Budget 2023: Time to think big and act bold on tax

As the Budget is just round the corner, the middle class is hoping for some relief from Sitharaman after being hit by the rising cost of living and worsening job market. (Representative image)

As the global economy inches towards a state of polycrisis (economics, geopolitics and energy), one wonders who will likely prosper amidst this gloom. India, which is on course to become the world’s most populous country, might just be the answer. Buoyed by growing domestic investments, record foreign direct investment (FDI) inflows and the China plus one strategy increasingly gaining popularity, the country will continue to remain a bright spot in an otherwise uncertain world.

All eyes now on this year’s budget, the last ‘full year one’ before elections. The budget is also significant as it comes on the heels of India’s G20 presidency. Among other things, tax policy will play a pivotal role in all of this.

Driving manufacturing competitiveness
The highly attractive corporate tax rate of 15 percent applies only to new manufacturing companies that commence operations by March 31, 2024. With more supply shifting to India, it is perhaps the right time for the government to consider extending the sunset clause date for new manufacturing commencement by at least three more years. This, when combined with the production-linked incentive schemes, will form a potent force in transforming the country’s manufacturing sector.

Revitalising special economic zones (SEZs)
With the phasing out of the tax holiday for units in SEZs, many are entering the last phase of this tax break. In this phase, the tax holiday is conditional upon creation of a reserve that is to be utilised towards plant and machinery. Since many companies in the services sector do not require heavy investment in plant and machinery, this requirement should either be done away with or expanded to cover buildings, infrastructure, furniture, etc. In addition, with hybrid working becoming the new normal, the government should proactively clarify that SEZ tax holiday benefits will be available in respect of work undertaken by employees working from home in accordance with the updated SEZ rules.