As part of the Budget 2024, the Finance Minister unveiled a suite of tax reforms designed to simplify taxes, enhance taxpayer services, build trust, improve tax certainty and minimise disputes.
Central to the Budget is the commitment to review the income tax law within six-months, reminiscent of past attempts to implement a “Direct Tax Code” which ultimately folded into the existing law itself making it cumbersome and unwieldy. The upcoming review is only expected to restructure the law for simplicity and clarity rather than overhaul it entirely.
The Budget has simplified capital gains tax provisions. Now, all asset classes largely have uniform holding periods for long-term investment classification as also uniform tax rates regardless of residential status of taxpayers. This long-anticipated change promises a more stable investment climate. Additionally, the budget has eliminated inflation adjustments for long-term capital gains, except in case of sales by resident individuals/ HUFs of immovable property bought before 23 July 2024. This move, in response to stakeholder feedback, aims to lighten the tax burden on earlier property purchases, by effectively providing that the tax under the new regime (without inflation adjustment) would not exceed the tax as per the old regime (higher tax rate but with inflation adjustment) .
Corporate buybacks have been a popular method for companies to return cash to shareholders. Such buybacks not only optimally utilise surplus cash, but also help some shareholders exit without affecting the owners’ control. However, the new budget makes buybacks less attractive by taxing the buyback amount as a dividend. The cost on acquisition shares bought back can only be used by the shareholders to offset other capital gains, if any, for the year or against future capital gains, and that too, within eight years. By imposing a tax on buyback amounts as if they were dividends, the tax net is widened to include transactions that don’t necessarily distribute accumulated profits, such as buybacks funded by share premium or the issuance of new securities. This broader tax scope may discourage companies from engaging in buybacks, potentially leading to an accumulation of unused cash reserves at a time when household investments and spending are on the decline.
The Budget takes the first step towards streamlining the Tax Deduction and Collection at Source (TDS/TCS) system, which in its present form affects almost all transactions. It has cut TDS rates for various payments, including commissions, brokerages, and insurance pay outs, from 5% to 2%, and for e-commerce sales from 1% to 0.1%. These reductions free up cash for businesses and individuals, potentially boosting spending and helping the economy. The e-commerce sector, in particular, stands to benefit from a level playing field between online and offline sales. Additionally, employers can now account for taxes deducted & collected at source from employees when calculating TDS on salaries, even if the deductions aren’t related to employment income. Despite these improvements, further reforms are necessary to resolve disputes and unlock funds tied up by high TDS rates, especially with the expansion of TDS to include interest and remuneration paid by firms/LLPs to their partners and of TCS to include luxury goods purchases.
The Indian industry will also benefit from the removal of the 2% Equalisation Levy on e-commerce transactions. This levy, though aimed at foreign sellers, ultimately increased costs for Indian consumers due to the pass-through of taxes. Its abolition will thus lower expenses for the Indian market.
The 2024 Budget has also made a strong push to reduce tax litigation, bring certainty and make the system more taxpayer-friendly. One major update is that tax officials now have only 6 years (7 years in case of search), instead of the previous 11, to reopen past tax cases. The government has also brought back the Vivad se Vishwas (VSV) scheme to help settle ongoing tax disputes. The move to not take small cases to higher courts by raising the monetary limit for filing appeals by the Government is a step in the right direction. Other positive steps include introduction of a six-year timeline for default cases involving non-deduction of taxes on payments made to non-residents, proposed expansion of safe harbour rules and streamlining of Transfer Pricing Assessment procedures.
Budget has some pleasant surprises, including removal of the angel tax, which although intended as an anti-abuse measure (to address cases of routing unaccounted monies in the guise of high share premiums) hindered bona fide fund-raising by start-ups at a high premium. This tax had just been expanded last year to shares issued to non-residents as well. Another big change is significantly reducing the time limit and bringing back the Block Assessment Scheme for search cases, which groups all findings from a search into one assessment for all years, a system that was last used in 2003. It’s worth noting that the search assessment rules were just overhauled in 2021. These quick reversals of policy while showing that India’s tax system is still evolving, does seem to also indicate an open mind to attempt at addressing genuine concerns of taxpayers & simplify the law.
While the Budget scores well on most counts, it could have used the opportunity to enhance India’s long term growth by introducing measures to promote R&D/Innovation, and further the simplification agenda by a more comprehensive review of the TDS regime.
In conclusion, the Budget tax proposals largely signal stability & continuity in tax policies. As we navigate through these changes, it is crucial for taxpayers and businesses to reassess their tax compliances, and planning to align with the new proposals.
The author is Chair, FICCI Taxation Committee
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