India Union Budget 2024-25 - Updates

Against the backdrop of the cautioning fiscal deficit and GDP numbers projected in the Economic Survey, the Finance Minister has tried a balancing act to make a reform oriented budget. It largely depicts the vision to make India a USD 5 trillion economy in the next few years. The budget allocation on the identified priority sectors such as Infrastructure, affordable housing, MSME, Innovation etc. would surely pave the way for a strong foundation to build a subtle economy. In the BFSI space, the key announcements which will lure foreign investors, are abolishment of Angel Tax, introduction on Variable Capital Company regime, reduction of tax on foreign corporates and to name a few. On the Capital markets front, there has been a mix of proposals viz. rationalisation of capital gains tax, marginal increase in long terms capital gains tax exemption by INR 25K, uniformity of period of holding of certain financial assets will bring in much needed clarity and simplification in tax rates. However, the removal of indexation benefits, increase in STT on FnO trades and introducing buyback tax in the hands of shareholders will invite not so positive reactions for the market participants as their net return on investments will get impacted. The government entering the Amrit Kaal has been mindful of long-term vision to position Indian economy as the fastest growing economies of the world. The policies and reforms announced are largely focused on building the base and infusing resources to make fundamentally resilient structure which is ready to embrace the dynamic changes across the globe.

Multiple incentives are provided to individual taxpayers to make the New Tax Regime (NTR) more attractive. Reduction in the tax rate and increase in the limit of the standard deduction from INR 50,000 to INR 75,000 will lead to a minimum tax saving of INR 18,200 (income tax plus education cess) and a maximum saving of INR 22,750 for the super-rich category having annual taxable income of INR 20 million and more. Further, an additional deduction of 4% of basic salary is provided towards the employer’s contribution to the National Pension Scheme (NPS) for employees working with private sector and public sector banks and undertakings and have opted for the NTR. E.g. Any individual with a basic salary plus dearness allowance of INR 100,000 per month may now be eligible to claim an additional deduction of INR 4,000 per month / INR 48,000 per annum for employer’s contribution to NPS and save annual tax of INR 14,976.

The FM has proposed a reduction in tax rates for foreign companies operating in India from 40% to 35%. This is a much-awaited change for the reinsurance companies operating through a branch office in India since 2017. The proposed change may not provide a level-playing field to the reinsurance branches with the domestic insurance companies (which continue to be taxed at a much lower rate) but will surely pave the path towards rationalising the tax rates for foreign companies operating in India.

In line with the 53rd GST Council meeting recommendations, the limitation period for raising demands has been made 3.5 years (42 months) from the due date of relevant annual return for all types of cases, instead of 3/5 years earlier, depending on whether fraud suppression has been alleged or not. This is targeted to streamline litigation matters for FY 2024-25 onwards.

Heartening to note the much-needed impetus provided to the employment, education & skilling sector. The announcement of INR 1.48 lakh crore provision along with inclusion in the list of 9 priorities of the Government spells out an intention to truly transform the sector for the upliftment of the society especially youth & women. Announcing three employment linked incentive schemes covering first timers in manufacturing & other sectors has the potential to generate millions of job-related opportunities in the formal sector. Furthermore, investments in upgradation of 1,000 ITIs with outcome orientation & improving access to skilling/educational loans is expected to empower the next generation to pursue higher & vocational education programs. Offering paid internship opportunities in top companies to over 1 crore youth is likely to open multiple doors to employment whilst bridging the gap between academia/skilling institutions & the corporate world. Unfortunately, no announcements with respect to restructuring the NTA, digitisation of competitive exams to avoid a NEET-like fiasco & incentivising foreign investment in K12 & higher education were made”

Earlier start-ups were allowed a tax exemption from Angel tax subject to certain conditions such as the amount of share capital and securities premium post fund raise does not exceed INR 25 crs, the end-use restrictions on funds raised by start-ups such as no investments in financial assets etc., and a requirement to submit declaration in Form 2 to DIPP. The abolition of angel tax provisions will now enable start-ups to raise funds without any such conditions and compliance requirements. This amendment is applicable from AY 25-26”

This year’s budget has given a great fillip to the start-up ecosystem. The abolition of Angel tax is a great sigh of relief benefitting the start-up industry. The announcement of INR 1000 cr venture capital fund for the space economy will encourage private participation in the ecosystem thereby enhancing India’s role in the global space economy. While the details are awaited, the FM also mentioned the Government will promote start-ups across the vegetable supply chain to spur growth in the agri-tech sector. Cumulatively these steps should encourage entrepreneurship and the evolution of new start-ups across agri-tech and space economy sectors”

The possible introduction of Vivad se Vishwas Scheme 2024 could significantly reduce litigation and create a better visibility of India as a tax friendly jurisdiction. The enhancements proposed for litigation at higher forums could also significantly reduce litigation at lower levels.

