Budget 2024: Reverse India's 'tax aggressive' image

After the restrained excitement from the interim budget which barely made any mark on the populistic measures, India Inc. awaits July 23, 2024, with bated breath hoping for landmark announcements. Modi Government will be presenting its first budget from its third consecutive term, and it is expected that the focus would be on policies addressing comprehensive economic reforms which will set the course of growth for the next five years.

The Government in past decade has been advocating its vision of ‘Atmanirbhar’ (self-reliant) Bharat and has been significantly incentivising domestic manufacturing to strengthen its position as a credible destination for global investors looking to implement a “China plus” strategy. With this background, the decision of the Indian Government to not extend the concessional tax regime for newly set up manufacturing companies was a major setback. The industry expects the Government will re-introduce the concessional tax regime for manufacturing entities.

In the Interim Budget (February 2024), the Government rebranded the earlier slogan ‘Jai Jawan Jai Kisan’ (which was later supplemented by ‘Jai Vigyan’) to ‘Jai Jawan, Jai Kisan, Jai Vigyan, Jai Anusandhan’ (hail the Soldier, hail the Farmer, hail Science and hail Research), thereby emphasising the importance of innovation as the foundation of development. Concessional tax regime for newly set-up R&D hubs will not only encourage industrial groups to establish dedicated R&D entities but also contribute to India's goal of becoming a global innovation hub.

Another key expectation of the industry is streamlining of capital gains. The current structure is a complex web of tax rates for different asset classes and different holding periods. Streamlining of capital gains tax rates would not only encourage compliance on behalf of taxpayers but also suppress disputes between the Indian Tax Authorities (ITA) and taxpayers.

In the Finance Act 2016, India had introduced concessional tax rate of 10% on gross royalty income from patents developed in India by eligible taxpayers. The expectation in this regard is extension of concessional tax rate to the sale of patented products manufactured in India as well, which can further promote "Make in India" and attract manufacturing investments.

India has been deemed as a tax aggressive jurisdiction at the Global platform and the Government of India has been promoting alternate dispute resolution mechanisms, such as Advance Pricing Agreements and Safe Harbour Rules, to reduce litigation and provide tax certainty in relation to transfer pricing disputes. Safe Harbour Rules have seen limited response on account of strict functional characterisation and transaction thresholds. Representations have been made by taxpayers and Nasscom for lighter taxation environment to support tech industry by raising the eligibility threshold and relaxations on the functional characterisation. Amendment in this regard will be a welcome change by the industry which is still facing disputes on account of functional recharacterisation and comparability related disputes with the ITA.

India is an active member of OECD’s Inclusive Framework and has been advocating against the shifting of profits to low-tax jurisdictions. Many countries have already incorporated the OECD Pillar 2-GloBE rules in their domestic legislation and several countries are amending their domestic tax law to prepare for the Global Minimum Tax (under Pillar 2). It is likely that the Indian Government would also introduce the OECD Pillar 2-GloBE rules in the domestic law in the upcoming budget.

Budget 2024 has become a wishlist for taxpayers in India. ‘Wants are unlimited but resources are limited, hence, the need for optimum utilisation of available resources.’ This concept of economics is going to be the guiding light for the Finance Minister in this budget. The expectation from the new Government is to carry forward the agenda of structural reforms, policy announcements and tax amendments. With the expectations of taxpayers, and its commitment towards fiscal consolidation, the Government is faced with a tough choice between populist measures (welfare schemes) and CAPEX investments. However, there is still optimism in the air and taxpayers are hopeful that the upcoming budget will have something for everyone.

(Aayush Nagpal is Partner, Shardul Amarchand Mangaldas & Co)

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