Budget 2022 – Key announcements in the Financial Services space

Sunil Badala, Anand Shah

Indian economy has shown great resilience and is once again poised for strong recovery which is evident from the robust growth in both direct and indirect tax revenues and healthy economic growth of 9.2 percent expected for FY 2021-22. The Budget 2022 aims to lay the blueprint to embark on the ‘Amrit Kaal’ i.e. next 25 years for the Prime Minister’s Independent India@100 vision.

In the area of key policy announcements from a BFSI perspective, the Finance minister announced a major push in digitization by enabling all the post offices to move into the core banking system for financial inclusion and has also proposed to set-up 75 digital banking units in 75 districts by Scheduled Commercial Banks. This will create a large footprint for digital banking in the rural areas for farmers and senior citizens and bolster ease of banking which could have a positive impact on the banking sector. Further, riding on the digital currency wave, RBI will shortly introduce a Digital Rupee using block chain and other technologies to boost the digital economy.

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International Financial Services Centre (IFSC) has become one of the preferred locations for undertaking financial services activities. To bolster activities in IFSC, additional measures have been introduced to make the IFSC proposition further attractive. International Arbitration Centre is proposed to be set-up in IFSC.

In terms of key tax proposals, announced by FM, in the context of FS sector includes tax exemption to non-residents on transfer of Offshore Derivative Instruments (‘ODI’) / Over the Counter (‘OTC’) derivatives and income from portfolio of securities or financial products managed by portfolio manager within IFSC, subject to certain conditions. Similar to aircraft leasing, income earned by a non-resident in the nature of royalty or interest on account of lease of ship from IFSC unit to be exempt from income-tax subject to certain conditions. Further, income arising from transfer of ships which was leased by an IFSC unit is proposed to be exempted. These are further steps in the right direction to promote IFSC as a global financial hub.

The cryptocurrency craze has already gripped India after making its presence felt across the world. So far, there was no clarity on tax implications on gains on transfer of crypto. Budget introduces taxation of gains arising from transfer of crypto and all other virtual digital assets @30% without set off of any expenses except the acquisition cost. Losses arising from transfer of digital assets would also not be allowed for set off against any other income and carry forward of such loss to subsequent years would also not be allowed. Gift of digital assets will also be taxable subject to certain relaxation. In order to track the transactions in the space, there is a proposal for TDS @1% on transfer of digital assets.

While taxation on crypto is introduced, some issues which remain unaddressed includes what would be the cost of acquisition for the recipient in the case of gift and possibility of TDS implications on both the buyer and seller in case of exchange of crypto.

Various other measures to boost confidence and investments in India include better litigation management for question of law pending before jurisdictional courts and restricting surcharge rates applicable on LTCG at 15 percent (currently, it is 37 percent for non-corporates) have been proposed, which will further boost long term investments.

Dividend and bonus stripping provisions to be expanded to the units of business trust (i.e. real estate investment trust/infrastructure investment trust) and AIF, in line with the existing provisions applicable to securities / units.

Also Read: Budget has underlined the potential of education financing: Amit Gainda, CEO, Avanse Financial Services

To overturn the rulings permitting the deduction of education cess, a retrospective clarificatory amendment is introduced in this Budget clarifying that term ‘tax’ includes any surcharge or cess, on such tax.

In terms of misses, few expectations that did not see the light of the day includes relaxation in TDS / TCS compliance provisions, reduction in headline corporate tax rates for foreign companies, harmonising tax provisions applicable to NBFCs by increasing the limit of deduction for NPA provisions, exemption from thin capitalisation provisions and extending the tax holiday period for companies operating in IFSC.

Overall, Budget 2022 lays down a promising and a growth-oriented approach which will help to achieve better economic functioning for the years to come.

Authored by Sunil Badala, Partner and Head, Financial Services, Tax, KPMG in India and Anand Shah, Chartered Accountant

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