Union Budget 2024-25: Emphasis on bringing simplicity in direct tax system | Supplements

Rationalisation of tax rates

Corporate taxes remain unchanged for domestic companies. Tax rates for foreign companies are proposed to be reduced from 40 per cent to 35 40 per cent on income excluding income subject to special rates, benefiting project & branch offices, permanent establishments of foreign entities in India.

Personal tax proposals nudge taxpayers towards adoption of the new tax regime to simplify compliances and increase disposable income. Along with a revision of slab rates (refer table 1) under the new regime, an increased standard deduction for salaried taxpayers from Rs 50,000 to Rs 75,000, and a raised ceiling for family pension deductions from Rs 15,000 to Rs 25,000 is proposed. Additionally, to align tax deductions for government and non-government employees, a deduction of up to 14 per cent of salary for pension scheme contributions (up from 10 per cent) is proposed, with corresponding amendments for deductions to non-government employers.

New capital gains tax rates are proposed to simplify and align capital gains taxation regime with global standards. Key changes include simplifying the rate structure (refer table 2) and holding periods for long-term and short-term gains as well as elimination of indexation benefits. The removal of indexation benefits relative to the reduced tax rates could be either beneficial or unfavorable depending on the nature of the assets and the holding duration. Properties acquired prior to 2001 continue to be grandfathered.

Reduction of TDS rates (Table 3) and a new provision has been proposed for withholding tax at 10 per cent on payments towards partner’s remuneration and interest, exceeding INR 20,000 in a financial year.

Ease of doing business

Angel tax that was applicable on funds raised by Indian companies, including startups, from investors that exceeded the fair market value of shares is proposed to be abolished effective April 1, 2025. This move is aimed to encourage investments and avoid scrutiny of genuine transactions. Anti-abuse provisions for unexplained cash credits/investments may continue to apply. A retroactive change in the same could have mitigated litigation.

The scope for lower TDS/TCS Certificates has been expanded to include the TDS/TCS provisions related to the purchase of goods. This will help bring in cash liquidity for manufacturers and traders.

International taxation

Equalization levy, a 2 per cent digital tax imposed on non-residents for online sales of goods or services to Indian customers, is proposed to be abolished effective August 1, 2024. This aligns with global commitment of India to withdraw unilateral digital taxation measures once the Pillar 1 proposals are implemented.

In order to promote domestic cruise ship operations by non-residents, a new presumptive taxation regime deeming 20 per cent of passenger carriage revenues as taxable profits for non-resident operators has been proposed. Additionally, lease rentals paid to foreign companies, under the same shareholding as the cruise operator, will be exempt until March 31, 2030.

Widening tax base

Buyback tax is proposed to be abolished to align taxation of buybacks with dividends thus shifting tax incidence to shareholders. The cost of the shares bought-back can be claimed as a capital loss and offset against future capital gains. This is likely to impact companies’ cash optimization strategies, leading to additional cash outflows for shareholders, contingency of offsetting capital loss on future capital gains and increased compliance. Availing tax treaty benefits on such recharacterization could be considered.

Capital Gains tax exemptions in case of gifts are proposed to be restricted to gifts by individuals and Hindu Undivided Families (HUFs), thus excluding corporate gifts. This could impact irrevocable trusts used by companies as a mode of reorganization.

Reducing litigation

Speedy disposal of appeals continues to be a focus area for the government with plans to deploy more officers to hear and decide long-pending appeals, especially those with large tax effect.  

Introduction of Vivad se Vishwas 2.0 is proposed aimed at providing a mechanism for the settlement of pending disputes. This follows the success of the previous scheme launched in 2020 which received a positive response from the taxpayers.

In order to address current staggered assessments in search cases, block assessments have been reintroduced for cases initiated on or after September 1, 2024, covering 6 preceding assessment years and the current year. A 60 per cent tax rate will apply on the total income including undisclosed amounts and a 50-60 per cent penalty on undisclosed income unless voluntarily disclosed. Block assessment must be completed within twelve months, with a possible six-month exclusion period.

The specified monetary limits for the tax department to file appeals before tribunals and courts have been increased.

Reassessment timelines proposed to be reduced from 10 years to five years and three months where income escaping assessment is Rs 5000, 000 or more. This should enable businesses to operate at ease without the constant worry of being scrutinized.

Timelines for issuing orders for TDS and TCS defaults has been reduced from seven to six years from the end of the financial year which will also apply to non-residents. The timeline is extended by 2 years where revised TDS/TCS statements are filed.

Expansion of the scope of safe harbor rules with a view to reduce litigation is proposed. Streamlining of the transfer pricing assessment procedure is also proposed, details of which are awaited.

Other proposals

·        Tax exemption regime for charitable trusts is proposed to be merged and streamlined into a unified framework. A new provision, effective April 1, 2025, will also exempt certain trusts from tax on accreted income upon merger, aiming to enhance clarity and reduce tax complexities.

·        Incentives to the International Financial Services Centre (IFSC) have been proposed to boost operations which includes extending tax exemptions to certain new funds, such as retail funds, ETFs etc. Further, exemption for investments (as unexplained cash credits) is also extended to VCFs regulated by the IFSCA. Thin capitalisation provisions will not apply to finance companies in the IFSC.

·        As a countermeasure to prevent promoters from claiming tax exemption on the sale of shares during the IPO, a retrospective clarification has been issued that cost of acquisition will be indexed up to FY18 for computing capital gains in case of shares under Offer for Sale. It will be interesting to see if a waiver of penalty can be explored for the past periods.

·        To prevent cash flow challenges for employees and simplify compliance procedures, starting October 1, 2024, any taxes deducted or collected (in addition to that of salaries) will be considered for the purpose of calculating taxes to be deducted on employees’ salaries.

·        Several administrative measures have been proposed aimed at enhancing administrative convenience and simplifying litigation, including decriminalization of delays in TDS payments up to the due date for filing relevant quarterly TDS statements, the establishment of a 6-year time limit for filing TDS/TCS correction statements, the enhancement of the Commissioner (Appeals)’ powers to refer cases back to tax officers, provisions for the withdrawal of pending applications before the Board for Advance Rulings.

Clarificatory amendments

·        Rental income from residential properties to be taxed under ‘income from house property’ instead of ‘profits and gains of business or profession,’ is proposed to avoid any misclassification of such income.

·        Payments subject to TDS under section 194J for professional or technical services would not constitute “work” for the purposes of TDS under section 194C, ensuring correct tax deduction application.

·        Expenditure incurred by businesses to settle proceedings initiated in relation to a contravention under any law will not be eligible for tax deduction.

·        Taxes withheld outside India to be included in the assessee’s total income calculation, preventing underreporting and double deductions when claiming foreign tax credits.

Unresolved agenda

The anticipated framework for implementing Pillar 2, which requires a global minimum tax rate of 15% is missing from the Budget proposals. While several countries have already adopted Pillar 2, the present government’s focus on rationalizing tax measures and conducting a comprehensive review of the Income-tax Act suggests that implementing Pillar 2 remains a subsequent prospect.

Extension of the incentivizing new manufacturing units with the 15 per cent lower tax rate has not been considered. Likewise, there have been no proposed tax measures to incentivize new-age technology and innovation including the government’s commitment to its net-zero goals.