The Union Budget 2024-25 proposals reinforce India’s commitment to simplifying the tax system, streamlining tax disputes, and fostering growth across multiple sectors. These reforms not only promise more certain outcomes for businesses but also align India with international best practices.
Certain welcome landmark tax proposals include the withdrawal of 2% equalisation levy (EL) and angel tax and streamlining of capital gains tax rates and tax assessment timelines. The headline tax rate for foreign companies is proposed to be reduced from 40% to 35% (plus applicable surcharge and cess).
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Key changes are discussed below.
No more 2% EL on e-commerce sale or supply
This EL impacted not only the classic e-commerce businesses but also those which engage in supply or services through any digital means or facility, like conducting any online lectures, courses or webinars. This levy, though aimed at protecting India’s tax base with respect to income earned bybusinesses without establishing an India presence, given the wide scope, it led to an increased compliance burden for a variety of businesses, and is viewed as an additional cost of doing business in India. This is because EL is not a “tax” under Indian tax law but a levy under a separate code, which may not benefit from tax treaties and be recognised by the home jurisdiction of the offshore businesses for the purposes of granting foreign tax credits.India has time and again shown its commitment toOrganisation for Economic Co-operation and Development’s(OECD)two pillar solution aimed at addressing the challenges posed by the digital economy, following global consensus and doing away with the unilateral measures like EL is indeed a step is in that direction.
Angel tax woes end
Another landmark change is the withdrawal of angel tax i.e. tax payable by a closely held Indian company on the premium received on issuance of shares in excess of fair value. This provision was initially made applicable to share subscriptions by resident investors to curb the flow of unaccounted money through capital infusion at significant premium not supported by the underlying valuations of the investee companies. However, last year this anti-abuse measure was extended to investments by non-residents as well and was seen as going beyond the intent of this provision. For non-residents investing in India, there are enough checks and balances under exchange control laws and adding this tax valuation requirement to capital infusion caused complexity and uncertainty. While the government did introduce additional valuation methods and relaxations for qualifying investors, it did cause hardship for startupsreceiving investments by way of primary and secondary investments at different valuations for sound commercial reasons and not aimed at tax avoidance. Recognising this, the government proposes to do away with this tax provision in entirety without any conditions, which is welcome.
Buyback tax to be replaced with shareholder level tax
The other key change is replacing the buyback tax with a shareholder level tax on distributions received from a company upon the buyback of its shares. The buyback tax is an additional tax of ~23% payable by the company, with theincome exempt in the hands of the shareholders. It is similar to dividend distribution tax (DDT) that companiesfaced until March 2020. Starting 1 April 2020, the DDT regime has been abolished, shifting the tax incidence from the company to the shareholders.
The new proposal seeks to treat buyback distributions as dividend income for shareholders, and the cost basis in shares will be available as a capital loss (to be set off against other capital gains). Resultantly, resident shareholders would pay tax at ~36% while non-residents would pay tax at 20% (plus surcharge and cess) but may benefit from tax treaty rates typically ranging between5% and 15% (subject to proving treaty eligibility in light of anti-abuse rules). Non-residents should also be able to claim credit of tax paid in India against taxes in their home jurisdiction, which was not the case with buyback tax paid at the company level.
Before the buyback tax was introduced (in 2013), buyback income was treated as capital gains in the hands of shareholders, benefiting from tax treaty provisions that offered zero tax (such as treaties with Singapore and Mauritius). The tax treaties were amended in 2017 plugging such capital gains tax exemption. Despite this, long-term capital gains enjoy concessional tax rates as compared to dividend income and therefore, the proposed treatment is tax disadvantageous compared to capital gains tax treatment.
Simplification of capital gains tax framework
The government proposes to streamline the holding period thresholds which determine whether the gains are long term or short term in nature and capital gains tax rates for various asset classes. These proposals have gotten a mixed reaction from the taxpayers as some may gain while some may lose under the proposed regime. For instance, for resident taxpayers, long term gains will generally be taxable at lower rates (12.5% instead of 20%), however, higher rates will apply to gains on an on-market sale of listed shares (12.5% or 20% instead of 10% or 15% applicable currently) and sale of unlisted debt securities (as ordinary income). The cost indexation benefit is proposed to be withdrawn. While there is always room for more, the Government must be applauded for the simplification measures proposed in this budget.
The writers are partners at Khaitan & co. The views are personal.