Expect Rule Simplification In Direct Taxes For Interim Budget 2024, Says Tax Expert Ajay Rotti

After a year of robust tax collections, the industry as well as direct taxpayers are expecting announcements related to lowering tax burdens in budget 2024-25. However, since the February 1 budget would be an interim budget, the government would likely hold back on announcements that could have revenue implications.

“This is not going to be a full-fledged budget. This is the government getting approval for spending money for the remaining period that they are there. However, I don’t think this will be a no-show with nothing coming out of it. There are a few things that people are expecting and the government could come up with certain clarifications, some minor tinkering on the procedural and administrative fronts,” Ajay Rotti, founder and chief executive officer of Bangalore-based tax consulting firm Tax Compass told The Core.

An interim budget, limits the scope of expectations around a budget, as it is a temporary financial account of the government's expenditures till a new government assumes power after elections. Subsequently, the newly formed government will announce a full budget after the Lok Sabha elections this year.

As far as taxes are concerned, the industry is looking forward to procedural simplifications that are not revenue-linked. Till now, tax collections in FY2023-24 have remained robust. According to government data, April-November net tax revenues were Rs 14.36 lakh crore, or about 62% of the annual estimate, up from Rs 12.25 lakh crore in the same period last year. For the April-November period, corporate tax collection grew 20% to Rs 5.14 lakh crore year-on-year, and personal income tax collections were up 29% to Rs 5.67 lakh crore.

Further Extension

Accounting firm EY said in its 2024 budget expectation report that the government could extend the concessional 15% income tax rate for corporates to set up new manufacturing units by one year till March 31, 2025, to encourage private investments. The report also said that the government would prioritise simplifying tax payment procedures, while ongoing efforts will be made to implement legislative reforms.

“It (extension of concessional rate) is linked to FDI (foreign direct investments) and PLI (production-linked incentive) scheme because you want to give some fiscal incentives to push more companies coming in. And therefore they may want to extend that window because when it came in, it was before Covid,” he said.

Since setting up manufacturing plants takes time, the government could consider extending the timeline for tax benefits. “If you want substantial manufacturing, you need at least 24 months for a greenfield plant to come up because this is available only for new manufacturing units. So, therefore, extending it by a year or so makes sense,” Rotti said.

The government in 2019 announced that any new domestic company incorporated on or after October 1, 2019, making fresh investment in manufacturing, will have the option to pay income tax at the rate of 15% if they commenced their production on or before March 31, 2023. In the Budget presented on February 1, 2023, the government extended the concessional 15% corporate tax rate for new manufacturing units by one more year till March 2024.

Tax Simplification On Hold

The Confederation of Indian Industries (CII), an industry body, in its budget wishlist, said the government should streamline personal taxation procedures, such as capital gains tax and tax return filing. It also said that maintaining tax certainty and ensuring ease of tax payment for the industry plays a crucial role in boosting investor and business confidence, leading to higher economic growth.

CII also said that the budget should consider revising the deadline for submitting revised tax returns until the completion of the assessment year. This adjustment would allow taxpayers to make necessary changes to their foreign tax credits. Typically, December 31 is the cutoff date for filing belated or revised income tax returns (ITRs) for a given financial year.

Another mention on CII’s wishlist is the simplification of the capital gains structure. Long-term capital gains (LTCG) refer to the earnings obtained from the sale of capital assets after one year. The applicable tax rate for LTCG is 20%, except on the sale of equity shares and equity-oriented funds. In such cases, the LTCG rate is 10% on amounts over Rs 1 lakh.

CII has proposed that the taxation on capital gains from the sale of various financial assets, including equity shares, preference shares, equity mutual funds, debt mutual funds, REITs, InvITs, bonds, and others, should be revised. According to their recommendation, short-term capital gains should be taxed at 15%, while long-term capital gains should be taxed at 10%. Additionally, the CII suggests that the minimum holding period for qualifying as long-term capital gains should be extended to 12 months.

“For rationalisation of capital gains, we will have to wait till July for any announcements because it has revenue implications and the government may not want to do it in an interim budget and wait for the main budget,” Rotti said.

As per the CII’s recommendations, the buy-back tax should not be applicable if the buy-back is under the ‘open market through stock exchange’ method. As a result, the exemption under Section 12 10(34A) should also not be applicable, and the transactions should still be subject to capital gains tax for the shareholders. Currently, companies are required to pay a buyback tax of 20% on the shares they buy back, while shareholders also have to pay capital gains tax on the shares they sell.

“Buy-back tax was brought in when dividend distribution tax was there. Dividends were taxable in the hands of the company and not the shareholder. Now with the dividend distribution tax gone and dividends being taxable in the hands of the shareholder, there is an expectation that the buyback distribution tax will also go and logically it needs to whether it will happen now or they'll have to do it in July,” he said.