Budget 2024: What's On Indians' Direct Tax Wishlist (2024)

Budget 2024Budget 2024: What's On Indians' Direct Tax Wishlist

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Budget 2024: What's On Indians' Direct Tax Wishlist (3)

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The Union Budget to the Aam Aadmi is the most anticipated time of the year for announcements on income tax cuts, more deductions and exemptions.

Direct taxes have become more crucial given that they were a healthy revenue head for the Indian government in the current fiscal. Hence, precise forecasting is crucial to help narrow the fiscal deficit while leaving room for more spending in FY25. Industry experts are keen that the upcoming Budget 2024 be more focused on policy continuity—from an extension of the concessional tax regime to rationalisation of capital gains tax.

NDTV Profit rounds up some of the top direct tax suggestions proposed by industry experts ahead of the big day on Feb. 1:

Simplify Tax Deducted At Source

Tax deducted at source can be simplified by having only two or three categories of payments and a small negative list of payments, which will not be liable to TDS, according to Chandrajit Banerjee, director general at the Confederation of Indian Industry.

"Currently, there are 31 sections dealing with different types of payments to residents where the TDS rates vary from 0.1% to 30%, leading to complex provisions," he said.

CII's suggestion for a 'negative list' of payments includes payments to senior citizens, exempting income payments, payments to registered charities, existing payees covered by Section 196 (government, RBI, statutory corporations and mutual funds), etc.

"This will considerably ease the compliance burden on the taxpayers, simplify the domestic TDS regime, and avoid litigation on characterisation disputes," CII noted in its pre-budget recommendations.

Extend Concessional Tax Regime

Section 115BAB of the Income Tax Act, 1961, was introduced to provide incentives to newly established manufacturing companies, registered on or after Oct. 1, 2019, and commenced manufacturing before March 31, 2023. These companies would enjoy a concessional tax rate of 15%, subject to certain conditions. This date was later extended to March 31, 2024.

"...an added opportunity has also arisen in terms of boardrooms globally and seriously discussing a 'China +1' strategy, with India at the forefront of it. There couldn't have been (a) better opportune time for India to enhance its manufacturing capabilities, and if India wants to attract global manufacturers and accelerate its objective of becoming (the) third largest economy by 2030, the initiative must be extended for at least five years," said Abhishek Mundada, a partner at Dhruva Advisors.

Increase Standard Deduction

A rise in inflation in FY24 has also left households and salaried income taxpayers yearning for more cuts. A standard deduction of Rs 50,000 was originally introduced instead of the exemption of transport allowance and reimbursement of miscellaneous medical expenses. It is also allowed under the new tax regime.

There is space for an increase in the standard deduction from salary income, said Deepashree Shetty, tax and regulatory services partner at BDO India.

"Considering the inflation, we can expect a raise in the amount of standard deduction that can benefit salaried individuals in the higher slabs," she said.

Exemptions Under 80C, 80D

The 80C and 80D provisions allow for certain investments and expenses to be tax exempted. The new tax regime, however, advocates a much lower rate without many of the usual deductions.

The industry has been hoping for a rise in the deduction limit and for allowing a few exemptions in the new tax regime too, in order to make it sweeter and encourage more adoption.

A separate and higher deduction for housing loan principal repayment would help boost housing sales, according to Badal Yagnik, chief executive officer at Colliers India. It is currently capped at Rs 1,50,000 under Section 80C.

"The new tax regime provides favourable results for taxpayers up to an income level of Rs 7,50,000. To increase acceptance for NTR, the government should allow deductions under this regime for employees’ contributions to PF (under Section 80C) and employees' contributions to NPS (under Section 80CCD). This would also promote the habit of building a retirement corpus for individuals too," according to Preeti Sharma, who is also a tax partner at BDO India.

Rationalise Capital Gains Tax Structure

CII's proposals for the upcoming budget hint at bringing about simplicity and rationalisation of the capital gains tax regime.

"At present, there is no consistency in tax rates or holding periods for different types of instruments falling within the same asset class. Even the indexation benefit differs in different situations. The tax rates also differ for residents and non-residents," the industry body said.

It also added that buyback tax should be exempted in the case of listed shares, wherein buyback is under the ‘open market through stock exchange’ method. "Consequentially, exemption under Section 10(34A) should also not be applicable, and the transactions should continue to be subject to capital gains or business income tax in the hands of the shareholders," it said.

Bringing parity between long-term capital gains tax on listed and unlisted equities was also suggested by the industry body, the Federation of Indian Chambers of Commerce and Industry. The move would increase the attractiveness for domestic and international investors towards start-up and unlisted equity investment in India and also offer better liquidity to employees with ESOPs in unlisted entities, it said.

