With Nirmala Sitharaman being sworn in again as the Finance Minister, expectations are high for significant changes in the July 2024 Budget, particularly from a direct tax standpoint. Economic expansion in India has been rapid, and as one of the fastest-growing economies, one can always expect our annual Budget to include measures that augment tax collection, enable ease of doing business, and streamline the process of tax collection.
Individual Taxes / Tax Rates
From an individual taxpayer perspective, we may hope for tax incentives under the new tax regime. While the government is nudging taxpayers to opt for the new tax regime, the new regime does not offer benefits like house rent allowance or deduction of interest on home loans. With the increasing culture of hybrid work post Covid-19, it becomes important that these benefits are also extended to those opting for the new tax regime. Additionally, it is expected that there will be a change in the limit of the standard deduction to keep pace with inflation rates. The current legal regime provides for a standard deduction of INR 50,000 to all salaried individuals. However, this amount was set in 2018. The increased inflation rates create a need to increase the limit of the standard deduction.
Capital Gains Tax Rationalisation
Approximately 17 percent of Indian households now invest in stock markets, giving prominence to the capital gains tax regime. The current framework is extremely complex for a common shareholder to understand, with different provisions for holding periods, different tax rates, and different parameters to compute the gains depending on the underlying nature of the capital asset.
At present, different capital gains tax rates (ranging from 10 to 40%) apply depending on the period of holding of underlying assets (one to three years), type of capital asset (equity, debt, immovable property, etc.), legal status, and tax residency of the taxpayer.
Simplification of the capital gains tax regime may be a sigh of relief for taxpayers (individuals, corporate entities, residents as well as non-residents) and simultaneously a boost for the economy, encouraging investments.
Boost for Businesses in India
The government is actively promoting policies like the Make in India initiative and Ease of Doing Business, which have paved the way for the Indian economy to become a global giant. Tax considerations form the backbone of these initiatives. The Economic Survey 2023 highlighted that startups are exploring “reverse-flipping,” or shifting their domicile back to India, a month after it emerged that fintech unicorn PhonePe has paid withholding taxes on behalf of its investors to the tune of INR 8,000 crore (around $1 billion) on account of relocation. Bringing innovation back to India, or in other words, reverse flipping or “desh wapsi,” has become the new trend. To promote reverse flip structures and bring back Indian innovation, the government may initiate reforms towards having a favorable tax regime for reverse flipping.
The Committee set up by the International Financial Services Centres Authority (IFSCA) made several suggestions on onshoring Indian innovation to GIFT IFSC. These recommendations, particularly from a tax perspective, are a stepping stone to reverse flip offshore companies to GIFT IFSC. If the recommendations are implemented with appropriate changes introduced through Budget 2024, it can catapult GIFT IFSC into becoming a global hub for startups wanting to explore the Indian and overseas markets.
Extending the Benefit of Concessional Corporate Tax Regime to New Manufacturing Companies
A major benefit of the Make in India initiative is the concessional tax rate for new manufacturing companies. However, the concessional rate is available to companies commencing their business prior to March 31, 2024. To continue with the progress already made through Make in India initiatives, it is expected that the government should extend the period beyond March 31, 2024, for at least another five years.
Removal of Double Taxation on Buyback of Shares
Buybacks of shares by a listed company can be undertaken under two methods: (i) “tender offer” and (ii) “open market via stock exchange route.” In its pre-Budget 2024 statement, FICCI highlighted that public listed companies are increasingly opting for the “open market through stock exchange” method for buybacks. According to FICCI, under this method, buybacks occur on recognized stock exchanges without prior knowledge of the seller's identity. Due to the lack of a mechanism to inform shareholders (via SMS or email) about the buyback, both the shareholder and the company may end up paying taxes — capital gains/business income tax by the shareholder and Buyback Distribution Tax (BBT) by the company — leading to double taxation.
It is therefore expected that Budget 2024 may remove this anomaly and may exempt transactions undertaken “open market through stock exchange” from BBT. Such transactions will continue to be liable to tax in the hands of shareholders (as capital gains or business income).
Introduction of Pillar II Rules
On October 8, 2021, 136 out of 140 member countries consented to adopting a ‘Two-Pillar’ solution to address the tax challenges arising from the digital economy and to prevent and protect the erosion of the tax base.
The Two-Pillar solution grants the taxing rights to market jurisdictions (i.e., where actual consumers are located) based on a ‘nexus’ approach and through the levy of a global minimum tax.
In line with the consensus, several countries have already incorporated OECD Pillar II model rules into their domestic tax laws. It is expected that Pillar II rules (including Qualified Domestic Minimum Top-up Tax (QDMTT), Income Inclusion Rule (IIR), and Undertaxed Profits Rule (UTPR)) may be introduced under Indian domestic tax laws in the upcoming Budget 2024. A swift integration of Pillar II rules into domestic legislation will facilitate the enforcement of laws mandating a minimum corporate tax rate of 15%.
ESG Principles
Tax laws must align with and encourage taxpayers to adopt ESG principles. In line with this objective, Budget 2024 could introduce amendments and consider granting weighted deductions for R&D in green assets, grant tax incentives for green commuting including extending the EV loan interest deduction by two years, grant accelerated depreciation on EVs for businesses, and provide employer-sponsored tax-friendly solutions for greener mobility options like EVs and hybrid company cars. Aligning with global practices, these initiatives could play a crucial role in fostering ESG practices among businesses.
Other Expectations
Some other significant changes that taxpayers expect and may be announced through this budget include lowering the rate of tax collected at source (TCS) under the liberalized remittance scheme (LRS). The government has increased the rate of TCS under LRS from 5% to 20% in the financial year 2023-24, effective October 1, 2023. This increased rate brings higher compliance burdens and practical challenges, besides the cash flow concern. It is expected that the government may reduce this rate from 20%.
Dispute Resolution
All substantive rights of a taxpayer become futile if they are not equipped with efficient and effective procedural rights. A major reform needed in terms of procedural change is easing the tax litigation process. The government may introduce measures to streamline the entire litigation process and address the challenge of pendency of cases, particularly at the Commissioner (Appeal) level. Under the current framework, the rate of disposal of appeals is slower than the rate of filing fresh appeals. While CBDT has proposed a roadmap in the recent Central Action Plan to dispose of the large number of appeals pending before various Commissioners (Appeals), the process should be expedited. Considering that the government has acknowledged the problem underlying the litigation process, concrete and effective plans to address the concern are still needed.
Thus, with constant policy initiatives by the government to boost the economy, this Budget 2024, we may witness the introduction of new approaches to implement the existing tax regime.
The article has been authored by Lokesh Shah (Partner) and Gaurav Goyal (Principal Associate), INDUSLAW. Views expressed are personal.