India Announces Simplified Tax Regime & Reforms

India’s recent budget proposals have introduced reforms to make its tax regime easier to understand and more business-friendly. In this article, the experts at ECOVIS RKCA explore how these new rules will impact a wide range of stakeholders, including start-ups, multinationals and individual investors.

The Indian Government has recently announced its budget proposals including major economic reforms and incentives. The important amendments impacting foreign businesses or subsidiaries of foreign companies in India are highlighted below.

I. Simplification of Capital Gains Taxation

The provisions of long term and short term capital gain taxes have been revised in a significant number of ways, including:

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months thus removing the 36-month holding period.
• The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered as long-term. The holding period for all other assets is 24 months.
• Unlisted bonds and debentures are brought into line with the taxation of debt mutual funds and market-linked debentures. They are subject to capital gains tax at the applicable slab rates. (i.e., they will be treated as short-term irrespective of the period of holding).
• The taxation of short-term capital gains on listed equity shares, a unit in an equity-oriented fund, and a unit in a business trust has been increased from 15% to 20%. Other financial and non-financial assets held for the short term shall continue to be taxed at slab rates.
• For the benefit of the lower and middle-income classes, the limit on the exemption of long-term capital gains on the transfer of equity shares or equity-oriented units or units of a business trust has been increased from Rs.1 lakh to Rs.1.25 lakh per year. However, the tax rate has increased from 10% to 12.5%.
• The exemption limit has been increased to Rs. 1.25 lakhs for the whole year, whereas the tax rate changed from 23rd July 2024.
• The tax on long-term capital gains on other financial and non-financial assets has been reduced from 20% to 12.5%. On the other hand, the indexation benefit previously available on the sale of long-term assets, has now been abolished. Thus, any sale of a long-term asset made from 23rd July, 2024 onwards, will be taxed at 12.5% without the indexation benefit.
• However, it should be noted that the provision of availing the benefit of Fair Market Value (FMV) of the asset as on 01.04.2001 as cost on sale of the asset, is still available even after the recent amendments.
• Recently, a further amendment to the rules has introduced the grandfathering rule, whereby one can pay the lower of the tax calculated by applying indexation (applicable only to resident individuals and Hindu Undivided Families [HUFs]) and tax at the old rate or under the new regime tax without indexation, whichever is the lower.

II. Abolition of Angel Tax

• The Angel Tax is to be abolished.
• Angel tax is a tax levied on companies that issue new shares to investors at a price above the company’s fair market value (FMV). The excess of the issue price over and above the FMV was made taxable to the company as Angel Tax. It is proposed to abolish this provision.
• The startup ecosystem will benefit considering the frequent fund raising that can happen in startups and the compliance cost and the time that is consumed by the said provision while conducting a fund raising in start-ups.
• The abolition of angel tax will now certainly attract foreign direct investment (FDI) and will relieve the investing companies from tax and complex burdens. This is a step in the right direction towards ease of doing business.

III. Corporate Taxes for Foreign Companies

• Corporate taxes are imposed on a company’s net income or profit. The 2024 Budget proposes to reduce the corporate tax rate for foreign companies from 40% (with surcharge & education cess @ 43.68%) to the current 35% (with surcharge & education cess @ 38.22%).
• This would mean a reduction in the tax rate for foreign companies operating in India through a branch or permanent establishment or executing engineers, procurement and construction (EPC) projects in India. As a result, foreign companies may now explore setting up a branch structure in India instead of an Indian subsidiary, as dividends received by the shareholder (holding company or foreigner shareholder) will now be taxable in their hands instead of in the Indian subsidiary company itself, and hitherto tax credit on such dividends was also not available in the home country.

