Budget 2024 Update

Budget 2024- Key tax highlights

Rationalisation of Capital Gains Tax

• Capital gains tax had been a complicated provision with multiple asset class, different holding period, and tax rates.
• The Budget has proposed holding period to be rationalised for listed shares, REIT, InvIT to 12 months and for unlisted shares, immovable properties, gold, bonds and debentures to 24 months.
• The tax rate for long term capital gains on listed shares had been increased from 10% to 12.5% and for short term capital gains from 15% to 20%. Indexation benefit has been dropped.
• This amendment shall be effective from 23 July 2024.

Abolishment of Angel Tax

• Historically, section 56(2)(viib) of the Income-tax Act (IT Act) had been in vogue to plug instances of issue of shares at prices above the fair value to launder black money.
• However, the said provision had been a deterrent in M&A deals involving issue of shares to existing shareholders followed by investment by third party investors at a higher price or back to back funding in Startups at elevated price than the previous funding round.
• The angel tax abolishment will ease out M&A deals and corporate restructuring.
• However, robust documentations to be kept for source of funds and valuation to substantiate the genuineness of funding under other provisions of the Income-tax Act.

Buyback Tax

• Under the current provisions, a company doing buyback was subject to pay buyback tax @23.296% and the consideration received by the shareholders was exempt in their hands.
• It has been proposed to treat the amount received on buyback as dividend in the hands of the shareholders.
• Since the shares will be extinguished on such buyback, the cost of shares bought back shall be treated as capital loss in the hands of the shareholders.

Corporate Gifts

• While transfer of shares for nil consideration is subject to the anti avoidance provisions under section 56(2)(x) and 50CA of IT Act, there are arguments placed that such transfer shall be exempt under section 47(iii) of IT Act.
• It has been proposed that transfer of shares between companies without consideration shall not be exempt under the above gift provisions of the Income-tax Act.

Streamlining of Reassessment

• Time limit for initiating reassessment proceedings has been reduced from 10 years to 5 years and 3 months, where income escaping tax is INR 50 lacs or more.
• In other cases, it has been modified to 3 years and 3 months.
• This provides more clarity on indemnity on deal situation.

Rationalisation of TDS Provisions

• Time limit for passing an order treating an assessee in default has been reduced from 7 years to 6 years for payments to residents.
• Now, non-resident payees are also been specifically included under the above provisions with time limit of 6 years. This provides more clarity on obtaining indemnity in deals.
• Decrminalisation for non deposit of taxes withheld under the TDS provisions, if taxes are deposited within the time limit for filing TDS return of the respective quarter.
• TDS rates are reduced from 2% to 1% and in few cases from 5% to 2%.

Clarification on Taxation of Sale of Shares Under Offer For Sale (OFS) in an IPO

• Basis the language under section 55(2)(ac) of the Act, arguments were placed that computation mechanism fails with respect to shares sold under OFS.
• It has been clarified that the fair market value of such shares shall be the cost of acquisition with indexation till FY 2017-18.
• This amendment shall be effective retrospectively from AY 2018-19.

GIFT IFSC

• Tax benefit has been extended to retail schemes and exchange traded funds regulated by IFSCA subject to certain conditions
• Finance company setup in IFSC are now exempted from the provision of thin capital rules under section 94B of the IT Act
• Tax exemption extended to clearing corporations setup under the IFSCA regulations
• VCs setup under the IFSCA regulations are exempted from the provisions of explaining source of funds.

Equalisation Levy on E-commerce Operators

• Equalisation levy at the rate of 2% on non resident e-commerce operators have been done away with
• This is in line with the Indian Government’s commitment to implement OECD’s Pillar one.

Other Key Amendments

• Introduction of Vivad se Vishwas Scheme 2024.
• Corporate tax rate on non-resident companies proposed to be reduced from 40% to 35%.
• Income from let-out property shall be taxable only under “Income from House Property”, not under business income.
• STT has been increased for futures and options to 0.02% and 0.1%, respectively.