Understanding India's Tax Structure for Businesses as per the recent union Budget

 The Union Budget 2024-25, presented by Finance Minister Nirmala Sitharaman, introduces notable tax changes, providing relief to certain taxpayers while raising concerns for investors. Here's a comprehensive breakdown of the key changes.

The Union Budget 2024-25, presented by Finance Minister Nirmala Sitharaman, brings significant tax changes designed to provide relief to taxpayers and simplify the tax structure. While measures such as increased standard deductions and enhanced pension benefits offer substantial relief, other changes, including the hike in capital gains tax and the Securities Transaction Tax (STT), have raised concerns among investors. Here’s a detailed breakdown of the major proposed changes.

Income Tax Reliefs
One of the most notable changes is the increase in the standard deduction for salaried employees opting for the new tax regime, which has been raised from Rs 50,000 to Rs 75,000. This move is expected to benefit around 40 million salaried individuals and pensioners, allowing them to save up to Rs 17,500 annually in taxes. Additionally, the deduction on family pensions for pensioners has been enhanced from Rs 15,000 to Rs 25,000.

The Finance Minister also announced a comprehensive review of the Income Tax Act to simplify it. This is a significant step, considering that more than two-thirds of individuals have opted for the new tax regime.

The revised tax slabs for the new regime are: income up to

• Rs 3 lakh will be tax-free;
• Rs 3-7 lakh will be taxed at 5%;
• Rs 7-10 lakh at 10%;
• Rs 10-12 lakh at 15%;
• Rs 12-15 lakh at 20%; and
• income above Rs 15 lakh will be taxed at 30%.
• Standard Deduction for salaried employees increased from Rs. 50,000 to Rs.75,000
• Deduction on family pension for pensioners increased from Rs. 15,000 to Rs. 25,000

In her speech, the Finance Minister announced plans for further simplification and rationalization of the GST regime, including its extension to other sectors in the near future. This indicates the government's intent to rationalize GST rates and potentially include petroleum products, a long-standing request from the industry.

Direct Tax Proposal:

To reduce the compliance burden, promote entrepreneurial spirit and provide tax relief to citizens:

Rationalization of Capital Gain:

• Short term gains of financial assets to attract 20% tax rate.
• Long term gains on all financial and non-financial assets to attract a tax rate of 12.5%.
• Increase in limit of exemption of capital gains on financial assets to 1.25 lakh per year.

Employment and Investment:

• Abolish ANGEL tax for all classes of investors.
• Simpler tax regime to operate domestic cruises.
• Provide safe harbor rates for foreign mining companies (Selling raw diamonds).
• Corporate tax rate on foreign companies was reduced from 40% to 35%.

Pension Boost:

The government has increased the deduction limit for the employer's contribution to the National Pension System (NPS) from 10% to 14%. This increase will cover government employees as well as private companies in the NPS. Additionally, the two perceequalizationion levy has been withdrawn.

Security Transaction Test and Capital Gains Tax:

The Securities Transaction Tax (STT) on Futures and Options contracts has been increased to 0.2% and 0.1% respectively. Furthermore, income received on the buyback of shares will now be taxed in the hands of the recipient. The raising of STCG to 20% and LTCG to 12.5% is a body blow. We need to brace ourselves for a negative reaction in the short term.

Tax Changes For Companies in Budget of 2024-25:

The capital gains taxation structure has also been simplified. Short-term gains on certain financial assets will now be taxed at 20%, while other assets will continue to be taxed at current rates. The exemption limit on capital gains for some financial instruments has been increased to Rs 1.25 lakh per year. However, unlisted bonds and debentures, debt mutual funds, and market-linked debentures will be subject to capital gains tax regardless of the holding period.

The exemption limit for capital gains on certain financial assets has been increased to INR 1.25 lakh per year. However, this benefit may be countered by the higher tax rates on short-term and long-term gains, leading to increased tax liabilities for some taxpayers. Overall, this move is pragmatic and offers significant benefits for the important middle-class taxpaying demographic.

