The budget has tax changes galore but mostly for the better

What were not widely expected, however, were the significant taxation changes proposed in the Finance Bill 2024. The fact that the memorandum explaining these provisions runs into 114 pages says a lot. 

As finance minister Nirmala Sitharaman said in her speech, she intends to overhaul the provisions of the Income Tax Act, 1961 with a view to making the Act reader-friendly and less complicated.

On three material aspects, she has made provisions in this Finance Bill itself. These deal with the taxation of charities, overhauling of tax deducted at source (TDS) provisions, and the taxation of capital gains.

Also read: Simplification of tax regimes is the focus of the budget: finance ministry officials

She also announced that there would be a review of other provisions over the next six months, and, therefore, it is quite likely that the next budget will once again see significant tax-related changes.

The changes proposed to direct tax laws in this budget are quite interesting and need to be examined with a fine-tooth comb. Let's begin with the provisions relating to the taxation of capital gains, as those have been very significant.

The long-term capital gains tax rate for financial assets is now 12.5% instead of 10%, and the short-term capital gains tax has been increased from 15% to 20%. In addition, the distinction between tax rates for residents and non-residents has been done away with.

The earlier situation, where the capital gains tax liability could be halved if one became a non-resident, is now no longer possible. This rationalization of provisions also means that the tax payable on unlisted securities by non-resident investors, like private equity investors, will go up from 10% to 12.5%.

While this increase may not have been expected, given the steep increase in share prices and intent of the government to curb stock-market exuberance, it is quite understandable.

Further, the holding period for non-financial assets like real estate to be categorized as long-term has been reduced from three years to two years.

A not-so-welcome provision is the removal of the cost-of-indexation benefit available on non-financial assets. This benefit essentially took care of inflation and ensured that the gains that were taxed were real gains and not gains arising merely from inflation. 

Also read: Taxes increased because…: Finance Minister Nirmala Sitharaman opens up on Budget 2024

For real estate gains, the indexation removal applies after a cutoff date and the exemption from taxation continues if the gains from a sale are reinvested into another house.

There was a significant demand from Indian industry for the rationalization of TDS provisions. The finance minister has done well to take heed. The rates of withholding taxes have been reduced and rationalized.

This ought to take away a significant cause for litigation, as one had to interpret the provisions to determine what was the applicable rate of tax. After all, a person withholding taxes is merely acting as an agent of the government to collect taxes and one should not face litigation merely because of an interpretation made of the tax rate.

The changes relating to the reassessment of income are welcome. It will now be possible to reassess income after an assessment is completed within five years, instead of the current time limit of 10 years. This will reduce the uncertainty attached to a completed assessment.

Another significant amendment is the abolition of ‘angel tax.’ This provision had created a slew of litigation. A number of baby steps were taken to ease the rigours of its provisions, but what has now been proposed is complete abolition, which is welcome and should help drive investments in startups.

Another impactful proposal involves the buyback tax. This was paid by the company when it bought back its own shares. The industry had long demanded that rather than the company paying buyback tax, it should be left to the individual recipient of the proceeds to pay their taxes.

While the demand for a change has been met, it is not in the form and shape that industry wanted. Industry had wanted the buyback to be classified as a capital gain in the hands of the recipient.

Also read: Confused whether capital gains tax will be short term or long term? Here is the guide across asset classes

Instead, buyback proceeds are now proposed to be taxed as dividend income in the hands of the recipient on the premise that the buyback represents a distribution of profits accumulated by a company, which otherwise would have been distributed by way of dividends.

The abolition of the 2% equalization levy is also welcome and is a precursor to the introduction of OECD recommendations into domestic law. There are several other amendments, and an analysis of the fine print will continue over time.

Overall, the provisions are well thought-out. They will promote simplification and ease litigation.

The author is chief executive officer of Dhruva Advisors LLP.