Budget 2022: 5 important changes in Direct Taxes (Income Tax)
Updated: Mar 21
The most anticipated part of any Budget, over the years, is taxes. It was even more anticipated this year, as we came off a pandemic and people desperately wanted to see a silver lining. In accordance with the Government's efforts to give a steady and predictable new tax regime, the direct tax proposals in Budget 2022 have been made with the goal of improving on the tax system, trying to simplify it, advancing voluntary compliance by taxpayers and reducing litigation. While the salaried citizens and professionals expected increased deductions, which the Budget failed to follow through, there were more than a few winners. While no changes have been proposed to the income tax slabs and tax rates, the Budget contains a few prepositions which will affect individual taxpayers. Here is the rundown of the most prominent changes in the Income Tax Act that stood out in the Union Budget 2022.
1. A new provision is introduced to permit taxpayers to update the past return and incorporate omitted income by additional tax payment. The updated return can be filed within two years from the end of the relevant assessment year.
As of now, an individual gets time till December 31 (except if it is extended by the government) of the relevant assessment year to file a revised Income Tax Return (ITR) to provide a correct picture of the income earned by them from various sources during the financial year.
As per the Memorandum to the Budget 2022, “It is proposed to introduce a new provision in section 139 of the Act for filing an updated return of income by any person, whether he has filed a return previously for the relevant assessment year, or not. The proposal for updated return over a period longer than that is provided in the existing provisions of Income Tax Act, 1961, would on the one hand bring use of huge data with the IT Department to a logical conclusion resulting in additional revenue realization and on the other hand, it will facilitate ease of compliance to the taxpayer in a litigation free environment.”
The memorandum further says, “It is proposed that the taxpayers may be given some more time under the Act to file particulars of their income for a previous year in an updated return. A payment of additional tax by persons opting to furnish their returns in the newly provided timelines is also required. It is proposed that an amount equal to 25% or 50% as additional tax on the tax and interest due on the additional income furnished would be required to be paid.”
2. The tax incentive period is extended by one year for start-ups. Eligible start-ups incorporated under Section 80-IAC will now get tax benefits until March 31, 2023.
Start-ups have arisen as drivers of development for the Indian economy. Through recent years, the nation has seen a manifold increase in fruitful start-ups. As indicated by the Finance Minister of India, Nirmala Sitharaman, taking into account the COVID-19 pandemic, the union finance ministry proposed to increase the time of incorporation of the eligible start-up by another year.
Indian start-ups have been praised a lot in the past 2 years with record numbers hitting the unicorn status. The proposed extension of tax benefits in Budget 2022 will additionally strengthen the business ecosystem of the nation.
3. Taxes on crypto and other taxes on income from transfer of different digital assets like crypto will be 30%. No deductions will be allowed except the cost of acquisition of digital assets. Loss on sale of digital assets cannot be set off against any other income.
One might say that this move perceives crypto as a legitimate asset class and crypto trading as a legitimate activity. Additionally, clarity on tax could bring more individuals into the crypto industry, hence boosting the industry growth. A well-regulated crypto eco-system will establish the right environment for innovation. However to have the option to carry forward losses into the next tax year is still something people want, crypto is intrinsically volatile and this will help the investors.
According to the Budget memorandum, virtual digital assets have acquired huge popularity in recent times and the volumes of trading in such digital assets has increased significantly. Further, a market is arising where payment for the transfer of a virtual digital asset can be made through another such asset. Accordingly a new scheme to provide for taxation of such virtual digital assets has been proposed in the Bill.
TDS will be imposed on payments for the transfer of crypto assets at a rate of 1% for transactions over a certain threshold. Furthermore, crypto gifts will be taxed in the recipient's hands. This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
4. Government will reduce the corporate surcharge from 12% to 7% for those having total income of more than ₹1 crore up to ₹10 crore. “This will help in enhancing the income of cooperative societies and its members who are mostly from the rural and from farming communities,” said the Finance Minister.
5. Any surcharge and cess levied on income are not allowed as business expenditure. The Finance Minister said that some courts have allowed the health and education cess as business expenditure but this is against the legislative intent. She also said that from now onwards, excess income detected in searches and raids will not be allowed to be adjusted against past losses.
Brought forward loss cannot be set off against undisclosed income detected during any survey or search.
In the recent past, the Government of India has rolled out several policy measures on the direct tax front to encourage private investments and provide tax certainty to investors and businesses. To recall a few, these policy decisions entailed reduction in corporate tax rates to 15 percent for manufacturing, abolishment of dividend distribution tax, withdrawal of “retrospective” capital gains tax on indirect transfer, dispensation from tax return filing in select cases, etc. Budget 2022 aims to rationalize many provisions of the Income Tax Act. However, it seems that in fact the law has become very complex and stringent for charitable trusts and institutions and the reopening provisions have also been widened, creating more uncertainty for the taxpayers.