Upcoming Union Budget: Enhancing Ease of Doing Business

February 1 has become one of the highly anticipated dates in India. The budget excitement is no longer limited to the corporates but even the general public which now eagerly awaits the Finance Minister’s speech anticipating the announcement of benefits for them. 

The Modi Government for the past 10 years has been introducing policies and schemes for promoting India on the global platform as the IT / ITeS destination and the upcoming manufacturing powerhouse to encourage domestic manufacturing.  Various fiscal incentives such as production-linked incentive (PLI) schemes have been announced by the Government in the past years to not only foster domestic production and exports, but to also attract foreign investments.

Numerous new initiatives specifically in respect of employment, skill development and other opportunities have been envisaged in the Union Budget of July 2024, with a capital outlay of INR 2 trillion (approx. USD 24 billion) over the next five years and allocation of over INR 3 trillion (USD 36 billion) to schemes benefiting women and girls, reflecting the government’s commitment to strengthening women’s position in the Indian economy.The Finance Ministry has also recently approved PLI scheme to the tune of INR 250 billion (USD 3 billion) for fostering the local manufacturing of electronics components including printed circuit boards (PCBs), batteries, displays and camera modules.  

Another objective of the Central Government has been to shed the image of India as a tough jurisdiction to operate. Numerous reforms have been made by the Modi Government in this regard including enactment of Jan Vishwas (amendment of provisions) Act 2023, which amended 42 Central Acts and decriminalised 183 provisions.

In continuation to this, the Finance Minister in the Union Budget 2024 has also announced the introduction of the Jan Vishwas Bill 2.0and has also encouragedthe States to advance their Business Reforms Action Plans and digitalization initiativesto foster a more favorable climate for business growth and contributing to the economic development. 

New Vivad se Vishwas Scheme, 2024, has also been announced to help settle pending tax appeals. A similar amnesty scheme was introduced in the Year 2020, which helped resulted in reducing the backlog of the pending appeals.The monetary limits for filing appeals by the Revenue before the Income Tax Appellate Tribunal, High Court and Supreme Court have been relaxed.Foreign Direct Investment rules have been proposed to be simplified. Further, reforms have been proposed for the Insolvency and Bankruptcy Code 2016 to speed up insolvency resolutions and establishment of additional tribunals to decide cases exclusively under Companies Act.

Substantial rationalization in Customs duties particularly in case of goods required to promote domestic manufacturing, like PCBA(s) for components, specified parts for manufacturing batteries, solar cells, connectors, oxygen-free copper, etc. Conditional exemptions to Basic Customs duty have also been extended till March 31, 2026, for targeted sectors like imports by textile industry, lithium-ion battery packs for EV manufacturing, etc. 

The aforementioned reforms have brought India a long way from rank 142 in 2014 to 63 rank in 2019 in the World Bank’s Doing Business Report, 2020 (last published in October 2019 before its discontinuation by the World Bank). This is a milestone achievement, which India has gained in mere 5 years, however, if India were to designate itself as the manufacturing hub for the World, then, there is scope for improvement in numerous other aspects. Recurring tax additions by Income Tax authorities and pressure to deposit additional tax demand even when the issue has been settled by the Appellate Court (and by the High Court in some instances) in case of the same taxpayer for another year suggests non-alignment between Government’s objectives and conduct by the Central Board of Direct Taxes.

Obtaining the tax refund once the issue is settled in favour of the taxpayer is another challenge. Specifically, in case of transfer pricing matters, a blanket approach is being used for all the taxpayers operating in the same industry without appreciation of facts. Though Advance Pricing Agreements is an excellent forum to resolve transfer pricing disputes, however, time and cost factors may not make it a valuable proposition for all taxpayers. 

The Union Budget unveiled in July 2024, which marked the first budget of the third term of the Modi Government was highly anticipated but received a mixed response. The budget had limited populistic measures, however, laid down the broad objectives for the next five years. The Finance Minister announced numerous reforms including expansion and relaxation of Safe Harbour rules, however, the actual implementation of the reforms would help in demonstrating the commitment of the Central Government to shed the image of a tax aggressive jurisdiction.

Hence, this Budget is important for the Government to lay down the step plan for the achievement of the broad objectives it committed to 6 months back.