Budget 2024: Roadmap for a Simplified Tax Regime!

The Finance Minister, Nirmala Sitharaman, presented the annual budget for 2024 – 25. The Budget makes significant strides in pursuit of Viksit Bharat 2047 and with this goal in mind, the Budget envisages sustained efforts for generating significant opportunities for all. The Budget proposes key changes to the direct and indirect tax regime – the overall spirit of the proposed changes is to simplify taxes, improve taxpayer services, provide tax certainty and reduce tax litigation.

The Finance Minister announced a comprehensive review of the Income Tax Act, 1961 (“ITA”) to make it concise, lucid, easy to read and understand, which is proposed to be completed within 6 months. At the outset, the regime for charities, TDS rate structure, provision for reassessment and search provisions and capital gains taxation have been

proposed to be simplified. Services of customs and income tax including rectification and order giving effect to appellate orders, are proposed to be digitalized and made paperless over the next 2 years.

The monetary limits for filing appeals related to direct tax, excise and service tax in the tax tribunals, high courts and supreme courts are proposed to be increased to INR 60 lacs, INR 2 crores and INR 5 crores, respectively. Scope of safe harbour rules are proposed to be expanded to make them more attractive for international transactions, along with streamlining of transfer pricing assessment procedure.

Set out below are some of the key proposals with respect to direct taxes announced in the budget.

Capital gains, period of holding and indexation benefit

The Finance Bill proposes to simplify the holding period and the rates of taxation applicable to capital gains.

i. Holding period has been rationalized as follows:

• all kinds of listed securities (such as listed units of a business trust) held for more than 12 months will be considered as long-term.

• for all other assets (not covered above), holding period for more than 24 months will be considered as long term. Thus, the holding period for bonds, debentures, gold is proposed to be reduced from 36 months to 24 months while for unlisted shares and immovable property it shall remain at 24 months.

ii. Rates:

• The rate for short-term capital gains is proposed to be increased from the current 15% to 20% for listed equity, units of equity oriented mutual fund and unit of a business trust. Other short-term capital gains continue to be taxable as they are today.

• The rate for long-term capital gains for all category of assets has been proposed to be kept at 12.5%. This means that the rate for listed equity shares, units of equityoriented funds and business trusts has increased from 10% to 12.5% while for all other assets including unlisted shares, it is proposed to be decreased from 20% to 12.5%.

• However, through the rate for long-term capital gains has been reduced from 20% to 12.5% for the aforementioned assets, the indexation benefit, which was available, has been proposed to be removed for calculation of long-term capital gains available for property, gold and other unlisted assets. This comes as a huge disappointment and will have significant impact especially for property owners since they will lose the benefit of indexation. However, basis newspaper reports, it appears that the Finance Ministry will provide indexation benefit to property purchased prior to 2001.

iii. With respect to listed equity shares on which Securities Transaction Tax (“STT”) has been paid, units of equity-oriented fund and business trust, the exemption of INR 1 lac which is currently available has been proposed to be increased to INR 1.25 lacs.

The above changes [(i) to (iii)] are proposed to come into effect from July 23, 2024.

iv. STT with respect to futures and options of securities is proposed to be increased from 0.02% to 0.1%, respectively.

v. The Finance Bill proposes to amend Section 47 of the ITA to exclude any transaction of gift by a company from the purview of eligible exemptions from capital gains. Consequently, only transfer of capital asset through gift or will or an irrevocable trust, by an individual or HUF shall be eligible for exemption from capital gains tax.

Buyback

i. The Finance Bill has proposed to overhaul the provisions in relation to buy-back of shares.

ii. It has been proposed that the buyback price paid by the company for the shares shall be treated as dividends in the hands of the shareholders.

iii. No deduction of expenses shall be available against such dividend income while determining the income from other sources in the hands of the shareholder.

iv. The cost of acquisition of the shares which have been bought back are proposed to be considered as capital loss in the hands of the shareholder which can be offset against a subsequent capital gain from sale of shares.

v. These amendments will take effect from October 1, 2024, and will accordingly apply to any buy-back of shares that takes place on or after this date.

Earlier, buy back was taxable in the hands of the company at the rate of 20% and was a final tax for which no credit was available in the hands of shareholders. The proposed changes will allow shareholders to pay taxes at the applicable tax rate including taking any benefit under tax treaties that maybe available to non-resident shareholders including credit for withheld taxes.

Withholding tax

i. The Finance Bill proposes to rationalize various provisions with respect to Tax Deduction at Source (TDS). The present rate of 5% for payments of (i) insurance commission; (ii) life insurance policy; (iii) commission etc. on sale of lottery tickets; (iv) commission or brokerage; (v) rent by certain individuals or HUF; (vi) certain sums by individual or HUF, has been rationalized and the rate of TDS has been proposed to be 2%.

ii. Considering that certain offline transactions for purchase of goods are subject to TDS at the rate of 0.1%, the Finance Bill proposes to reduce the TDS rate of 1% applicable to e-commerce operators to 0.1% to bring parity between the provisions.

iii. It has also been proposed to remove TDS on payments on repurchase of units by Mutual Fund or UTI which currently attracts TDS at the rate of 20%.

iv. Further the Finance Bill proposes to include a TDS provision wherein TDS at the rate of 10% will be applicable on payments (such as salary, remuneration, commission, bonus and interest) made to the partner of a partnership firm, if such payments to a partner in a given financial year is more than INR 20,000.

v. Withholding of tax on payment for “work” at the applicable rates is mentioned under Section 194(C) of the ITA. In this regard, the Finance Bill clarifies the meaning of “work” wherein any sum referred to Section 194J(1) has been specifically excluded from the purview of work for the purposes of TDS under Section 194C of the ITA.

vi. Certain clarifications with respect to TDS on sale of immoveable property have been proposed.

vii. With a view to decriminalize penalty provisions, the Finance Bill proposes to give additional time to the taxpayer to make payment of the withheld tax which is otherwise subject to rigorous imprisonment for a term which shall not be less than three months, but which may extend to seven years along with fine.

