In this backdrop, some top of the mind income-tax and other reforms that India expects from the upcoming budget are:

A fine harmony is required between spurring infrastructure investments, incentivising manufacturing, and having a healthy fiscal deficit. This budget must manage the expectations of corporate India (including Small and Medium Enterprises and Micro Small & Medium Enterprises) and the middle-class population alike, each of whom are contributing towards India’s $5-trillion economy vision. Therefore, the Union Budget 2023 would be a tricky balancing act for the finance minister.

Nonetheless, given the aspiration, now is the time for the government to unveil the next set of bold reforms to strengthen manufacturing, promote exports riding on recently concluded free trade agreements, provide impetus to green investments, ease out compliances, clarify vexed issues and win confidence of the common man.

In this backdrop, some top of the mind income-tax and other reforms that India expects from the upcoming budget are:

Strengthening ‘Make in India’

The production linked incentive (PLI) schemes, which were introduced covering almost 14 sectors, in line with the Atmanirbhar Bharat campaign, have given a major fillip to various sectors. Looking at the interest generated by the PLI schemes in the last three years, the government should consider not only increasing the allocation of funds to the existing schemes but also extend it to other sectors, such as leather and footwear, broader toys’ sector and fertilisers. The government must also consider reducing the tax rate for PLI-focused sectors.

Also, given the geo-political dynamics, the government can buttress India’s position in the global supply chain and manufacturing ecosystem by promoting investments in the arena of semiconductors and chips and EV batteries. Here, looking at the need to bring India at the forefront, the government may consider to introduce investment linked deductions/tax breaks for companies setting up such manufacturing facilities in India.

With a focus on sustainable development, the government must provide additional incentives for investment in green technology, be it through the PLI schemes or separate investment linked incentives for technology (including R&D).

That apart, sunset clause for commencing manufacturing activities for companies availing concessional tax rate regime of 15% may be extended from March31, 2024 by at least five years.

This would not only encourage companies to set up new manufacturing facility in India but also give medium term certainty.

Simplifying compliances and clarifying ambiguous issues

With each successive budget since 2020, the scope and rigour of tax withholding has been increased with an objective of widening the tax base and creating a trail of all transactions. While the objective is well understood, such provisions (including some overlapping ones) have created ambiguity and increased compliance workload of the taxpayers. The government needs to simplify and rationalise such withholding tax provisions, which at times cause unnecessary blockage of working capital and disrupt operations.

Specifically, with the operation of Section 194Q, the corresponding TCS provisions could be done away with. Further, it should be clarified that Section 194Q does not apply to export of goods.

Section 194R, introduced vide Finance Act, 2022, has created uncertainty amongst all businesses. There is need for additional clarity on the scope of the term ‘perquisite or benefit in the course of business or profession’.

Digital businesses require clarification with respect to digital tax provisions especially ‘significant economic presence’ and ‘equalisation levy’ since their current construct is ambiguous. For example, a strict reading of the provisions seems to cover non-digital and traditional business models as well. Also, with rapid developments in global base erosion and profit shifting provisions, especially, Pillar One approach, digital businesses want clarity on the fate of digital tax in India.

Capital gains tax structure in India is quite complex with different categories, varied tax rates, different mechanism of computation, etc. This needs to be simplified.

Incentivising the common man: The consumption engine of the economy

Given the positive tax collections, there appears enough elbow room for the government to add a sweetener in this budget for salaried personnel, which could include increasing standard deduction, revisiting the tax slabs, increasing limits under Section 80C or boosting the house rent allowance. This also becomes imperative considering the rising inflation.

Many consumers are increasingly making conscious choice of buying green products. With the environment and climate change in mind, the government should consider an increased quantum of deduction in relation to purchase of electric vehicles (EVs).

Given the spotlight on India in the current global economy, there is a spotlight on the Union Budget 2023 and its ability to deliver on the hopes and aspiration of corporate India and the common man. The next few days will be rife with anticipation.

https://www.financialexpress.com/budget/a-step-towards-realising-the-vision-of-5-trn-economy-2964823/