IV. Other Direct Tax Updates

• Reopening of Income Tax Return (ITR) – Only if the evaded income is Rs 50 lakh or more, an assessment can be reopened beyond three years from the end of the assessment year, up to a maximum period of five years from the end of the assessment year. In the case of search cases, the time limit of 10 years is reduced to six years.
• Income Tax Appeals – To reduce the number of pending cases, the monetary limits for filing tax dispute appeals in the tax tribunals, high courts, and the Supreme Court have been increased to Rs.60 lakh, Rs.1 crore, and Rs.2 crore respectively.
• Vivaad se Vishwas Scheme – This scheme has been reintroduced to facilitate the settlement of income tax disputes and eliminate litigation.

V. GIFT City in India

• Gujarat International Finance Tec (GIFT) city in India is an attractive destination for leasing aircrafts and ships from foreign lessors. Foreign lessors are exempt from any income tax on income earned from such leases. However, the GIFT city unit must have commenced its operations by 31 March 2024 for the foreign lessors to claim the tax exemption. The Bill proposes to grant an additional year to such GIFT city units to commence operations by 31 March 2025. Additionally, the GIFT city units that are engaged in leasing of aircraft or ships will themselves be exempted from any income on transfer of the leased aircraft and ships. Again, such an exemption is only available where the GIFT city unit had commenced operations by 31 March 2024, which is now proposed to be extended to 31 March 2025.
• Investment divisions of offshore banking units set up in GIFT city are exempt from income on certain investments including (i) Rupee Denominated Bonds, Global Depository Receipts, derivatives etc. listed on a recognised stock exchange in the GIFT city and denominated in convertible foreign currency, (ii) transfer of Indian securities (other than shares), (iii) income from foreign securities and (iv) receipts of securities in Indian Asset Restructuring Companies etc. Currently, the exemption is only available to offshore banking units that have commenced operations by 31 March 2024. The proposal extends the deadline to 31 March 2025.
• Foreign sovereign wealth funds (SWFs) and pension funds (PFs) are not taxed on income earned from investments in the infrastructure sector in India. The exemption covers income in the form of interest, dividends, long-term capital gains etc. However, the exemption is available only for investments made by 31 March 2024. It is proposed to extend the investment window for SWFs and PFs till 31 March 2025.
• Start-ups are granted a tax holiday for any three consecutive financial years out of the initial 10 years. The tax holiday is only available if the start-up is incorporated by 31 March 2024. The Bill proposes to extend the tax holiday to new start-ups to be incorporated by 31 March 2025.

VI. Equalization Levy Abolished

• The Budget has abolished the 2% equalization levy on e-commerce transactions by non-resident e-commerce operators, supplying goods or services to Indian residents.
• This is a good amendment in the budget as it was one of the major concerns for non-resident digital companies with a customer base in India, which required registration, quarterly payments and annual filing and this levy was also not eligible for tax credit in the home country, thus directly impacting the company’s bottom line.

VII. Buy Back of Shares

• The treatment of the share buy back is now a deemed dividend in the hands of investors.
• For a non-resident investor, he can explore a beneficial tax rate provided under the tax treaty for dividend income, subject to the relevant treaties, or the tax could also be available as a tax credit in the home country.
• In addition, the cost of equity shares would also be available as a capital loss which could be used to offset capital gains income.

VIII. Liaison Office

• Until now, no penalty has been imposed for late submission of an annual statement by a liaison office.  The office in India is required to submit a statement detailing its activities for each financial year within 60 days of the end of the financial year and it is now proposed to impose a penalty of INR 1000 per day for delay up to three months or INR 100,000 in any other case.

IX. The Way Forward

• India’s tax laws are due to be completely revamped in the next few months. This will make Indian tax laws simpler and easier to comply with.
  The Indian government is also working on ways to simplify the Foreign Direct Investment (FDI) regime in India to encourage investment in India.

These latest tax reforms are a big step towards modernising the country’s tax system. The changes will make it easier for businesses to comply with tax rules, and will foster a more appealing environment for foreign investment. As India continues to overhaul its tax laws and investment regulations, these changes signal a promising shift towards greater opportunity for businesses and investors alike.