By Ganesh Raj

Finance Minister’s seventh budget is visionary and path breaking on many fronts. It maintains the fiscal consolidation path with 4.9% fiscal deficit for FY25, lower than 5.1% estimated in the interim budget, and sets a target of 4.5% for FY26. It also keeps the promise of capex spend, with a provision of 3.4% of GDP for the purpose. The strong direct tax revenues have been a key factor that enabled this balance of capex with fiscal prudence.

On direct tax side, the budget stands out for focusing on tax simplification. Many simmering issues that the taxpayers were facing have now been addressed, sending a clear message that the government remains committed to providing tax certainty and reduce litigation.

Rationalisation of withholding taxes has been an important ask from taxpayers. The budget lowers the Tax Deducted at Source (TDS) rates for many transactions, which should ease the cash flow for taxpayers while meeting the government’s objective of tracking transactions.  For instance, it is proposed to lower the TDS rates from 5% to 2% in case of payments related to insurance commission (person other than company), life insurance policy, commission or brokerage and rent paid by individual or HUF. E-commerce participant (ECP) had to earlier bear a TDS rate of 1% which was not only higher than that applicable for offline transactions but was a squeeze on the thin margins of many ECPs. The budget now brings parity in the TDS rates at 0.1%, providing much relief to the ECPs on payment by E-Commerce operators.  Payments on account of repurchase of units by Mutual Fund or Unit Trust of India has been excluded from current TDS deduction liability of 20%.

Another significant relief is that earlier Tax Collected at Source (TCS) paid by salaried employees was not considered while computing his TDS liability u/s 192 of Income Tax Act and the employee had to claim a refund for the TCS paid, which added to the compliance burden. The budget now allows credit of TCS paid while computing TDS liability on salary income.

With more than 5 lakh litigation cases stuck at CIT (Appeals) level, the pendency of disputes has been a serious concern. The budget proposes to introduce a Direct Tax Vivad se Vishwas Scheme 2024 as a dispute settlement mechanism. The earlier VSV scheme had helped settle about 1.3 lakh cases, despite pandemic related constraints.  It is hoped that the new Scheme will encourage settlement of many more cases.

Simplification of capital gains taxation has been a long standing ask of taxpayers.  Short term gains on listed financial assets will be taxed at 20%, with all other financial and non-financial assets taxed at the applicable tax rate. Long term gains on all financial and non-financial assets (except unlisted debentures and unlisted bonds, which will be taxed at applicable rates) will attract a 12.5% tax. While the rates rationalisation will mean higher tax burden for some, the lower and middle-income classes will have some respite due to increase in the limit of exemption of long term capital gains from Rs 1 lakh to Rs 1.25 lakh per year.

The holding periods are now proposed to be only two.  For all listed securities, the holding period is proposed to be 12 months and for all other assets, it shall be 24 months.  In a positive move for REITs and InVITs, the units of listed business trust will now be treated at par with listed equity shares at 12 months instead of earlier 36 months. The holding period for bonds, debentures, gold will reduce from 36 months to 24 months. For unlisted shares and immovable property it shall remain at 24 months.

Income from buy-back of shares by companies was getting taxed in the hands of the company at 20%.  The sum paid by a domestic company for buy back of its own shares will now be taxed in the hands of recipient investor as dividend, with the cost of such shares to be treated as a capital loss to the investor which can be carried forward for set off against capital gains from sale of shares

The current procedure for assessment or reassessment of income is governed by multiple sections which specify different procedural requirements for assessment or reassessment of income. The budget proposes to simplify these provisions. Going forward, reopening an assessment beyond three years from the end of the assessment year will be possible only if the escaped income is Rs 50 lakh or more, up to a maximum period of five years from the end of the assessment year. Even in search cases, a time limit of six years before the year of search, as against the existing time limit of ten years, is proposed.  This will help reduce tax-uncertainty and disputes.

To further nudge individual taxpayers towards the new, simplified income tax regime the budget proposes to increase the standard deduction to salaried individuals and pensioners from Rs 50,000 to Rs 75,000 under the new tax regime. The higher deduction, together with the rationalisation of the tax slabs, would put higher additional disposable income of Rs 17,500 in the hands of a taxpayer, which should also contribute to increasing consumption.

There are other welcome announcements such as removal of 2% equalization levy on consideration received/ receivable by an e-commerce operator from e-commerce supply or services, lowering of the tax rate on foreign companies from 40% to 35% and abolishment of angel tax. All these should give a positive signal to the foreign investors about India’s intent to provide a benign tax regime.

Finance Minister has assured a comprehensive review of the Income-tax Act, 1961 to make the law concise, simple and easy to understand.  Continued focus on tax simplification is the right way forward and will further improve tax buoyancy.

Ganesh Raj, Partner and National Leader, Business Tax Services, EY India.

Views are personal and do not represent the stand of this publication.