The new mechanism proposed for facilitating credit to the MSME sector will ensure deeper participation by the MSMEs. This will also enlarge the base for new entrants providing them much-needed financial support at the entry level. The new norms for financing and regulatory changes would make the ease of business for such MSMEs.

Angel tax has been a bone of litigation for many companies especially new age ones. The FM has abolished this tax with effect from this financial year. While the past period litigations could continue, however, with the abolishment of the Angel tax provisions, India Inc is likely to get a sigh of relief from this provision. This proposed amendment would also do away with peculiar situations requiring exact valuation at FMV to meet FEMA and Angel tax provisions, while raising money from non-resident investors.

The Government has ably taken steps towards its goals for a Viksit Bharat by 2047. The key focus of the budget outlay has been on the poor, women, farmers and youth. From a tax perspective, the focus continues to be on tax rationalisation and simplification. The Government has also proposed a comprehensive review of Customs rates and exemptions, to alleviate challenges faced by domestic manufacturers. This would, inter alia, also lead to India becoming a more integral part of the global supply chains. The industry would have liked to see an amnesty scheme in Customs.

The space sector has been receiving special attention. The proposed set up of a Venture Capital Fund of INR 1,000 Cr is a great beginning. Further rationalisation of Customs Duty and BCD on some of the important minerals will also help the sector.

The rationalisation of differential stamp duty levied across the states would ensure a level playing field and make the cost of investments in immovable property lucrative. Also, concessional rates for women investors would encourage investment by women and make them financially independent.

The announcement for the set-up of 12 new Industrial Parks will boost the manufacturing sector and encourage new entrants to get easy entry into the space with much-needed financial support. It will also enhance employment opportunities and enable the Banking sector to participate while financing the working capital needs.

The announcement for rolling out the Variable Capital Company (VCC) regulations primarily will aid in assisting the aircraft and shipping companies in their leasing activities. This will bring India in line with countries like Singapore and Mauritius. This will also incentivise entities to carry out business in India by taking advantage of the flexibility of the VCC model.

The budget has emphasized structural changes in unlocking the value chain in the agriculture and allied areas. Thrust on R&D in collaboration with industry in PPP mode can significantly enhance productivity and bring much-needed innovation to the sector. Secondly, a marked difference in this budget is the clear focus on sustainable production driven by the promotion of natural farming in the sector. Despite being the leading producer of several crops, India lags in Agri exports globally. To harness the potential, the budget has laid significant thrust on promoting cluster development in horticulture products which can significantly boost the contribution of the sector to the national economy. Given the predominance of small and marginal farmers in the country who lack scale, the announcement of the formulation of a National Cooperative Policy is expected to address issues related to scaling up, collectivisation and streamlining the value chain. Thrust on increasing self-sufficiency is reflected in the announcement for pulses and oilseeds which can help reduce the import bills. Last but not least, the enablement of Digital Public Infrastructure can bring in much-needed efficiency in the value chain – which will give the Annadatas of the country access to resources, advisory and financial support, in the process creating a globally competitive food industry.

The introduction of Variable Capital Company (VCC) structure for Private Equity could be a game changer for the Fund community. This structure is prevalent in countries like Singapore and the introduction of VCC coupled with the existing GIFT city structure could certainly bring India a step closer to becoming a financial hub like Singapore.

One of the hindrances to the success of IBC was the delays from the judiciary system. Setting up additional tribunals to deal with IBC cases is a welcome step which will expedite the resolution process. While the details are yet to be released, an integrated technology platform will also help in the timely dissemination of information and bring in efficiencies in the IBC process

A boost to Andhra Pradesh in the form of additional support of 15k crores for capital formation, enabling Polavaram irrigation project completion, development of Visakahapatnam-Chennai corridor, and promotion of capital investments amongst others will result in holistic development of Andhra Pradesh and Southern India.

The Budget has emphasized on the importance of manufacturing and services. The introduction of the Credit guarantee scheme for MSMEs, enhancement of mudra loans and the introduction of E-commerce hubs under the PPP model will not only boost revenue in these sectors but also fuel employment and provide for higher wage opportunities.

The announcement of various schemes to promote employment seems to be focussing on lower / mid-level employees with an announced cap of INR 1 lac salary. It also seems that the Schemes apply to multiple sectors and will likely facilitate employment generation across sectors and thereby to an extent, take care of unemployment concerns raised in the recent past.