Union Budget 2024: FM's tax measures seek to widen net, cut litigation

Deepening the tax base, reducing litigation, and ensuring tax certainty for taxpayers with a long-term vision to reform the taxation framework have been emphasised in the Budget.

Also,  Sitharaman did away with angel tax and equalisation levy. She also announced a comprehensive review of the decades-old Income Tax Act in six months. 

The end of angel tax for all investor classes will spur investment in startups, a sector that has been starved of funds since the onset of the so-called funding winter. Angel tax is applicable when shares issued by a privately held company exceed their fair value. The tax was introduced in the 2012 Budget to arrest fund laundering for domestic investors. Later, it was extended to foreign investors.

The proposed amendments to the angel tax regime will be made effective from April 1, 2025, and will be applicable from assessment year 2025-26.

“First of all, to bolster the Indian startup eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” Sitharaman said in her Budget speech.

Amit Maheshwari, tax partner, AKM Global, said: “Since its introduction, the startup community has seen waves of tax scrutiny on account of this levy. However, suitable guidelines and safeguards are expected in that respect.”

Big Tech such as Amazon, Netflix, and Google will be relieved over the removal of the equalisation levy, which was a 2 per cent tax on the profits of non-resident digital companies providing services to Indian firms. This is in line with the global tax deal pursuant to the pillar one solution developed at the OECD (Organisation for Economic Cooperation and Development) G20 inclusive framework.

The proposed removal of the 2 per cent levy will come into effect on August 1, 2024. The 6 per cent levy on online advertisements and related services will continue.  Other than tweaking the slabs of personal income tax, raising capital gains tax on listed securities, and taxing buybacks in the hands of the recipient, there are tax exemptions for venture capital funds, retail schemes, exchange-traded funds, and others located in International Financial Services Centres, such as the GIFT City in Gujarat. 

Corporation tax payable by foreign companies has come down from 40 per cent to 35 per cent; and de-penalising of not reporting small foreign assets is up to Rs 20 lakh. Other than these, there is a new block assessment scheme for search and seizure. For reassessment, the time limit has come down from 10 years to five, accompanied by a rationalisation of the procedure. “The cut in the tax rate for foreign firms and the abolition of the equalisation levy were a surprise. Logically these would be replaced with alternative levies in the runup to implementing Pillar one obligations,” said Rohinton Sidhwa, Partner, Deloitte India. Just as significant is the measure to provide immunity from penalty and prosecution to the benamidar on full and true disclosure by amending the Benami Transactions (Prohibition) Act, 1988. Benami transactions pertain to properties held by a person but paid for by another. The amendment will also rationalise the time limits for attachment of property and reference to the adjudicating authority. 

To reduce disputes, the Budget has brought back Vivaad se Vishwas Scheme, a direct tax dispute resolving scheme. Earlier, this scheme was introduced in 2020 and it got an encouraging response from taxpayers and also helped in fetching substantial revenue for the exchequer. 

Tax deduction at source (TDS) has been rationalised with reduced rates. In another change, the Budget has provided a penalty on furnishing statements on TDS or TCS late. 

“The reduction of TDS rates from 5 per cent to 2 per cent for specific categories aims to alleviate the financial burden on taxpayers, improving liquidity and cash flow for businesses and individuals,” said Rakesh Nangia, chairman, Nangia Andersen LLP.

The Budget has outlined several anti-avoidance measures including TCS on luxury goods if they exceed Rs 10 lakh in value.