Abolition of Angel Tax

Section 56 of the ITA is an anti-abuse provision. Section 56(2)(viib) of ITA taxes companies on issuance of shares if the company received more consideration than its fair market value (FMV) on the difference between the consideration and the FMV (“Angel Tax”). Earlier, the provision was applicable only in case the company received consideration more than its FMV from Indian residents. Certain exemptions were provided to start-ups from the

applicability of the provision allowing them to receive higher consideration for their shares even in case the investment came from residents. However, the Finance Act, 2023 amended the provision to also include non-residents within its ambit. Thus, any investment received by companies whether from resident or non-residents which was higher than the FMV of the shares of the company, was made subject to tax in the hands of the company on the difference, as income from other sources. This had an adverse impact on structuring investments by investors in Indian companies.

The Finance Bill proposes to abolish Angel Tax from April 1, 2025, and shall accordingly apply from assessment year 2025-26. This comes as a shot in the arm for start-ups who were most affected as these provisions hindered their ability to raise capital and had consistently demanded for the removal of this unangelic Angel Tax!

Tax rates

i. Tax rates remain largely unchanged. The Budget does not make changes to the tax rates other than for individuals, Hindu Undivided Family (HUF), association of persons (AOP), body of individuals and artificial juridical persons for whom the exemption under the slab rates under the new regime have increased (which should result in a benefit of INR 17,500 to such taxpayer). The rate of surcharge and cess continue to remain the same as they exist today.

ii. Further, the standard deduction of INR 50,000 which was available today has also been proposed to be increased to INR 75,000 with the aim of encouraging and incentivizing taxpayers (specially the salaried taxpayers) to shift to the new tax regime.

iii. With respect to foreign companies, the Budget proposes to reduce the tax rate from 40% (exclusive of surcharge and cess) to 35% (exclusive of surcharge and cess) for income other than income chargeable to tax at special rates as specified under the Act. This comes a benefit to non-resident companies who either have a business connection

in India or a Permanent Establishment (PE) in India and were to pay tax at the rate of 40% (exclusive of surcharge and cess) on profits that were attributable to India.

Equalisation Levy

The Finance Act, 2016 had introduced an equalization levy at the rate of 6%, which was amended by Finance Act, 2020 to provide for imposition of equalization levy (EL) of 2% on the amount of consideration received/ receivable by a non-resident e-commerce operator from e-commerce supply or services. Considering concerns that were raised and with a view to reduce compliance burden, the Finance Bill proposes to abolish the equalisation levy at the rate of 2% which is applicable to consideration received or receivable for ecommerce supply or services by such e-commerce operator, on or after the 1st day of August, 2024.

Vivad se Vishvas Scheme

Similar to the Direct Tax Vivaad Se Vishwas Act, 2020 which was launched for appeals pending as on 31.01.2020, the Finance Bill proposes to introduce Direct Tax Vivad se Vishwas Scheme, 2024 with the objective of providing a mechanism of settlement of disputed issues, thereby reducing litigation which has been increasing significantly.

Promotion of Cruise Shipping Industry

i. The Finance Bill, with a view to promote cruise-shipping industry in India, has proposed a simple taxation structure for the business of cruise-shipping.

ii. Subject to prescribed conditions, the Finance Bill proposes a presumptive tax of 20% of the aggregate amount received/ receivable by, or paid/ payable to, the non-resident cruise-ship operator, on account of the carriage of passengers, as profits and gains of such cruise-ship operator from its business operations in India.

iii. Further, income from lease rentals paid by a company, which opts for the aforementioned presumptive taxation regime, is proposed to be exempt in the hands of the recipient company, if such company is a foreign company and such recipient company and the first company are subsidiaries of the same holding company.

Reopening

The Finance Bill proposes to rationalize provisions relating to assessment and reassessment under the ITA. Some of the key changes include:

i. Notice under Section 148A of the ITA cannot be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year.

ii. Notice to be accompanied by the information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year.

iii. The time limitation for issuance of notice in respect of reassessment proceedings has also been proposed to be rationalized wherein the maximum time limit for reassessment has been reduced from 10 years to 5 years.

Other Key Proposals

i. Benefits such as specified income of core settlement guarantee fund set up by recognised clearing corporations in IFSC to be exempted; finance companies located in IFSC proposes to not be subject to restriction on deduction of certain interest expense.

ii. Simplification of Foreign Direct Investment policy and overseas investment rules, especially to promote usage of Indian rupee as currency for overseas investment, is expected.

iii. Further amendments in Jan Vishwas Act is expected (to reduce penalties and decriminalise certain offences across various laws).

iv. The services of the Centre for Processing Accelerated Corporate Exit (C-PACE) will be extended for voluntary closure of LLPs to reduce the time taken to close the LLP.

v. Probable reduction in stamp duty rates especially on conveyances / property transfer through incentivisation to states.

vi. Reduction of custom duty on certain items including certain medical equipment, goods used in manufacture of solar cells, critical minerals such as lithium, copper, gold and silver.