Can the vote-on-account Budget 2024 be a silver lining for the Indian economy?

Finance Minister Nirmala Sitharaman remarked that there may not be any spectacular announcement during this Interim Budget 2024. However, on direct tax front, this vote on account budget can bring on the table some notable and much-needed measures to rationalise the income tax provisions. With the rapid economic expansion in India and our aspiration to become the fastest growing economy, one can always expect to have measures that at least simplify the process of tax collection.

An Individual’s Outlook

From an individual taxpayer perspective, we may hope for tax incentives under the new tax regime. While the government is nudging taxpayers to opt for the new tax regime, the new regime does not offer benefit like house rent allowance or deduction of interest on home loan. With increasing culture of hybrid work post Covid-19, it becomes important that these benefits are also extended to those opting for the new tax regime. Additionally, it is also expected that there will be a change in the limit of standard deduction, keeping pace with the inflation rates. The current legal regime provides for a standard deduction of INR 50,000 to all salaried individuals. However, this quantum was set in 2018. The increased inflation rates create a need for increase in the limit of standard deduction.

Further, increase in investments, wherein, now, approximately 17 per cent of Indian households invest in stock markets have led to capital gains tax gaining prominence. The current framework is extremely complex for a common shareholder to understand, with different provisions for holding period, different tax rates, and different parameters to compute the gains depending upon the underlying nature of capital asset. Thus, simplification of the capital gains tax regime may be a sigh of relief for the taxpayers and simultaneously a boost for the economy encouraging investments.

Boost for businesses in India

The government is actively promoting policies like the Make in India initiative, Ease of doing business, etc., which has paved the way for Indian economy to become a global giant. Tax considerations form the backbone of these initiatives. The Economic Survey 2023 (last year) highlighted that startups are exploring “reverse-flipping”, or shifting their domicile back to India, a month after it emerged that fintech unicorn PhonePe has paid withholding taxes on behalf of its investors to the tune of INR 8,000 crore (around $ 1 billion) on account of relocation.  Bringing innovation back to India or in other words, reverse flipping or “desh wapsi” has become the new trend. In order to promote reverse flip structures and bring back the Indian innovation, government may initiate reforms towards having favourable tax regime for reverse flipping.  

The Committee set-up by International Financial Services Centres Authority (IFSCA) made several suggestions on onshoring the Indian innovation to GIFT IFSC. These recommendations, particularly from a tax perspective, are a stepping stone to reverse flip offshore companies to GIFT IFSC. If the recommendations are implemented with appropriate changes introduced through Budget 2024, it can catapult GIFT IFSC into becoming a global hub for startups wanting to explore the Indian and the overseas market.  
 
A major benefit as part of the Make in India initiative is the concessional tax rate for new manufacturing companies. However, the concessional rate is available to companies commencing their business prior to March 31, 2024. In order to continue with the progress already made through Make in India initiatives, it is expected that the government should extend the period beyond March 31, 2024, for at least another five years.  

Other Expectations

Some other significant changes that taxpayers expect and may be announced through this budget include lowering down rate of tax collected at source (“TCS”) under liberalised remittance scheme (“LRS”). The government has increased the rate of TCS under LRS from 5% to 20% in financial year 2023-24 with effect from October 01, 2023. This increased rate brings with it higher compliance burdens and practical challenges, besides the cash flow concern. It is expected that the government may reduce this rate from 20%.

Dispute resolution

All substantive rights of a taxpayer become futile if they are not equipped with efficient and effective procedural rights. A major reform needed in terms of procedural change is easing the tax litigation process. The government may introduce measures to streamline the entire litigation process and address the challenge of pendency of cases particularly at the Commissioner (Appeal) level. Under the current framework, the rate of disposal of appeals is slower than the rate of filing of fresh appeals. While CBDT has proposed a roadmap in the recent Central Action Plan, to dispose of the large number of appeals pending before various Commissioner (Appeals), the process should be expedited. Considering that the government has acknowledged the problem underlying the litigation process, concrete and effective plans to address the concern is still the need of the hour.  

As a vote on account budget no spectacular changes are expected. However, some changes to rationalise the whole process of collection of tax may be welcomed. With constant policy initiatives by the government to boost the economy, this interim budget, may potentially witness, introduction of new approaches to implement the existing tax regime.

Views are personal. The authors are with INDUSLAW