Indian Union Budget 2023

India’s Union Budget 2023, presented on 1 February 2023, has focussed on seven priorities to achieve the Government’s vision as a technology-driven and knowledge-based economy with strong public finances. The “Financial Sector” has been identified as one such priority area for the Government.

Key tax proposals that were announced in the Budget and are relevant to the Financial Services Industry, include the following:

1. Non-Banking Financial Companies (NBFCs) exempted from Thin Capitalisation rules: The Government has finally decided to exempt certain class of NBFCs (to be notified separately) from the applicability of thin capitalisation rules (i.e., restriction on tax deductibility of interest payments made to associated enterprises).
   
   
2. Re-characterisation of income on Market Linked Debentures [MLD]: All profits/gains arising to investors in MLDs issued by NBFCs, will now be taxed as short-term capital gains in their hands, on transfer/redemption/maturity of such MLDs, irrespective of their period of holding. This will potentially increase the base tax rate on such investments from 10% (as availed presently for MLDs held for more than 12 months) to 25%/30%/40%, and end the tax arbitrage benefits that existed.
   
   
3. Life insurance maturity proceeds to be taxed: Investors are to now pay tax on receipts from all life insurance policies (other than Unit Linked Insurance Policy) purchased on or after 1 April 2023, if the premium payable for any year during the term of the policy exceeds INR 0.5 million (approx. US$ 6,000). Tax will be payable in a manner to be prescribed on the net receipts (i.e., amount in excess of the aggregate premiums paid). Sums received on the death of the insured will continue to be tax exempt. This will bring investment-cum-insurance products offered by life insurance companies more-or-less on par (from a tax perspective) with debt products offered by other financial intermediaries (i.e., banks, NBFCs, Mutual Funds).
   
   
4. Specific Anti-Avoidance Rule (SAAR) provision for taxing premium on issue of shares extended to receipts from non-resident investors: Share capital infusions in Indian closely held companies, made by non-resident investors at a value that exceeds the fair market value (FMV) of the shares of the Indian company will now be treated as ordinary income of the Indian company and taxed in its hand to the extent that the consideration exceeds the FMV of the shares. This has been a controversial move on the part of the Indian Government, and efforts are on to get the Indian Government to reconsider this amendment.
   
   
5. International Financial Services Centre (IFSC)―Gujarat International Finance Tec-City (GIFT City) tax relaxations: The sunset clause granting tax exemptions to foreign investment funds keen to relocate to IFSC-GIFT City has been extended by two years, from 31 March 2023 to 31 March 2025. Additionally, foreign Investors are to be exempted from tax on any income distributed on Offshore Derivative Instruments entered into with IFSC-GIFT City Banking Units.
   
   
6. Real Estate Investment Trusts (REITs)/Infrastructure Investment Trusts (InVITs) distributions: The distributions by REITs/InVITs in the nature of repayment of debt are to be taxable in the hands of unitholders as ordinary income. Any foreign investor receiving such distributions may now be taxed at a base tax rate of 40%. Unitholders to be eligible to apply for lower/nil withholding tax certificates to income receivable from REIT/InVITs.

While the Budget focuses on increasing the growth and resiliency of the Indian economy, there were a few misses in the Budget. For example:

1. Non-extension of the concessional 5% tax rate for Foreign Portfolio Investments and other non-residents, beyond Jun 30, 2023, on Indian sourced income earned on certain Indian debt securities and cross border loans granted.
   
   
2. No mention of a simple and separate tax and regulatory framework to cater to the needs of the Private Equity and Venture Capital industries, unlike what was expected.
   
   
3. Non-simplification of the existing structure for taxing Indian sourced capital gains, across all asset classes (including financial securities).

For further information on these developments, see here:
https://www2.deloitte.com/in/en/pages/tax/articles/union-budget.html