Budget 2024, the 7th in a row for honorable Finance Minister, added wheels to the country’s journey from Vikasheel Bharat to ‘Viksit Bharat’, focusing on key sectors crucial for India exponential growth and development narrative. A sharp focus on pioneering innovation, augmenting infrastructure, capacity expansion, enhancing skill building and productivity – all with a view to bring India at the front and center. Talking of tax, the proposals clearly insinuate a strong commitment towards rationalizing the taxation ecosystem, reducing uncertainty and enhancing the country’s position as an attractive investment jurisdiction.
A snapshot of some key direct tax take aways from the Budget is presented below:
Boosting investor confidence & certainty
- Tax rate for foreign companies slashed: While on one hand global economies continue to navigate the dual challenges of inflation and taxation, MNCs’ on the hand are looking at alternate jurisdictions as part of their ensuing supply chain realignment efforts. Taking cognizance of that, the FM made a bold move to bolster foreign investment and stimulate economic growth by reducing the tax rate from 40% to 35% for foreign companies. This addresses a long-standing demand for parity for global companies and will enhance India's attractiveness as an investment destination.
- Angel tax abolished: Presenting music to the ears of the burgeoning start up community, the announcement of eliminating the angel tax effectively removes a significant financial hurdle for the sector, potentially encouraging greater investment and facilitating capital flow.
- Scrapping the 2% Equalization Levy: Equalization Levy was fraught with interpretational ambiguities seemingly impacting various non e-commerce players like brick and mortar outfits and intra -group ERP procurement and service transactions using online platforms. While announcement of the abolition of 2% Equalisation Levy from 1 August 2024 is welcome, any indication of India’s roadmap on adoption of BEPS Pillar 2 proposals seemed conspicuously missing.
Rationalisation and deepening tax base
- Capital Gains: The government has proposed a significant simplification of the capital gains taxation regime. Short-term gains on transfer of STT paid equity shares/ equity oriented funds will now be taxed at 20% (previously 15%).
Further, Long-term gains will now be taxed at 12.5% for all asset categories without the benefit of indexation (except unlisted bonds and debentures, debt mutual funds, and market-linked debentures which will attract capital gains tax at applicable rates).Indexation offers reduced tax burden by adjusting the cost price of an asset for inflation and bereft of this benefit, taxpayers may suffer increased tax incidence on sale of assets (such as real estate, other unlisted assets) despite the reduced LTCG rate. (It was clarified in the post budget conference by the Finance Secretary that properties held before 2001 would continue to enjoy the indexation benefit.)
The holding period to classify assets as long-term has been proposed to be 12 months (for all listed securities) and 24 months (for all other assets).
For benefiting the lower and middle-income classes, the exemption limit on long term capital gains is proposed to be increased to INR 1.25 lacs.
While the legislative intent behind these amendments is to simplify capital gains taxation, the changes present a mixed bag and whether these amendments are beneficial or detrimental to taxpayers will require a case-by-case analysis.
- Buy-back tax: In an attempt to attain parity with dividends, the FM has announced abolition of the 20% buyback tax earlier levied on companies and has proposed taxing the income from buyback as dividends in the hands of the shareholders. However, the cost of acquisition of the shares tendered for buyback will be allowed as a capital loss to the shareholder, eligible for offset with any capital gains. While this may reduce the tax burden on companies, it may dampen investor sentiment and add to complexity in tax computation.
Easing dispute resolution and enhancing taxpayer experience
- Direct Tax Vivad se Vishwas Scheme, 2024: Building on the success of the previous Direct Tax Vivaad Se Vishwas Act, 2020 (launched for appeals pending as of January 31, 2020) and in response to the growing backlog of litigation at various levels of the tax appellate system, the Finance Bill proposes to introduce the Direct Tax Vivad se Vishwas Scheme, 2024.
- Prioritising First Appeals and Enhancing Field Officers: The Finance Minister announced a strategic plan to expedite the resolution of first appeals, deploying more officers to decide on cases with substantial tax implications. Additionally, monetary limits for filing appeals related to direct taxes, excise, and service tax will be increased in appellate bodies, aiming to improve the overall efficiency of the tax litigation system.
- Digitalisation is yet another key focus, with a commitment to render all major taxpayer services (under GST, Customs and Income-tax) digital and paperless within the next two years.
Simplification Reforms
- Re-assessment regime revamp: In a strategic move designed to streamline the tax assessment process and reduce tax-related disputes, the bill has proposed a comprehensive simplification of the provisions for reopening assessments. Under the new proposals, the maximum period for reopening assessments is limited to five years from the end of the assessment year (if the escaped income amounts to INR 50 lacs or more).
- Rationalising penalty provisions: For easing taxpayer’s burden, the government has proposed several amendments such as decriminalising delay for payment of TDS up to the due date of filing the TDS statement, rolling out a standard operating procedure for TDS defaults and rationalising compounding guidelines. Also, penalties for non-compliance under the Black Money Act have been exempted if the aggregate value of specified assets is under INR 20 lacs.
