Union Budget 2024-25 – Corporate Tax Wishlist
With an aim of fostering a more conductive environment for business growth and investment, the government is expected to introduce measures that streamlines tax compliance and reduce the overall tax burden on corporations. These changes are likely to focus on enhancing ease of doing business, encouraging foreign direct investment and supporting micro, small and medium enterprises. Some of the significant changes which are likely to be proposed vide Union Budget 2024-25 pertaining to corporate tax landscape in India are listed below:
1. Extension of Lower Tax Rate of 15% for New Manufacturing Domestic Companies under Section 115BAB to be extended to 31 March 2027
As per the provisions of Section 115BAB of the Income-tax Act, 1961 (IT Act), new domestic manufacturing companies engaged in the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by them and incorporated on or after 1 October 2019, have an option to pay tax at a lower effective rate of 17.16% (i.e. (15% basic tax + 10% surcharge) + 4% cess)} subject to fulfillment of specified conditions.
Companies opting for this section would not be required to pay Minimum Alternate Tax (MAT) but are not eligible to claim majority of the deductions available to other business assessees. One of the conditions prescribed under this section is that the companies must commence their production on or before 31 March 2024. India is emerging as the preferred manufacturing destination as most global companies are looking at broad basing their manufacturing locations in view of the geo-political developments. In recent times, several global companies in electronics, auto and engineering sectors have announced mega investment plans for India for manufacturing projects. Most manufacturing projects have long gestation periods ranging from 2 year to 3 years.
Therefore, it is widely expected that the sunset date for commencing manufacturing activity would be extended by 3 years to 31 March 2027 so as to boost the new manufacturing companies
2. New Concessional Tax Regime for Service sector
Section 115BAB of the IT Act has offered concessional rate of tax to domestic manufacturing companies so as to boost the economic and manufacturing activities in India. However, the present tax laws do not offer any concessional tax regime for the services sector despite high employment propensity. Also, the prevailing tax holiday u/s 10AA has also expired for units in Special Economic Zones
Hence, it is expected that new concessional tax regime @ 20% (plus surcharge and cess) should be provided to the service sector.
3. Deduction in respect of Employee Costs – Section 80JJAA
Under section 80JJAA of the IT Act, assessees can claim a deduction of 30% of employee cost incurred on hiring new employees for 3 assessment years, provided the conditions mentioned therein are satisfied. One of the prescribed conditions is that the total emoluments paid to new employees are upto Rs. 25,000 per month. Such limit has not been revised since its introduction in Finance Act 2016.
Given our large workforce and need for massive employment generation, it is necessary to incentivize businesses that generate employment for the lower and mid-level wage and salary levels. It is also widely known that increased employment has a multiplier effect on the economic growth.
Considering the above and the inflation in the last 8 years, it would be a great initiative to increase threshold limit of emoluments from the present Rs.25,000 per month to Rs. 50,000 per month for the purpose of deduction under section 80JJAA.
4. Tax on Dividends Distributed by Domestic Companies to be Restricted to 20%
Under the existing provisions of the IT Act, there is a double taxation of income in case of companies – firstly the companies are required to pay corporate tax and then the shareholders pay tax on the dividends. In case of resident individual shareholders, the tax on dividends can be as high as 35.88%. On the other hand, non-residents are liable to tax on dividends @ 20% (plus surcharge and cess) which may further be lowered by Double Tax Avoidance Agreements to 5%-15%.
In order to reduce the cascading effect of double taxation, it is expected that the maximum tax on dividends distributed by domestic companies in case of resident shareholders is limited to 20% (plus surcharge and cess).
5. Reduction in Tax Rate for Partnership Firms and LLPs
Small and medium enterprises generally prefer partnership firms or LLPs as compared to companies due to ease of formation, reduced statutory obligations, lesser compliances, etc. However, the taxation structure is higher in case of partnership firms and LLPs as compared to corporates where the rates of tax generally range from 17.16% to 25.17% (including the applicable surcharge and cess) under the new optional corporate tax regime and new manufacturing companies tax regime.
Partnership firms and LLPs are taxed at a flat rate of 30% (plus surcharge and cess) which may effectively result in a rate as high as 34.944%. At the same time, there is no tax on distribution of profits in case of partnership firms and LLPs whereas in case of companies, dividends are taxed in the hands of the shareholders. There is a need to reduce the disparity with the corporates and to incentivize the small and medium sized businesses. Thus, it is expected that the tax rate for firms and LLPs would be reduced to 25% (plus surcharge and cess).
