By Sameer Gupta
In the backdrop of global economic uncertainty, the Union Budget 2024-25 continues to steer along the path of reforms and fiscal prudence. The finance minister’s commitment to simplicity and reform is evident in the proposed measures, which aim to streamline the tax system, improve services for taxpayers, and ensure tax predictability.
The centre piece of these reforms is the decisive announcement to comprehensively review the Income Tax Act, 1961 within next six months, with the objective to make it concise, easy to understand and thereby reduce litigation.
Key steps in this direction are the simplification of the capital gains taxation framework, rationalisation of TDS rates and removal of angel tax to boost the India startup ecosystem. The Budget also aims to provide a window to taxpayers for resolving disputes, both direct tax and GST, through an amnesty scheme.
Addressing changes with significant impact on the investor community, the Budget introduces a long-anticipated overhaul of the capital gains tax structure to streamline the process. Moreover, the Economic Survey emphatically pointed out that speculative trading, particularly in Futures and Options (F&O), is not conducive to the economic environment of a developing nation like India.
In response, there has been a revision in the Securities Transaction Tax (STT): the rate for Options has risen from 0.0625% to 0.1% of the option premium, and for Futures, it has increased from 0.0125% to 0.02% of the trading price. Additionally, the short-term capital gains tax rate has been escalated from 15% to 20%, a move likely aimed at curbing short-term trading.
The Budget has also proposed standardising the holding period of assets to either 12 or 24 months, doing away with the erstwhile 36 month requirement for certain assets. The rate for long term capital gains is unified to 12.5% (without indexation) as against existing 10% or 20% depending of the class of asset and residency of the taxpayer. The absence of indexation could result in an additional tax incidence for a set of taxpayers (illustratively, for sale of listed equities and house property) while those in the 20% tax regime (illustratively, sale of unlisted shares) would stand to gain.
The abolition of the angel tax, introduced in 2012, underlines the intent of the government to support the vibrant Indian startup ecosystem. This tax, which applied to private companies getting funds in excess of their fair market value, often placed undue burdens on startups. It has been on the wish list of the start-up/ private ecosystem and the government has heard the plea.
The rationalisation of TDS provisions, with the reduction of various rates, is another step towards simplifying the tax process. Notably, the TDS rate for payments to residents (other than salaries) under several sections has been lowered from 5% to 2%, reflecting the government’s approach to simplifying tax collection.
Improving the ease of doing business in India has been a key focus areas of the government. Tax litigation in India has long been voiced as a concern by India Inc, with dispute resolutions taking well over a decade. The appellate fora are overwhelmed with appeals, and the introduction of the Vivad se Vishwas Scheme, 2024 is a welcome initiative to close direct tax disputes. The scheme’s scope currently includes cases with filed appeals but does not extend to cases where the appeal deadline has not yet passed, as was covered in the previous scheme. Expanding the scheme’s coverage could further incentivise taxpayers to embrace it.
The government has unveiled an amnesty scheme for GST as well, aimed at reducing litigation and providing a clean slate for businesses that had grappled with compliance during the initial years of GST implementation. This scheme offers a waiver of interest and penalties on any unresolved GST demands from the fiscal years 2017-18 to 2019-20, provided that the principal tax amount is paid in full by March 31, 2025. By allowing for the settlement of outstanding demands without the additional weight of interest and penalties, the scheme is expected to encourage compliance and reduce the backlog of cases related to the teething period of GST.
In summary, the Union Budget for the fiscal year 2024-25 adopts a harmonious strategy, marrying tax reforms with India’s overarching developmental aspirations. The forthcoming comprehensive review of the Income-tax Act, scheduled for completion within the next six months, is set to be a pivotal move in steering India toward a more efficient and growth-focused tax framework.
(The author is the National Tax Leader at EY India.)
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