Insights
Direct tax: Budget expectations from startups, crypto industry
January 31, 2024As we enter a two phased deliberation process for the Union Budget this election year, here are some key expectations in the direct tax space.
Start-ups have experienced a funding winter lately. Tax benefits may provide a necessary fillip to the industry. In this respect, employee stock options and stock awards have been a key mechanism for start-ups to attract and retain talent. A long-standing request of the industry has been to defer the taxation of ESOP on the sale of stock (as against on exercise of options), which is the realization event. Previously, some relief was given to employees of a subset of start-ups registered with DPIIT. The hope is that the Government will defer the taxable event to the date of sale of shares allotted (which is the realization event) for the broader start-up community. Even generally, significant uncertainty exists around taxation of ESOPs routed through ESOP trusts and deductibility of ESOP expenses, which should be clarified. Relatedly, the tax holiday for eligible start-ups is currently available for start-ups incorporated till March 31, 2024. The Government may extend such sunset date to continue to promote the start-up ecosystem.
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While angel tax continues to be a concern for several Indian companies raising capital, there have also been a parallel spate of cases where additions have been made in the taxable income of Indian companies receiving substantial share premium under Section 68 (unexplained cash credits)of the Income-tax Act, 1961. Despite the Government’s strict stance in the past, several of these matters relate to genuine cases of foreign direct investment and do not have a substantial basis. The Government should consider issuing necessary guidelines under Section 68 to shield genuine cases as this adversely impacts ease of doing business in India. This is more so now that angel tax applies to investments from both Indian residents and non-residents and share valuations are tested.
The crypto industry has been highlighting the impact that the one percent withholding tax on crypto gains has had on diversion of user traffic to foreign platforms. This has been counterproductive since it defeats the Government’s intent to monitor transactions in crypto trading. The Indian crypto industry hopes for a significant reduction in the withholding tax rates on sale and purchase of cryptocurrency.
IFSCs continue to attract the policymakers’ attention. Since few tax benefits associated with IFSCs are set to expire on March 31, 2024 (such as tax benefits of aircraft leasing business), it is likely that the Government may extend the sunset date of such benefits.
Given the large pendency of income-tax cases at the first appellate level, the Government had introduced JCIT(A) as an addition first appellate authority to adjudicate tax matters with low tax effect, and domestic / corporate tax issues vide Finance Act, 2023. However, in the year gone by, there has not been a significant clearance of the pending cases. The taxpayer community has for long yearned for a stringent bar of limitation to be imposed at the first appellate level to speed up the adjudication process.
The CBDT has also mulled over an alternate dispute resolution mechanism in the form of authority for advance rulings (AAR) which was later replaced by a new board of advance rulings (BAR). However, these advance ruling authorities have not proved to be effective in redressal of taxpayer disputes.
While the Settlement Commission was abolished vide Finance Act, 2021, we have seen huge success of tax amnesty schemes that have helped clear pendency of tax cases like the Vivaad se Vishwas Scheme that was introduced in 2020. International investor community also hopes for a settlement mechanism where pending disputes that have become a hindrance in achieving business objectives can be efficiently and amicably settled. As such, the Government could consider bringing back a settlement mechanism similar to past amnesty schemes which have seen successful results as a permanent feature of the tax statute.
This article was originally published in The Economic Times on 31 January 2024 Co-written by: Gouri Puri, Partner; Suyash Sinha, Principal Associate. Click here for original article
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Contributed by: Gouri Puri, Partner; Suyash Sinha, Principal Associate
Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
