The Union’s 2022 budget presented in Parliament on Tuesday had raised a lot of expectations among the common man struggling with the fallout from the Covid-19 pandemic. The top tax rate was expected to fall from 30 percent to 25 percent, with a corresponding increase in the limit from Rs 10 lakh to Rs 20 lakh. It was also expected that the government could propose an additional deduction for “work from home” as employees currently work from home in several companies and incur additional “work from home” related expenses such as internet costs, rent, electricity, and furniture. Expectations were high about the increase of the limit of Article 80C of the Income Tax Act 1961 (Act).
However, no such changes were proposed. Instead, the Treasury Secretary steered the proposals toward three critical areas, namely simplification, increasing compliance and voluntary reporting, and reducing lawsuits.
The government has proposed filing an updated return in a case where the taxpayer failed to report certain income to the tax authorities and included it in the tax return. Current tax laws provide for a period of 9 months from the end of the relevant fiscal year to file a late return or revised return, as the case may be. Since this additional timeline for filing a revised/late return may not be sufficient, and to motivate taxpayers toward the desired goal of voluntary tax compliance, the budget proposes that taxpayers be able to file an “updated return” at payment of additional tax.
This updated return can be submitted within three years after the end of the relevant financial year. It is proposed to levy an additional amount of 25 percent per year if the tax return is filed within two years from the end of the relevant financial year, or 50 percent if the tax return is filed after two years but before three years. The addition is due on the tax owed and interest on additional earnings stated in the updated return.
Further, the long-term capital gains arising from publicly traded equities, equity-oriented funds are subject to a maximum surcharge of 15 percent; in contrast, the other long-term capital gains (eg LTCG on real estate or LTCG on shares of privately held companies) are subject to a graded surcharge that can be as high as 37 percent, depending on the individual’s total income. Accordingly, as a step towards rationalizing the said provision, the FM has proposed limiting the surcharge on long-term capital gains arising from the transfer of any type of capital asset to 15 percent. This is a good move and should give the start-up community in particular a boost.
In line with the recent trends, the budget proposes to tax the sale or donation of virtual digital assets (VDA) like cryptocurrency, NFT etc. Nowadays, more and more people are investing in crypto and Non Fungible Trusts (NFT). There has been a phenomenal rise in interest in such assets, especially from the millennials. Given the size and frequency of these transactions, it was the need of the hour to provide clarity about the taxability of such VDA. Accordingly, it has been proposed that all income from digital asset transfers (defined in the law), including crypto and NFTs, be taxed at the flat rate of 30 percent. It is proposed to allow deductions only for the purchase cost and no other deductions are allowed. Likewise, the gift of such assets will also be taxable in the hands of the recipient.
While the budget may have missed the glamor, it seems like a step in the right direction to ensure compliance and reduce lawsuits. The extent to which these will be achieved will become apparent in the coming years.
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