Why in News
In a directive issued last week, the tax department has asked its field officials to not do verification for the recognised start-ups for cases pertaining to Section 56 (2) (viib) of the Income-tax Act, which was amended in the Finance Act, 2023 bringing in non-resident investors also under the angel tax levy.
About Finance Act,2023
The Finance Act 2023 is a financial document that outlines the Indian government's tax proposals and budgetary allocations for the fiscal year 2023-24. It provides a roadmap for how the government plans to allocate its financial resources and streamline the country's tax policies.
Important Highlights of the bill:
- The Union Government has scrapped the long-term capital gains treatment (with indexation benefits) for income from debt mutual funds and other schemes that invest up to 35% in equity shares of domestic companies.
- Previous to the amendment the investments were considered long-term investments and taxed at 20% with indexation benefits.
- The Act has amended Section 56(2)(viib) of the Income-tax Act, commonly referred to as the 'angel tax,' which was originally introduced in 2012 to prevent the use of unaccounted money in closely held companies.
- This provision considered any equity investment exceeding the face value of shares in an unlisted company, including those from foreign investors, as taxable income.
- However, DPIIT-recognized startups remained exempt from this angel tax.
- Enhanced tax benefits to offshore banking units operating in GIFT city, offshore banking units to get a 100% deduction on income for 10 years.
- Tax on royalty or technical fees earned by foreign (non-resident) companies hiked from 10% to 20%. This would increase the cost of Imports in case of a lack of a bilateral treaty.
- No change in tax on non-par savings insurance products (5 lakh cap remains).
- No change in taxation REITS/InviTs despite representation (Income from REITS to be taxed as ‘income from other sources and not as capital gains).
- The securities transaction tax (STT) on the sale of options has been increased to 2,100 on a turnover of 1 crore against an earlier levy of 1,700, an increase of 23.5%, while on the sale of futures contracts, STT has been raised to 12,500 on 1 crore of turnover against 10,000 earlier, indicating a 25% hike.
Key Terms
Long-Term Capital gains: For tax purposes, an Increase in the price of a savings instrument (Capital Gain) is treated at a lower rate if the instrument is held for more than three years.
Indexation: Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. For Example: Consider a capital gain of Rs. 50,000. Indexation considers The cost of inflation index (CII) and reduces the capital gain to a lower value, thereby saving the tax liability
Securities Transaction Tax (STT): It is a tax payable in India on the value of securities transacted through a recognized stock exchange.
REITS/InviTs: Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) are instruments that allow developers to monetise revenue-generating real estate and infrastructure assets while enabling investors to invest in these assets without actually owning them.
Benefits of Finance Act, 2023
Simplified Angel Tax:
- The amendment to Section 56(2)(viib) is a positive step towards simplifying the taxation of equity investments in unlisted companies.
- It brings clarity and fairness to the taxation of investments, benefiting startups and investors.
- The inclusion of foreign investors under the provision can potentially enhance foreign investment in Indian startups, fostering entrepreneurship and economic growth.
Incentives for Offshore Banking Units:
- Offering a 100% deduction on income for offshore banking units operating in GIFT city is a strategic move.
- It encourages foreign financial institutions to establish a presence in India, potentially leading to increased capital inflow, job creation, and growth in the financial services sector.
- This can strengthen India's position as a financial hub.
Concerns of Finance Act, 2023
Increased Tax on Royalty and Technical Fees:
- The doubling of the tax rate on royalty and technical fees earned by foreign companies from 10% to 20% may have a detrimental impact.
- It can increase the cost of importing technology and services, potentially discouraging foreign technology transfer and innovation. The lack of a bilateral treaty exacerbates concerns, as it limits avenues for tax relief.
Securities Transaction Tax (STT) Hike:
- The substantial increase in STT rates for the sale of options and futures contracts might discourage trading activities.
- This is a concern for the financial markets as it could lead to reduced market liquidity and make India less attractive for traders and investors.
- A careful evaluation of the impact on market dynamics and investor confidence is essential.
Taxation of REITs and InvITs:
- Taxing income from Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as 'income from other sources' rather than capital gains could deter investors.
- These investment vehicles have been pivotal in attracting funds into the real estate and infrastructure sectors.
- This change may impact the attractiveness of these sectors for both domestic and foreign investors.
Way Forward
- Bilateral Treaties: The government should actively engage in negotiating bilateral tax treaties with key trading partners to provide relief from the increased tax on royalty and technical fees. These treaties can help maintain a conducive environment for foreign investments and technology transfer.
- STT Rate Review: The government should continuously monitor the impact of the increased STT rates on market dynamics and investor behavior. If needed, adjustments can be made to ensure market liquidity and attractiveness.
- Clarity and Incentives: Ensure that taxation policies related to investments, such as those affecting REITs and InvITs, are clear and investor-friendly to attract more capital into these sectors. Consider offering additional incentives to promote investments in these areas.
- Stakeholder Engagement: The government should engage in regular dialogue with stakeholders, businesses, and investors to assess the long-term impact of tax policy changes and make necessary adjustments to promote economic growth and investment attractiveness.
Conclusion
A balanced approach, with proactive policy adjustments and engagement with stakeholders, is essential to leverage the advantages and mitigate the concerns presented by the Finance Act 2023 to promote sustainable economic growth in India.
Practice Question
Q: Do you think the Finance Act,2023 addresses the major challenges of Indian taxation system.
