On July 23, 2024, Hon’ble Finance Minister Nirmala Sitharaman presented the first budget of Modi 3.0. This Union Budget is a forward looking and sets the work plan for a developed India, or Viksit Bharat. The primary focus, as emphasized by the Hon’ble Finance Minister, is on employment, skill development, MSMEs, and the middle class. This budget bears footprint of a strong government with an extenuating effect of a coalition government. This has given a stern message that the government is not going to bend beyond its numbers in the Parliament.

There are some intrepid steps, like increase in capital gains tax rates particularly for listed securities. This could not have been done in fag end of the ruling term. The removal of indexation benefit for real estate sector comes with the sweet bitter pill for the middle class. Though, there is a removal of indexation benefit but at the same time lowering of tax rate, with added sweetener in form of slight relaxation of personal tax rate slab. There are also hidden gems for taxpayers in the fine prints, such as relief to foreign investors in capital gains on account of neutralisation of gains attributable to foreign exchange fluctuations.

The budget provides additional benefit of Rs. 17,500 to the taxpayers. There is no new introduction of personal tax regime. However, the slab for existing new regime, has proposed to be slightly rejogged, as indicated below:

The standard deduction for salaried individuals has been increased from Rs. 50,000 to Rs. 75,000, providing a marginally higher tax-free disposable income. These changes will result in additional savings of Rs. 17,500 for taxpayers.

The income chargeable under Section 56(2)(viib) of the Income Tax Act, 1961 (“IT Act”) is commonly referred as “Angel Tax”. It taxes the difference between the share premium at which the shares are subscribed by the investor in the Indian entity and fair market value (computed as per prescribed methodology under the IT Act) of the Indian entity. In other words, the said provisions taxes, the share premium amount over and above the fair market value of the company The said difference is taxable in the hands of the Indian entity.

The Angel Tax was introduced in the 2012 with an intent to check money laundering practices through investments in small companies. Over the period of time, the scope of Angel Tax was extended to include foreign investors as well.

The differential pricing between the Indian promoter investor and the foreign investor, is not uncommon in the Indian market. The Indian promoter, in directly, charge premium from the foreign investors, by asking for higher subscription price. Over a period of time, this is developed a market practice in India. However, with the imposition of Angel Tax, the structuring of differential pricing had become complex.

Further, the Angel Tax has provided another valuation criterion in addition to the valuation prescribed under exchange control laws and corporate laws. This again had added the level of complexity of the investment structures in India, more particularly when foreign investors are involved.

Hon’ble Finance minister, has now propose to abolish the Angel tax provided under Section 56(2)(viib) of the IT Act. This may provide a much-needed relief to Indian corporates.

In an effort to simplify the capital gains tax regime, it is proposed to retain only two period of holding for the purposes of classification of gains as long term capital gains or short term capital gains. The period of holding has been prescribed to be 12 months for listed securities and 24 months for all other assets to determine short-term versus long-term capital gains.

The long-term capital gains tax on listed securities have been increased from 10% to 12.5%, however, capital gains exemption limit has been increased from Rs. 100,000 to Rs. 125,000 per year, for small tax payers. There is also an increase in the rates of Securities Transaction Tax: from 0.0625% to 0.1% for options and from 0.0125% to 0.02% for futures.

The benefit of indexation of cost of acquisition, has been proposed to be withdrawn, in entirety for all asset classes. This has significantly impacted the real estate sector. The withdrawal of indexation benefit has been offset by reduction in long term capital gains tax from 20% to 12.5%.

This particular proposal, has been in circles amongst the taxpayers, if this has positive impact for taxpayers, resulting in decrease in tax liability or it has impacted adversely.

There is no straight jacked formulae, which one can apply to the above proposals. It depends upon the facts and circumstance of each case, to analyse the impact of the proposals.

Currently, the tax burden in case of buyback is upon on the company and the tax rate on buy back is 20%. The new proposal shifts this burden to the recipients, which is likely to impact shareholders and more particularly the promoters of cash-rich companies.

As a corollary to above, the abolition of the buyback tax is likely to improve cash flow of the companies as the burden of tax will no longer be borne by the corporates. However, taxing buyback income as dividends may reduce investor enthusiasm.

While on the other hand, for shareholders, the option to claim a capital loss on tendered shares offers some consolation, though it adds complexity to portfolio management.

There have been notable changes in tax deduction (“TDS”) provisions of the IT Act. The proposal provides that tax collection at source and TDS under all provisions of the IT Act, is required to be considered by the employer while deducting TDS on salary income. This is likely to provide some relief to salaried class.

Further, a new TDS provision (levying TDS of 10%) is proposed to be introduced on the payment of salary, remuneration, interest or bonus paid to a partner of a partnership firm.

Furthermore, the TDS rates under various provisions have been rationalized.

There is a hidden sweetener for the foreign companies who intend to sell the shares of Indian entities. Currently, the foreign shareholders, who are option for 10% tax rate, are required to pay capital gains on accretion earned on account of foreign exchange fluctuation as well. However, under the tax proposals, although the long term capital tax has been increased to 12.5%, however, they are not required to pay gains attributable to foreign exchange fluctuation. This could be a significant benefit to the foreign investor community.

There is a relief for Indian employees working with multinational companies and deputed abroad, if they have failed to disclose their foreign assets like shares allocated under stock option scheme, etc. Such non-disclosures will not attract any levy of penalty under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, if the taxpayer has failed to disclosed foreign assets to the extent of Rs. 2 million.

The government has again attempted to rationalize the reassessment related provisions. As per the tax proposal, the tax authorities will not be able to reopen cases beyond three years if the escaped income is less than Rs. 5 million and more than 5 years, if the escaped income is more than Rs. 5 million.  This is a significant relief, considering that the current time limits for reopening of assessing is upto 10 years, if the escaped income is more than Rs. 5 million. Similarly, the time limits for search and seizure cases has been reduced from 10 years to 6 years.

The government has yet again introduced the amnesty scheme. This is on the similar lines of Direct Tax Vivad Se Vishwas Act, 2020. Considering that the 2020 scheme produced an encouraging response and aided the government in meeting the tax collection targets, the government has again attempted to garner revenues from proposed 2024 scheme.

The Indian Budget 2024 is a mix blend of reliefs and rationalization, aiming to bolster economic growth while addressing various structural issues. The changes in tax proposals, the abolition of the angel tax, and the simplification of capital gains tax are expected to provide not only a much-needed boost to individual taxpayers but also bring parity in taxation. However, the success of these measures like any policy initiative will much depend on their effective implementation and the government's ability to navigate the prevailing economic uncertainties. Overall, this year’s budgetary tax proposals focus on rationalization rather than appeasement of the common man.

About the authors: Amit Singhania is the Managing Partner of Areete Law Offices and Hitesh Jangra is an Associate at the Firm.

Views expressed are personal and need not necessarily the views of the Firm they represent.