It is a progressive budget that outlines the key economic priorities of the government to foster sustainable and inclusive growth while maintaining a fine balance between revenue generation and fiscal discipline
Budget 2024, the seventh in a row for the honourable Finance Minister Nirmala Sitharaman, added wheels to the country’s journey from ‘Vikasshil Bharat’ (developing) to ‘Viksit Bharat’ (developed), focusing on key sectors crucial for India’s exponential growth and development narrative. It focused on pioneering innovation, augmenting infrastructure, capacity expansion, and enhancing skill building and productivity. Speaking of tax proposals, it insinuates a strong commitment towards rationalising the taxation ecosystem, reducing uncertainty and enhancing the country’s position as an attractive investment jurisdiction.
A snapshot of some key direct tax takeaways from the Budget is presented below:
BOOSTING INVESTOR CONFIDENCE & CERTAINTY
1) Tax rate for foreign companies slashed: While on the one hand, global economies continue to navigate the dual challenges of inflation and taxation, MNCs on the other, are looking at alternate jurisdictions as part of their ensuing supply chain realignment efforts. Taking cognisance of that, the FM made a bold move to bolster foreign investment and stimulate economic growth by reducing the tax rate from 40 percent to 35 percent for foreign companies. This addresses a long-standing demand for parity for global companies and will enhance India’s attractiveness as an investment destination.
2) Angel tax abolished: The announcement of eliminating the angel tax is music to the ears of the burgeoning startup community. It removes a significant financial hurdle for the sector, potentially encouraging greater investment and facilitating capital flow.
3) Scrapping the 2 percent Equalisation Levy: The Equalisation 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 the announcement of the abolition of the 2 percent Equalisation Levy from August 1, 2024, is welcome, any indication of India’s roadmap for adopting BEPS Pillar 2 proposals seemed conspicuously missing.
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RATIONALISATION AND DEEPENING TAX BASE
1) Capital Gains: The government has proposed significantly simplifying the capital gains taxation regime. Short-term gains on transferring STT-paid equity shares or equity-oriented funds will now be taxed at 20 percent (previously 15 percent).
Further, long-term gains will now be taxed at 12.5 percent 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 the sale of assets (such as real estate and other unlisted assets) despite the reduced LTCG rate. (The Finance Secretary clarified in the post-budget conference that properties held before 2001 would continue to enjoy the indexation benefit.)
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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).
The exemption limit on long-term capital gains is proposed to be increased to Rs1.25 lakh to benefit the lower and middle-income classes.
While the legislative intent behind these amendments is to simplify capital gains taxation, the changes present a mixed bag, and whether they are beneficial or detrimental to taxpayers will require a case-by-case analysis.
2) Buyback tax: To attain parity with dividends, the FM has announced the abolition of the 20 percent 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 complexity to tax computation.
EASING DISPUTE RESOLUTION AND ENHANCING TAXPAYER EXPERIENCE
1) Direct Tax Vivad se Vishwas Scheme, 2024: Building on the success of the previous Direct Tax Vivad 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.
2) 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.
3) Digitalisation: It is yet another key focus. The government has committed to rendering all major taxpayer services (under GST, Customs, and Income Tax) digital and paperless within the next two years.
SIMPLIFICATION REFORMS
1) 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 Rs50 lakh or more).
2) Rationalising Penalty provisions: To ease the taxpayer’s burden, the government has proposed several amendments, such as decriminalising delay in paying 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 Rs20 lakh.
Also Read- Budget 2024: A clear path to fiscal consolidation
To summarise, much was expected from the announcements, and Budget 2024-25 certainly didn’t disappoint. The comprehensive review of the existing tax code aimed at a fair, transparent, and efficient tax system marks a significant step towards simplifying India’s tax regime. It is a progressive budget that outlines the key economic priorities of the government to foster sustainable and inclusive growth while maintaining a fine balance between revenue generation and fiscal discipline.