TDS and Tax Appeals:

To simplify compliance, the government will introduce standard operating procedures for TDS defaults and work to streamline and rationalize the resolution of such offences. The TDS rate on e-commerce transactions will be reduced to 0.1%. Delays in TDS payments up to the tax filing date will be decriminalized. Additionally, the monetary limit for filing tax appeals has been increased to Rs 60 lakhs for the ITAT, Rs 2 crore for high courts, and Rs 5 crore for the Supreme Court.

Sector Specific Custom Duty Proposals:

Comprehensive review of the rate structure for ease of trade, removal of duty inversion and reduction of disputes:

Changes in Custom Duty

• Fully exempt 3 more cancer medicines from custom duties
• Reduce BCD to 15% on Mobile phone, Mobile PCBA and charger
• Reduce custom duty on gold and silver to 6% and platinum to 6.4%
• Reduce BCD on shrimp and fish feed to 5%
• Exempted more capital goods for manufacturing of solar cells & panels
• Fully exempt custom duties on 25 critical minerals.

GST and Custom Duty:

The government has expressed its intention to further rationalize the GST structure. Krishan Arora highlighted that the government plans to include petroleum products in the GST regime, which has been a long-standing request from the industry. Additionally, a thorough review of the customs duty structure will be conducted over the next six months.

Angel Tax and Corporate Tax:

The Angel Tax for investors has been abolished to strengthen the Indian startup ecosystem, and the corporate tax rate for foreign companies will be reduced from 40% to 35%.

From a financial services perspective, some changes, such as the removal of the Angel Tax and the peak tax rate adjustments for foreign banks, are seen as positive. However, experts have pointed out that the modifications in the capital gains tax regime—particularly the increase in Securities Transaction Tax (STT), higher tax rates for both long-term and short-term gains on listed securities, and the removal of indexation benefits, especially for the housing sector—could have a short-term impact on capital markets, despite simplifying the overall capital gains framework.

On a different note, the comprehensive review of the Income Tax Act, utilizing the Direct Taxes Code (DTC) proposed in the Budget, offers a strategic opportunity to create a modern and efficient direct tax regime. This initiative is expected to simplify tax laws, automate compliance, reduce litigation, and enhance the ease of doing business in India.

Income Tax Changes for Companies in Budget 2024-25:

The income tax rate will remain at 25% for domestic companies with a turnover not exceeding Rs. 400 crore for the financial year 2022-23, as outlined in the Finance Bill presented with the Budget 2024-25. Companies operating under the section 115BA regime will continue to benefit from this rate.

For all other cases, the income tax rate will be 30% of the total income. However, domestic companies have the option to choose taxation under section 115BAA or section 115BAB, provided they meet the specified conditions. Under section 115BAB, the tax rate is 15%, while section 115BAA has a rate of 22%, with a 10% surcharge applied in both cases.

For non-domestic companies, the tax rate is proposed to be reduced from 40% to 35% on income not subject to special rates specified in Chapter XII of the Act.

Surcharges:

The surcharge at a rate of 7% will continue to apply to domestic companies (excluding those opting for taxation under sections 115BAA and 115BAB of the Act) if their total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore. A surcharge of 12% will be levied if their total income exceeds Rs. 10 crore.

For companies other than domestic ones, the existing surcharge of 2% will continue if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore. A surcharge of 5% will apply if their total income exceeds Rs. 10 crore.

It is proposed that the surcharge will not apply to advance tax or tax computed on the income of specified funds (as referenced in clause (c) of the Explanation to clause (4D) of section 10) chargeable under clause (a) of subsection (1) of section 115AD of the Act. In other cases, including those under sub-sections (2A) of section 92CE, 115QA, 115R, 115TA, or 115TD, the surcharge will be levied at a rate of 12%.