global audience and this forces companies to shift base outside the country. Urgent steps in this direction will help high growth companies keep base in India, generate employment across the spectrum and help revive the national economy after the shock of the pandemic. The government should scale up its investment in digitization projects.
 
4. The traditional method of calculation of Transfer Prices is no longer durable in the backdrop of the covid pandemic. The most common method used to determine the arm’s length price is the Transactional Net Margin Method or Cost-Plus Method which involves the historical data of the comparable enterprises operating in comparable circumstances with the assumption of a certain degree of stability in business and economy at large. Since the assumptions of stability are no longer applicable due to the economic turmoil caused by the pandemic, the method needs to be reviewed and a new formula in tandem with the covid situation needs to be developed. Furthermore, the advance pricing agreement negotiated with the authorities is witnessing force majeure conditions as well as materially adverse circumstances requiring a renegotiation of these agreements to accommodate the new market conditions.
 
Rationalization of M&A transaction
 
1. The company law and foreign exchange rules permit the merger of Indian companies with global corporates. However, the Income Tax law does not provide tax neutrality concerning such outbound mergers. It is recommended that appropriate amendments in the Income Tax law provide tax neutrality concerning such outbound mergers. This would act as a big incentive for Indian promoters considering cross-border acquisitions/mergers and the economy would witness more and more global M&A which is the need of the hour. Furthermore, the government should ensure uniform stamp duty across for Scheme of Arrangements approved by NCLT.
 
2. When an Indian partnership firm or LLP gets converted into a company or vice-versa there are many conditions attached to make it tax neutral one such condition is the continuity of shareholding. It is recommended that such post-conversion conditions (of continuation of shareholding etc.) ought to be relaxed so that smaller organizations will have more opportunities for fundraising as well as growth.
 
3. Many new companies in India are taking the SPAC route for raising capital. The regulatory framework in India hinders SPAC acquisitions. There is a lack of precise and detailed regulations in place concerning SPAC's, barring the IFSCA (Issuance and Listing of Securities) Regulations, 2021 which also requires amendments. It would be a big boost to Make in India and the Startup community of the country to make necessary amendments to facilitate raising capital via SPACs.
 
Conclusion
 
Apart from the ones mentioned above, there are several other benefits that people are vouching on from the Union Budget 2022-23. The economy is witnessing a steady recovery and hopefully, the government would generously give back to the people in form of added deductions, exemptions, reduced prices and better schemes and savings opportunities for individuals, corporates and MSMEs alike.