India releases Union Budget 2024

Executive summary

The Finance Minister of India presented the Union Budget 2024 (the Budget) on 23 July 2024. The Budget includes positive proposals such as:

• Reduction in the base corporate tax rate for nonresident corporate taxpayers from 40% to 35%

• A simplified and rationalized capital gains tax regime

• Abolishment of the Angel Tax for all investors

• Withdrawal of the 2% E-Commerce Equalization Levy (EL) on e-commerce supply or services

• An exemption from interest limitation rules for financial companies operating in an International Financial Service Center (IFSC)

• Introduction of onetime tax settlement scheme — Vivad se Vishwas (VSV) — to enable expeditious disposal of pending tax disputes

• A reduction in statutory timeline for reinitiating tax audits

This Alert summarizes the key budget proposals.

Key direct tax proposals

Corporate tax rates

No changes are proposed to the tax rates for Indian companies and partnerships (including Limited Liability Partnerships). The corporate tax rate for nonresident corporate taxpayers would be reduced from 40% to 35%.

No change is proposed for the Surcharge and Health and Education Cess rates.

Capital gains tax

The holding periods for classifying capital assets as long-term or short-term assets would be simplified. Specifically:

• Listed securities including units of business trusts would be considered as long-term capital assets if held for a period exceeding 12 months.

• All other capital assets (other than business undertakings) would qualify as long-term if held for a period exceeding 24 months.

• The holding period for a transfer of business undertaking (i.e., slump sale) would continue to be 36 months.

• Unlisted bonds and debentures transferred, redeemed, or maturing on or after 23 July 2024 would be deemed to be short-term capital assets, irrespective of their holding period.

• Unlisted debentures and bonds are proposed to be taxed at applicable rates, irrespective of the holding period.

• A capital gains tax exemption that has been available to taxpayers transferring assets as gifts would be withdrawn for corporate entities.

• Cost basis in equity shares acquired prior to 1 February 2018 and sold under an Offer for Sale would be computed based on indexed cost of acquisition for the financial year 2017-18.

Tax rates proposed to change for long-term and short-term capital gains with effect from 23 July 2024, are as follows:

* Applicable rate refers to the maximum rate as prescribed for the taxpayer — e.g., 38.22% (inclusive of surcharge and cess) for a foreign company.

Angel tax to be abolished

The tax applicable to a closely held Indian company that issues shares in excess of fair value would be abolished.

Withdrawal of EL

The 2% EL applicable on e-commerce supply or services provided or facilitated by nonresidents would be withdrawn, effective from 1 August 2024. The corresponding exemption from corporate income tax would also be withdrawn.

The 6% EL applicable on payments for online advertising and the provision of digital space is being retained, however.

Reduced limitation period for reopening audit

The time limit for reopening audits for high-value cases involving undisclosed income exceeding US$60,240 would be reduced to six years and three months (from 11 years) from the end of the financial year sought to be audited.

Buy-back tax on purchase of own shares abolished

The existing regime of taxing an Indian company on the purchase of its own shares would be abolished. Instead, the amount an Indian company pays for the purchase of own shares would be treated as a dividend and taxed in the hands of shareholders on gross basis at applicable rates.

No deduction for expenses or cost basis would be allowed in determining taxable dividend income. The cost basis of shares that have been bought back may generate a capital loss for the shareholder and be available to offset other capital gains.

Exemption from interest limitation rules for financial companies operating in IFSC

Interest limitation rules restrict interest deductibility in the hands of an Indian entity to a specified threshold (i.e., 30% of earnings before interest, taxes, depreciation and amortization (EBIDTA)). It is proposed to exempt finance companies located in the IFSC from the interest limitation rules subject to certain yet-to-be-prescribed conditions.

Reintroduction of onetime tax settlement scheme — VSV

The VSV has been reintroduced to enable expeditious disposal of pending disputes/litigation through the VSV settlement mechanism; the change would apply upon notification (i.e., publication in the Official Gazette). The mechanism would apply to Transfer Pricing disputes as well.

Comprehensive review of current tax law

A comprehensive review of the current direct tax rules is proposed to be completed within six months, with the objective to make the rules concise, lucid and easy to read and understand, and thereby reduce litigation and provide certainty to taxpayers, the Finance Minister explained in a speech.

Key indirect tax proposals

A new amnesty scheme would provide for the waiver of interest and penalties in certain situations for financial years 2017-18 to 2019-20, upon satisfaction of certain conditions.

The time limit for filing an appeal before the Goods and Services Tax Appellate Tribunal will be three months from the later of the date the taxpayer is notified or receives an order to pay goods and services tax.

The amount of pre-deposit required to be made before filing an appeal is proposed to be reduced. The size of the reduction depends on the forum where appeal is proposed to be filed.

The time limit to take advantage of the Input Tax Credit for financial years 2017-18 to 2020-21 would be extended to 30 November 2021 where the relevant return is filed up to that date.

The Government will specify the date when it will stop accepting new application with respect to anti-profiteering.

A person summoned by a tax officer may appear in person or through an authorized representative.

Customs duty rates would be modified to further support the Make in India initiative.

Base Erosion and Profit Shifting Action Plan (Pillar Two)

Despite an expectation that the Budget would propose a framework for the implementation of Pillar Two, the Budget presently makes no mention of Pillar Two.