Budget 2024: Govt can extend sunset clause to provide concessional tax benefit to new manufacturing companies

As India gears up for the upcoming Union Budget 2.0 in July, taxpayers across various categories have multiple expectations from the finance minister on direct tax matters. Overall, there is a demand from the industry to rationalise tax laws, reduce tax burdens and minimise tax litigations. 

The OECD/G20 Inclusive Framework comprising 140 countries has agreed to a Two-Pillar solution to address the tax challenges arising from the digitalisation of the economy. As India is a member, the Pillar 2 rules will be incorporated into the domestic tax laws. The government could consider introducing Pillar 2 rules as draft legislation as well as form a committee to deliberate on the implementation of these rules and address any possible complications. 

The government could consider extending the sunset clause to provide concessional tax benefits to new manufacturing companies to boost the Make in India initiative. It could also consider extending the concessional tax benefit to the companies engaged in R&D activities and undertaking huge capex investments such as setting up data centres, IT parks, etc.  

There is a demand from the industry for tax holidays/exemptions for Indian companies engaged in the export of services from India. Incentivising exports will encourage MNEs to set up their export hub in India resulting in increased foreign exchange inflow. The government could also consider introducing a concessional tax regime for the Indian units set up as GCCs by global MNEs, which could foster the development of this industry in India and generate large employment opportunities. 

On the individual taxation front, anticipation is high that the slab rates may change, reducing the overall tax burden on the middle class. This can bring in a populist touch and boost consumerism. The government could consider exempting the annuity in the hands of the employees to increase the adoption of NPS.  

Additionally, the government can consider increasing the deduction limit under section 80TTA towards the interest earned from bank deposits and expand its scope to include interest on all types of bank deposits. It is also anticipated that the limit for deduction on tax-saving investments will be increased to at least Rs 2.5 lakh considering the inflation rate. 

The government could consider rationalisation and simplification of the capital gains tax regime by reducing the number of asset classes and tax rates. As the number of MNEs in India grows, cross-border mergers and acquisitions activities have also gained significant traction. The Budget can consider the benefit of capital gains exemption for mergers of Indian companies into foreign companies, and exclude indirect transfers within the group as a part of group reorganisations from the indirect transfer tax net. 

The government should also consider rationalisation and simplification of the TDS and TCS regime, given the multiple provisions in the law dealing with TDS and TCS.   

To provide relaxation to foreign companies, the government can consider providing an exemption to foreign companies from filing tax returns in India where tax has been appropriately deducted by the payer as per the rates mentioned in the tax treaties. Further, to attract avenues for raising funds from foreign investors, the government could consider reintroducing a concessional TDS rate of 5 percent for borrowings in foreign currency. 

To reduce tax outflows for foreign companies due to disputes arising as to the taxability of receipt, post-discharge of equalisation levy by a non-resident, the equalisation levy paid by the non-resident should be allowed to be adjusted against the tax demand raised on the characterisation of the said receipt as royalty/fees for technical services. 

While the taxpayer’s demands from the government will remain never-ending, various representations and recommendations are being made for the FM to consider in the upcoming Budget. How many of those will be considered, will remain a mystery till Budget Day, however, these reforms in the tax laws will significantly help in reducing tax burdens and rationalising tax laws.