By Dinesh Kanabar and Abhishek Mundada
The Finance Bill, 2024, heralds several amendments aimed at refining and attempting to simplify India’s direct tax regime to a large extent. The focus of the Bill is on enhancing the tax landscape, easing taxpayer difficulties, and rationalising various provisions.
The Bill brings notable amendments to the capital gains tax regime. One major change is introducing a uniform holding period for determining long-term capital gains (LTCG). While the period of holding for all listed securities remains 12 months, any other asset class held for more than 24 months will qualify for LTCG, simplifying the earlier disparate holding periods. On the tax rate front, especially for capital gains arising on listed securities (equity shares, equity-oriented mutual funds), the short-term capital gain (STCG) tax has been increased to 20% from 15%, and the LTCG tax raised to 12.5% from 10% (with marginal relief on basic exemption limit increased from Rs 1 lakh to Rs 1.25 lakh). The LTCG tax rate for assets other than listed securities has been reduced to 12.5% for all taxpayers without any indexation benefit. The government has thus adopted a give (reduced tax rate on LTCG) and take (indexation benefit/increased tax rate on listed securities) approach, while rationalising the capital gains tax regime.
All unlisted bonds/debentures (including those that are convertible into equity) shall be deemed to be taxed as STCG irrespective of their period of holding before the transfer. This will significantly affect private equity investments done through convertible debentures, which provide their own set of advantages commercially, to consider the tax impact before the same are offloaded as such.
Then there is taxability of buyback of shares, which, over the years, has undergone various changes. Earlier, it was taxable as capital gains in the hands of shareholders. Currently, buyback tax on distributed income is payable by the company undertaking the buyback, and shareholders are exempt from taxation. The Bill (with effect from October 1, 2024) characterises buyback as the same as dividend income. While the entire buyback consideration is taxable as dividend income at applicable rates in the hands of shareholders, the cost pertaining to shares bought-back will be construed as capital loss for the shareholder which is available for set-off against other capital gains as per the applicable provisions.
The most controversial taxation of share premiums received by privately held companies is proposed to be done away with. This amendment will simplify compliance, especially for startups and small businesses, thereby encouraging capital formation and entrepreneurial growth.
Foreign companies earning income from India have something to cheer about. The tax rate of foreign companies has been reduced to 35% from 40%, giving relief to their branch/permanent establishment operating in India. The withdrawal of the 2% equalisation levy on e-commerce transactions with foreign players is a welcome decision. The levy was introduced as an interim measure until BEPS (Pillar 1 and Pillar 2) provisions are introduced. But the ambiguity surrounding the applicability, compliance and discharge of equalisation outweighed the intended increase in tax collection, resulting in its ultimate abolition.
The Bill has brought considerable changes in terms of rationalisation and simplification of tax compliances, procedures and for reducing tax litigation. Major amongst them are reduction in TDS rates (from 5% to 2%) on various payments, reduced timelines for reassessments (from 10 years to 5 years) in specific cases involving income escaping assessment for more than Rs 50 lakh and reintroduction of tax amnesty scheme (i.e. Vivad se Vishwas).
In summary, the Bill introduces several direct tax amendments that streamline compliance, encourage investment, and broaden the tax net. These changes reflect a balanced approach to tax administration, promoting ease of doing business while ensuring robust revenue collection.
(The authors: Dinesh Kanabar is the CEO and Abhishek Mundada is partner at Dhruva Advisors. Views are personal and not necessarily those of financialexpress.com.)