Defer Tax On ESOPs For All Employees

Deferral of tax on ESOPs is applicable in cases where the ESOP shares or sweat equity shares are allotted directly or indirectly by a startup eligible under Section 80IAC. (Section 80IAC provides a 100% tax exemption for startups recognised by the DPIIT). This was intended to reduce the TDS burden when the ESOP is exercised.

"...(The) circumstance of the liquidity crunch may not be restricted to the case of startups but may extend to other taxpayers as well. It is recommended that the benefit of deferral of tax be extended for ESOPs granted by all employers," FICCI noted in their pre-budget suggestions.

Clarify Pricing Of Corporate Guarantees

Intercompany corporate guarantee fees in India range from 0% (no charge) to 0.5% of the amount utilised under the CG cover, based on a variety of underlying facts, according to Lalit Attal, a tax partner from BDO India.

He explained that the income tax appellate tribunal has so far held pricing at about 0.5% in disputed cases in many cases. However, he added that the central board of direct taxes (the government's direct tax arm) devised a price of 1.75% or 2% under the safe harbour regime (Rule 10TD(2)) and agreed to a price in the range of 0.40% to 0.60% under the Advance Pricing Agreement framework.

Picking up from the recently approved GST levy on corporate guarantees, the pricing for GST was decided at 1% or the actual amount charged, whichever is higher in the context of related-party transactions.

"A plain reading of the issue itself depicts the need for harmony between the laws and bridging the wide gap in the pricing of CG at multiple forums within the government body/jurisprudence," Attal added.

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As an expert in tax and fiscal matters, my extensive knowledge in this field allows me to critically analyze and provide insights into the direct tax suggestions proposed by industry experts for the upcoming Union Budget 2024. I have a deep understanding of the intricate details of tax laws, fiscal policies, and their implications on the economy. Now, let's delve into the concepts mentioned in the article:

  1. Simplify Tax Deducted At Source (TDS): The article suggests simplifying TDS by having only two or three categories of payments and a small negative list of payments not liable to TDS. The proposal includes creating a 'negative list' of payments exempt from TDS, such as payments to senior citizens, income payments exempting registered charities, and more. This simplification aims to reduce compliance burden, streamline the TDS regime, and prevent litigation on characterisation disputes.

  2. Extend Concessional Tax Regime: Section 115BAB of the Income Tax Act, 1961, introduced a concessional tax rate of 15% for newly established manufacturing companies registered on or after Oct. 1, 2019, and commencing manufacturing before March 31, 2023. The suggestion is to extend this initiative for at least five years, aligning with the global 'China +1' strategy. This extension is seen as an opportunity for India to enhance its manufacturing capabilities and attract global manufacturers.

  3. Increase Standard Deduction: The article discusses the possibility of raising the standard deduction from salary income, considering the rise in inflation in FY24. A standard deduction of Rs 50,000 was initially introduced to replace the exemption of transport allowance and reimbursement of miscellaneous medical expenses. The potential increase aims to benefit salaried individuals in higher income slabs.

  4. Exemptions Under 80C, 80D: The 80C and 80D provisions allow tax exemptions for certain investments and expenses. The industry hopes for an increase in the deduction limit and exemptions in the new tax regime to encourage adoption. Suggestions include a higher deduction for housing loan principal repayment and allowing deductions under the new tax regime for employees' contributions to PF and NPS, promoting retirement savings.

  5. Rationalise Capital Gains Tax Structure: Recommendations from CII focus on simplifying and rationalizing the capital gains tax regime. Calls for consistency in tax rates and holding periods for different instruments within the same asset class are made. Additionally, the proposal suggests exempting buyback tax for listed shares and bringing parity between long-term capital gains tax on listed and unlisted equities to attract investors towards start-ups and unlisted equity investments.

  6. Defer Tax On ESOPs For All Employees: The suggestion is to extend the deferral of tax on Employee Stock Option Plans (ESOPs) for all employees, not just startups. This is recommended due to a perceived liquidity crunch that may extend beyond startups to other taxpayers.

  7. Clarify Pricing Of Corporate Guarantees: The article addresses the need for clarity and harmony in determining intercompany corporate guarantee fees. Discrepancies exist between different forums within the government body/jurisprudence, and there's a call for bridging the gap in pricing for Corporate Guarantees.

In summary, the proposed suggestions for Budget 2024 aim to simplify tax procedures, encourage economic growth, and make the tax regime more taxpayer-friendly by addressing various aspects of direct taxation in India.

Budget 2024: What's On Indians' Direct Tax Wishlist (2024)

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