Union Budget 2023-24 & Direct Taxes: Certain Sectoral Implications

The Union Budget 2023-2024 has been presented in the backdrop of a very challenging global geo-political environment, and an equally challenging macro-economic environment; of course, India is relatively better placed and has performed quite credibly.  

While there have been several laudable macro initiatives, on the direct tax front, there is a mixed picture: there have been some relaxations, but there are several provisions that give cause for concern, and also many long pending and rational asks have unfortunately not found a place in the Finance Bill.

Tax Rates

On the individual tax front, there has been some reduction in tax rates up to an income of Rs 15 lakh, where the overall saving is Rs. 37,500.  For incomes over Rs. 5 cr, the maximum tax rate is ~ 43 per cent, which will now be ~ 39 per cent; the 39 per cent rate is still very high compared to peers, and one would have hoped that it would have been at a maximum of 35%.  In any case, the overall impact of the reduction, will, to some extent spur consumption, especially for daily essentials such as products of FMCG companies.

The 39 per cent rate also applies to private discretionary trusts, except in relation to special rate regimes eg capital gains and dividend incomes

Real Estate

There has been a significant change in relation to roll over exemption u/s 54 and u/s 54F, where a property is sold (section 54) or any other long term capital asset is liquidated (section 54F) and the proceeds are reinvested in a residential property.  What has now been done is that the cost of the newly purchased residential property ('NPRP') is capped at Rs. 10 cr and that will obviously curtail the exemption.  

When one looks at the exorbitant price of properties in Tier 1 cities (and, to some extent, Tier 2 cities) and factoring in transaction costs (such as stamp duty and brokerage), the capping proposal can be a significant hit to the real estate sector, and, from the perspective of an individual who is looking to shift to better accommodation, this can become a major dampener in financial terms.

Insurance

The insurance sector is badly under penetrated and one would have hoped for certain sops to this sector.  However, unfortunately, there is a proposal, that in for life insurance policies issued post 1st April 2023, if the premium payable exceeds Rs. 5 lacs p.a., then the amount received on maturity of the policy shall be taxable to the extent of the excess over the premium.  Of course, policies of this quantum are relatively less, but there will be still some impact on the insurance sector; incidentally, there will be no taxability in case the amount is received on death.  It is also unfortunately provided that, as opposed to capital gains, it will be taxable as normal income, making it a double whammy.

Capital market related

There has unfortunately been no streamlining of capital gains provisions, but unfortunately, there is now a provision that, in relation to Market Linked Debentures, the redemption amount minus investment will be taxed as short term capital gains; also, unlike in case of equity shares or equity oriented mutual funds, the STCG rate is not a concessional rate, but regular rates will apply.  Conceivably, therefore, the tax rate could go up from ~ 11% to as high as 39%.

M&A / Cross border investment provisions

Although not sectoral, there is a worrisome amendment u/s 56(2)(viib) of the Income Tax Act popularly called the 'angel tax' provision.  This extreme outlier provision has already caused massive litigation ; it has fortunately not applied till now for cross border investments, but the amendment in the Budget will make it applicable to cross border investments.  This is going to become a real issue, since, under FEMA, there are floor price provisions and the investment must be equal to or above the floor price; this provision talks about 'excessive premium' being taxable as income.  Clearly, this provision can become a major dampener for cross border investments and is likely to create significant controversy in the years to come.

Additionally, it is a big disappointment that several MnA/restructuring provisions which need to be addressed haven't so been ; as one example, write-backs of borrowing haircuts is a controversial issue (inspite of favorable judicial precedents). Other examples are non allowability of set off of losses on mergers of nonmanufacturing companies, and highly restrictive definition of tax neutral demerger.

Summing up

All in all, some laudable macroproposals in the Budget, but direct tax provisions are a disappointment in certain aspects. One hopes that some of the issues pointed out in this piece are addressed by the Government before the Bill becomes as Act; we are in a very challenging environment and the lesser the controversies we have to deal with, the better it will be.

Ketan Dalal .

Guest Author Managing Director - Katalyst Advisors pvt ltd