Striding Towards an Empowered and Inclusive Economy: The Union Budget

The Union Minister of Finance and Corporate Affairs, Smt. Nirmala Sitharaman presented the Union Budget 2023-24 (“Budget“) in the Indian Parliament on February 01, 2023. The Budget is centered around opportunities for citizens with special focus on youth, growth and job creation and strong and stable macro-economic environment. The Budget adopts seven priorities (termed Saptarishi), namely: inclusive development, reaching the last mile, infrastructure and investment, unleashing the potential, green growth, youth power and financial sector to guide the country towards ‘Amrit Kaal’ and therefore, providing a blueprint for an empowered and inclusive economy.

One of the very important reforms proposed by the Budget that affect the legal industry relates to e-courts. An outlay of INR 7,000 Crores has been announced for launching the third phase of the e- courts project. This phase will enhance the accessibility and efficiency of the courts and will allow the litigants to file a case from anywhere, at any time, without having to hassle through the corridors of the courts. The aim is to provide a conducive environment for smooth adjudication through optimal hearings, via audio and video conferencing, in person or in writing and simplify the judicial proceeding using technology.

The Budget also proposes setting up a central data processing centre for faster response to companies through centralized handling of various forms filed with field officers under the Companies Act, 2013. The central repository for financial and related information will be established in the form of National Financial Information Registry. This will encourage financial inclusion, efficient flow of credit and financial stability. Investors will also be able to easily reclaim unclaimed shares and unpaid dividends from the Investor Education and Protection Fund Authority, owing to the proposed establishment of an integrated IT platform. The Budget has also proposed certain amendments to the Banking Regulation Act, Banking Companies Act and the Reserve Bank of India Act to improve governance and to offer protection to investors in the banking sector.

The government’s digital certificate repository, Digilocker, will be made available to the fintech industry and help fintech businesses. Digilocker’s entrance into the fintech industry will open up new business prospects and enhance access to crucial certificates and documents. The country’s march towards research, innovation, and digital transformation will be aided by the centres of excellence for AI. The establishment of three centres of excellence for AI which was announced by Smt. Nirmala Sitharaman is a way to further the development and application of AI in India. The government is placing a lot of emphasis on AI in an effort to promote its development and make sure that it will be advantageous for the nation.

Section 135 of the Companies Act, 2013 mandates the companies to spend a minimum of 2% of its net profit over the preceding three years as Corporate Social Responsibility (CSR). The Companies have been using the provision of Section 17(5) of the CGST Act to gain Input Tax Credit (ITC) on the purchase of goods and services for fulfilling the obligations under the CSR regulations. The Budget proposes to restrict the companies from gaining the Input Tax Credit on their obligations under the CSR activities.  The proposal is a result of the conflicting rulings by various courts where tax benefits were denied on the grounds that the CSR expenses do not fit into the definition of a business expense and tax credit can only be claimed for expenses made in furtherance of business.

The Budget clarifies the taxation policy related to online gaming by introducing two additional provisions for TDS on online gaming, the abolition of the current threshold of INR 10,000 for the application of TDS and a 30% tax on the payout of net winnings in a financial year. In addition, tax must be withheld at source at the conclusion of the financial year in the event that the money is not taken from the user account.

In an attempt to raise the effective taxes on long-term capital gains, the exemptions offered on the purchase of residential homes have been limited. While any long-term capital gains from the sale of real estate were previously exempt from taxes to the extent that they were used to buy or build a new home, the exemption has now been reduced to INR 10 Crores. Similar to this, long-term capital gains from the sale of any other assets, such as shares and stocks, are proportionately free from taxation if the funds are used to buy or build a new residential home.

The Budget also proposes to extend the ambit of angel tax to funds raised from non-resident investors by a company on issuance of shares above the fair value, though the tax exposure continues to be on the company. This will impact taxability of fund raises from foreign private equity funds, non-resident angels and any foreign companies. While the foreign exchange regulations permit a company to issue shares to non-residents above fair value, such issuance will now attract tax for the company. The effective taxes will rise significantly as a result of this move, particularly in transactions where considerable capital gains are created, including offers for sale in initial public offerings.

The Indian Government will also launch a National Data Governance Policy (“Policy“) to enable access to anonymised data. The Policy will also unleash innovation by startups and academia. To ensure that non-personal data and anonymized data from both government and private entities are safely accessible to the research and innovation ecosystem, the government introduced the draft Policy last year. The Policy also proposed establishment of India Data Management Office (IDMO) to oversee the formulation of all specific standards and guidelines on all aspects of data storage and data anonymisation. Besides, the Know-Your-Customer (KYC) process is also proposed to be simplified, and a risk-based approach will be adopted instead of a one-size-fits-all approach.

The Budget included a number of initiatives, including various initiatives for Medium-Sized, Small and Micro Enterprises (“MSMEs“). A number of incentives, including INR 9,000 crore fund for a revamped credit guarantee programme, an increased presumptive taxation limit, and a refund of 95% of amounts forfeited during the covid period for bid or performance security were announced for MSMEs. It is proposed that payments to micro/small businesses will only be permitted as deductions on real payments as part of a measure linked to the welfare of MSMEs and to encourage timely payments to them. This will make it easier for micro and small businesses to manage their need for operating capital in a time efficient manner. The Budget also aims to settle contractual disputes of government, wherein arbitral award is under challenge by introducing a voluntary settlement scheme with standardized terms.

To further enhance the ease of doing business in the country, more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized by the introduction of Jan Vishwas Bill (JVB), which amends 42 central Acts, including the Copyright Act, 1957, the Patents Act 1970, the Trademarks Act, 1999, the Geographical Indications of Goods (Registration and Protection) Act, 1999, the Information Technology Act, 2000 and the Legal Metrology Act, 2009.

To develop GIFT City as a global financial hub while enhancing the efficiency level of the services, the Budget has proposed to delegate powers under the Special Economic Zones Act, 2005 (“SEZ Act“) to International Financial Services Centres Authority Act, 2019 (“IFSCA Act“) to avoid dual regulation. It will also amend the IFSCA Act for statutory provisions for arbitration, ancillary services, and avoiding dual regulation under SEZ Act. Steps like single window IT system and allowing acquisition finance by branches of foreign banks set up in the IFSC region will also be taken to make GIFT City a global financial hub.

In conclusion, the Budget is a progressive one that aims to broaden the country’s horizons and further bolster India’s place in the world’s economic order. The Budget’s strong emphasis on the nation’s sustainable growth is its main message. The emphasis on healthcare, agriculture, infrastructure, and MSMEs at this stage of India’s development is noteworthy. A thoughtful emphasis on data governance policies will usher in a new digital era as a result of this Budget.