Budget 2022- Impact on the financial services sector

Budget 2022 seeks to focus on long-term growth, domestic manufacturing, digitisation, rural upliftment and planned urbanisation.

Allocation of funds towards capital expenditure and infrastructure sector sets out a futuristic and inclusive vision for the nation over the next 25 years.

Budget 2022 proposes several policy changes including the introduction of Digital Rupee, set-up of digital banking units, replacement of SEZ Act with new legislation and various measures for promoting IFSC as one of the favoured global financial service-oriented destinations. 

The Budget highlights the underlying commitment of the government towards increasing tax certainty and reducing litigation.

Further from a financial services sector perspective, the following key changes have been proposed:- 
 

Taxation of virtual digital assets (VDA) 

Income arising on transfer of VDA (i.e. cryptocurrencies, NFTs, other digital assets, etc.) would be taxable at 30% without any deduction (except the cost of acquisition). Loss, if any, cannot be set off and carry forward. The payer would be liable to withhold taxes at 1%, subject to certain conditions. The introduction of a specific tax regime relating to the taxation of VDA shall provide much-awaited clarity to investors.

Bonus Stripping

The scope of anti-avoidance provisions relating to bonus stripping has been sought to be expanded to include stocks, shares, units of REIT, InvIT and AIFs. Earlier, it was restricted only to mutual fund units. This proposal seeks to plug the tax planning opportunities resorted by the market participants by setting-off such losses against other capital gains.

Tax incentives for IFSC

1. Income earned by non-residents from the transfer of offshore derivative instruments or over-the-counter derivatives entered with Offshore Banking Unit ('OBU') in IFSC would be exempt. This proposal seeks to incentivise OBUs to shift their ODI business from popular overseas jurisdictions to IFSC, as it will increase the popularity of TRS, P-Note, ODI, etc. issued from IFSC in a tax-efficient manner. 
2. Income earned by non-residents from the portfolio of securities/funds, managed by a portfolio manager based in IFSC, in an account maintained with an OBU in IFSC, to the extent such income accrues outside India, would be exempt. This proposal would attract global asset managers to carry on portfolio management activities from IFSC and thus would give a boost to the IFSC GIFT City.
3. Considering the growth of the aircraft leasing business in IFSC, the government has introduced similar tax exemptions for ship leasing businesses that commence their operations before March 31, 2024. 
4. Further, angel tax provisions would not apply where consideration is received from Category I/II AIF regulated by IFSCA. 

The Budget seeks to introduce several measures to promote the financial markets, support the development of IFSC, promote public-private capital investments and ensure overall fiscal management.

This article was originally published on Business Today.