Budget 2024: Here’s what the govt may do regarding the issue of direct taxation

Despite a slowdown in the global economy and accompanying uncertainties, India is poised for a significant economic expansion backed by a politically stable environment. The International Monetary Fund (‘IMF’) recently upgraded its projections for India, affirming that while the world economy is expected to grow at no more than 3%, India is expected to see one of the strongest growth rates of 6.3% in 2024. 

In such a scenario, while there are expectations from Union Budget 2024, it is widely believed that being an interim Budget, there may not be any policy major proposals and the government would avoid taking any populist measures and focus more on Make in India, creating job opportunities and taking measures to sustain a strong and stable economy.

The current direct tax policy landscape in India is constantly evolving, driven by the government's efforts to reform existing systems and processes with a focus on improving efficiency and transparency. Significant measures adopted by the government, such as reduction in corporate tax rates, introduction of concessional tax regimes and elimination of the minimum alternate tax regime, have attracted investment and fostered a favorable business-friendly tax climate. 

Yet the tax policy landscape remains complex and challenging due to the impact of various judicial decisions and legislative amendments, which in turn present significant opportunities for a more taxpayer friendly and investment-attractive system. 

Some of the measures which tax policy administration could consider are:

1.    Extending concessional corporate tax rate for new manufacturing companies 

The existing concessional corporate tax rate of 15% is available to new domestic manufacturing companies under section 115BAB, which commence manufacturing operations by 31 March 2024. 

Recognising the substantial role this measure has played in advancing economic objectives and attracting foreign investments, the tax policy administration may consider extending the sunset clause of this regime for an additional two years. 

Extending the concessional tax rate would provide an opportunity for investors currently in the process of setting up or considering India as a potential investment destination.  As global supply chains continue to disrupt and reallocate around the globe, India could potentially capture some of the benefit of these disruptions by extending the sunset period. 

2.    Settlement scheme to resolve past tax disputes arising from differential treaty interpretations

Foreign investors have often faced tax disputes arising from differences in treaty interpretations. Adding to this uncertainty is the recent decision by the Supreme Court in the case of Nestle SA which has wide ramifications on treaty interpretation and various treaty benefits that taxpayers have historically availed relying upon favourable high court rulings.

Recognising the need to provide certainty and resolution for cases where the treaty benefit has already been claimed, the tax policy administration should consider establishing guidelines under a settlement scheme. Such schemes could provide one-time window for taxpayers to make voluntary tax payments of differential taxes, without interest or penalty. This initiative would offer relief and certainty to taxpayers, while also facilitating efficient collection of taxes from the tax administration’s perspective. It would also reduce the burden on tax administration and on courts from addressing applications and writs for abatement/waiver of interest, penalties that several taxpayers typically resort to in these circumstances.

3.    Incentivising exports through the tax holiday regime

To stimulate exports, the tax policy administration may consider reinstating tax holiday or exemption for income generated from export of both goods and services. This measure would attract foreign exchange and align with the government’s ‘Make in India’ campaign, encouraging MNCs to establish export hubs in India as well as to augment the country’s export growth that recently contracted by 7.7% (in GDP terms) in Q1 of FY24, after consistently growing in double digits for eight consecutive quarters earlier.

4.    Promoting R&D through weighted deductions 

Substantial investment in R&D, both in strengthening existing institutions and in establishing new research institutions, is essential to reduce reliance on foreign technology and innovations.

Given the focus on promoting manufacturing, investing in R&D is crucial to facilitate development 
of advanced manufacturing processes and technologies. 

The government should encourage technological innovation and promote competition through increased incentives and tax concessions for R&D. It may also consider restoring weighted deductions for R&D expenditure and donations to scientific research institutions that were available in the past. 

The government has introduced several policy initiatives, such as Atal Innovation Mission, and R&D policy in the pharma sector to encourage R&D. Introduction of tax incentives, coupled with these policy measures, can effectively support the broader objective of the Make in India campaign. India can further foster innovation and position itself as a hub for cutting-edge R&D activities especially for Global Capability Centres.

While the Finance Minister may have stated that there will be “no spectacular announcement” in this Budget, yet emphasis on measures that foster economic growth, that aim to reduce tax litigation, equitable tax policies and promoting ease of compliance, would be helpful. 

Views are personal. The authors are with Deloitte.