In brief

The Indian Finance Minister on February 1 presented the last full Union Budget for 2023-24 (Budget 2023) of the current Modi Government. With India’s economic growth in the current year estimated at 6.8%, Budget 2023 focuses on creating an empowered technology-driven and knowledge-based economy with sustained focus on infrastructure and green energy, strong public finances, and a robust financial sector.

On the tax front, the Finance Minister has continued with the underlying theme of providing a stable and predictable tax regime, promoting ease of compliance, widening the tax base, and reducing litigation, while keeping the overall tax structure unchanged. No specific announcements have been made on BEPS Pillar Two implementation. 

This Insight highlights some key Budget 2023 tax proposals affecting foreign investors and multinational enterprises doing business in India. Budget 2023 proposals would take effect once the Budget passes both houses of Parliament and obtains Presidential assent.

Action item: Budget 2023 continues with the theme of providing a stable tax regime in India with a focus on ease of doing business. Foreign companies should monitor these developments closely and be especially mindful while planning capital infusions into Indian subsidiaries in line with the proposals. 

Cost of acquisition for intangible assets

Currently, Indian tax laws do not specifically lay out the cost of acquisition or improvement in the case of intangible assets or rights (such as intellectual property, etc.) for which no consideration was paid for acquisition, leading to multiple legal disputes on the taxability of capital gains.

Budget 2023 proposes to clarify that the cost of acquisition or improvement of an intangible asset or any other right for which no consideration is paid for at the time of the acquisition shall be treated as Nil.

Simplified process for tax appeals

With a view to reduce the pendency of appeals, a new substitute authority is proposed to be created to dispose appeals against audits concluded by junior tax officers.

Refund of WHT credit where income is offered on accrual basis

Budget 2023 proposes to introduce a new provision to enable a taxpayer to claim a refund of withholding taxes where the corresponding income already has been offered to tax in prior years on an accrual basis (and taxes are withheld subsequently on a payment basis). 

Extension of benefits to start-ups

Currently, only companies incorporated until March 31, 2023 are eligible for being recognized as a ‘start-up’ under Indian tax laws. Budget 2023 proposes to extend the benefits of those provisions for start-ups incorporated until March 31, 2024.

Further, protection to carry forward and offset losses of start-ups in case of a substantial change in shareholding (exceeding 49%) is extended from 7 to 10 years from incorporation. 

Timeline for completion of tax audits

Budget 2023 proposes to increase the time limit to complete tax audits for FY 21-22 and onwards from 21 months to 24 months from the end of the fiscal year.

Conditions for a tax holiday claim to units in the Special Economic Zone (SEZ) 

Budget 2023 proposes to specify a time limit of six months from the end of the FY (or as extended by the Indian Federal Bank) for realization of export proceeds by the SEZ unit in order to claim the tax holiday.

GST scope on Online Information Data Access and Retrieval Services (OIDAR) widened 

OIDAR services (cloud services, online digital content, online gaming, online advertising, etc.) provided by non-resident entities from outside India to unregistered GST users (such as individual consumers in India) are liable to GST in India to be paid by the non-resident service provider. The law was interpreted in a manner that the levy applied only if the services were completely automated.  Budget 2023 now seeks to expand the operation of this levy by proposing that OIDAR services shall be liable to GST irrespective of whether services are automated or whether any human intervention is involved.