Indian Union Budget 2023

Tax rates

• There is largely no change in the tax rates for the income earned by FPIs.
• Withholding tax on income in respect of units of a mutual fund paid to non-residents to be changed from 20% to the lower of (i) 20% or (ii) rate as per the applicable Double Taxation Avoidance Agreement (DTAA).
• The concessional tax regime of 5%* is presently available until 30 June 2023 on interest payments on government securities, rupee-denominated bonds of Indian companies and municipal debt securities. The Finance Bill does not propose an extension of this concessional tax regime. Accordingly, the interest income earned by FPIs on or after 1 July 2023 will be chargeable to tax at the rate of 20%*. This tax rate of 20%* is subject to relief, if any, available under an applicable DTAA.
• Any distributions (in excess of cost) towards redemption of units received by FPIs from Real Estate Investment Trusts (REITs) or Infrastructure Investment Trusts (InvITs) will be taxed as ‘income from other sources’ at 20%*, subject to relief, if any, available under the applicable DTAA.
• The capital gains earned on transfer, redemption or maturity of market-linked debentures (MLDs) are deemed to be ‘short-term capital gains’, irrespective of the holding period. Such short-term capital gains will be taxed at the rate of 30%*, subject to relief, if any, available under the applicable DTAA.
• FPIs being Sovereign Wealth Funds or Pension Funds investing in units of REITs or InvITs can apply for a nil or lower withholding tax certificate.

^{*Plus applicable surcharge and cess.}

International Financial Services Centre (IFSC) related announcements

• The timeline for tax neutral relocation of FPIs (Original Fund) to the IFSC (Resultant Fund) is extended untill 31 March 2025.
• Offshore Derivative Instruments (ODI) issued by FPIs in the IFSC are considered as valid contracts under the Securities Contracts (Regulation) Act, 1956.
• In addition to the exemption currently available in respect of gains on the transfer of ODI entered into by a non-resident with an IFSC banking unit, the distribution of income in respect of such ODIs to also be exempt from tax subject to such income being chargeable to tax in the hands of the IFSC banking unit.

Tax compliance related announcements

• The timeline for completion of tax audit proceedings is increased to 24 months from the end of the FY instead of 21 months from the end of the FY, e.g. tax audit proceedings for FY 2021–22 would be completed by 31 March 2024 instead of 31 December 2023.
• Joint Commissioner (Appeals) level to be created to handle certain appeals involving small amounts of disputed demand with the aim to reduce the time frame for the disposal of pending appeals before the Commissioner of Income-tax (Appeals)).
• Withholding tax credit for income offered to tax in earlier years can now be claimed within a period of two years from the end of the FY in which the tax was deducted.
• Penalty and prosecution provisions to be introduced for non-compliance of withholding tax provisions with respect to providing benefit or perquisite arising from business.
• Time limit to furnish transfer pricing documentation during assessment proceedings reduced to 10 days (from existing 30 days) which can be further extended by another 30 days.
• A ‘next-generation common income-tax return form’ for taxpayer’s convenience will be rolled out.

Note that the above tax proposals will get enacted only after the Bill is passed in the Parliament and receives the President's assent.