Ballots to Budget: Taxpectations from Union Budget 2024

Economists predict a potential populist shift through a surge in welfare initiatives, write Sandeep Puri and Jitendra Jain

Fresh from the ballot boxes, India finds itself at crucial crossroads, brimming with anticipation as the current government gears up for its third consecutive term in power. The latest provisional growth figures released in May 2024 by the Ministry of Statistics and Programme Implementation reaffirm India’s position as the fastest-growing economy in the world, with its gross domestic product (GDP) estimated to grow by 8.2 per cent for FY24 (against 7 per cent in FY23), signalling that it is firmly on the path to achieve its vision of becoming a $7 trillion economy by 2030.

India now needs to focus on the unveiling of the full Union Budget for FY25, which will set the tone for the next few years for the newly elected government. Anticipation looms large as economists predict a potential populist shift through a surge in welfare and support initiatives.

 

On the direct tax front, India Inc eagerly anticipates an extension of the sunset date for the reduced corporate tax rate for newly established manufacturing companies. Currently, only companies that commenced production before March 31, 2024, qualify for the reduced tax rate of 15 per cent. An extension of this window, say for the next 3 to 5 years, would attract new investments in manufacturing, boost production, and stimulate capital inflow and expenditure in line with the government’s broad policy objectives around ‘Make in India’. In fact, a bolder step would be to ideate India’s own bonded logistics park (BLP) regime, which would enable faster duty-free imports of components, manufacturing and local value additions, and re-exports by large multinationals as part of their China Plus One strategy. A similar regime for focus sectors like research and development, semiconductors, and healthcare would also help in realising the broader policy goals.

Furthermore, rationalisation of the capital gains tax structure by simplifying tax rates and holding periods for various asset classes would simplify the complexity of the present regime. Similarly, the withholding tax and tax collection at source provisions are also overly cluttered and burdensome in terms of compliance obligations. Therefore, having a single uniform rate or clubbing different provisions within two or three broader categories would simplify the compliance burden and may reduce litigation related to interpretational issues.

Another area that should be addressed in the forthcoming Budget is the amendment introduced last year to address liquidity issues faced by micro, small, and medium enterprises (MSMEs). As per the amendment, deductions on delayed payments to small businesses can only be claimed in the year in which the payments are made. While well-intentioned to ensure timely payments to MSMEs, this amendment has had the effect of inadvertently discouraging large businesses from transacting with small businesses to avoid the consequences of such provisions. A relook at these provisions would be a welcome move.

On the transfer pricing (TP) front, harmonisation of the Customs and TP provisions for related party imports would be encouraged. Both regulations have the same end goal – to arrive at an import price not influenced by intercompany relations, albeit with a different objective. TP authorities check for inflated import prices that could diminish profits in India, while Customs authorities look for under-reported prices that minimise import duties. This dichotomy has had a detrimental impact on businesses. To mitigate these issues, as a first step, synchronising the TP advance pricing agreements (APAs) with Customs’ advance rulings may lead to uniformity in the accepted import prices, thereby removing hardships for taxpayers. Additionally, sharing information and conducting joint audits by the two authorities might streamline the processes, conserve resources, and provide taxpayers with more certainty.

On the global stage, considering India’s active participation in discussions on global minimum tax (Pillar Two), taxpayers would expect an announcement on India’s roadmap for implementing Pillar Two rules into domestic legislation. Broadly speaking, these rules ensure an effective tax rate of 15 per cent on certain defined multinational enterprises at a jurisdictional level. Closer to home, certain changes are needed to boost the growth of the GIFT International Financial Services Centre (IFSC). While the tax regime for inbound investments into the IFSC is established, there is a lack of a competitive tax regime for IFSC-based outbound funds. Such parity is crucial to compete with other international financial centres.

In conclusion, the Budget is not just a financial statement but a statement of intent, reflecting the government’s resolve to navigate the interplay of growth, investment, and social welfare. As the nation waits in anticipation, we hope that the Budget will not only meet but exceed its ‘taxpectations’.

(Sandeep Puri and Jitendra Jain are partners at Price Waterhouse & Co LLP)

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