6. Deduction of expenditure incurred on Corporate Social Responsibility (CSR) required under section 135 of the Companies Act
Under the existing provisions of the Income Tax Act, 1961 (‘IT’ Act’), Explanation 2 to section 37(1) explicitly disallows expenditures incurred by companies on activities relating to corporate social responsibility (CSR) as referred to in section 135 of the Companies Act 2013. The company law regulations impose statutory obligation on certain companies (such as companies having average annual profits of more than Rs. 5 crores) to spend at least 2% of the average net profits of company made during the 3 immediately preceding financial years in India on CSR activities. This provision has gone a long way in improving the socio-economic situation and upliftment of the lower strata of the society and is a statutory obligation.
In view of the above, there is an expectation that CSR expenses should be allowed as tax deduction and for this purpose, omit Explanation 2 to section 37(1) of the IT Act.
7. Scope of Safe Harbour Regulations for Transfer Pricing to be expanded to include more Industries
The transfer pricing regulations have resulted in vast number of tax disputes and is one of the uncertainties companies having global operations are concerned about. With the objective to reduce litigation pertaining to international transactions conducted between Associated Enterprises, the income tax authorities, in 2015 had introduced the Safe Harbour Regulations for the purpose of determining arm’s length price. Presently, the scope of such regulations is limited to very few sectors and industries such as IT industry, back-office services and auto sector and have greatly reduced disputes. Due to its ease of applicability and acceptance from Indian Revenue Authorities, more industries should be brought within the purview of these rules.
Hence, to ensure certainty for the taxpayers and reduce litigation with tax authorities, the scope of Safe Harbour Regulations for Transfer Pricing should be expanded to include more industries and sectors such as electronics, metallurgical industries, Gems and Jewllery, engineering industries and distribution companies.
8. Extension of sunset provision in respect of specified business u/s 80-IAC
As per the provision of section 80-IAC of the IT Act, an Undertaking being an eligible start-up which is engaged in the business of innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation can claim deduction of an amount equal to 100% of the profits and gains derived from such business for 3 consecutive assessment years out of first 10 years.
Further the section specifically defines the term “eligible start-up” as a company or LLP which cumulatively fulfils the following:
i. The total turnover of the business should not exceed Rs. 1 billion in the previous year in which deduction is claimed.
ii. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government.
iii. It must be incorporated between 1 April 2016 to 31 March 2024.
India has become home to several startups due to exponential economic growth and business friendly fiscal policies. As a result of the same, the number of recognised start-ups has increased from 452 in 2016 to more than 98,000 in 2023.
In order to continue incentivizing and encouraging more entrepreneurs, it can reasonably be expected that the Central Government may propose to extend the sunset date of incorporation from 31st March 2024 to 31st March 2026.
9. Tax on Buy-back of shares under section 115QA be rationalised for listed companies
As per the provisions of section 115QA of the IT Act, while doing buy-back of shares, a domestic company is liable to pay tax on the distributed income (i.e. consideration paid by the company on buy-back as reduced by the amount received by the company at the time of issue of shares). These provisions were made applicable even to listed companies w.e.f. 5th July 2019.
Listed shares are transacted frequently and the shareholder transferring the said shares is liable to pay tax under the head capital gains on the value of appreciation each time a transfer takes place. Hence, the difference between the buy-back price and purchase price of such shares is the real income in the hands of the shareholder. However, buyback tax is levied on the entire difference between the buy-back price and the issue price which conveniently ignores the intermediary transactions and tax thereon paid by the shareholders who have transacted the shares between the date of issue and the date of buyback. Thus, this results into double taxation on the same income.
Hence, akin to tax on dividend, it is expected to delete section 115QA and section 10(34A) and tax the gain resulting on buyback directly in the hands of the respective shareholders whose shares are acquired under the buyback based on the buyback price and the cost of acquisition of shares for such shareholders.
10. Rationalisation of TDS rates for start-ups, small businesses
Certain sections provide a nominal TDS rate (for instance, Section 194C – applicable for contracts imposes a TDS rate @ 1%/2% depending upon the nature of tax deductee whereas 194H- applicable for commissions imposes a TDS rate of 5%) whereas the TDS rates in certain other sections (Section 194J – applicable for Professional Services) is 10%. This rate of TDS effectively means net profit margin of 30% to 40% of the turnover, which results in excessive tax deduction.
Subjecting small businesses and start-ups to withholding requirements imposes restriction on their liquidity which is a vital factor for functioning of the business operations and creates working capital issues. Thus, it is expected that the TDS rates will be rationalized and reduced from 10% to 5% under section 194J.
11. Disallowance for delay in payments to Micro or Small Enterprises u/s 43B(h) may be restricted to delays beyond 90 days
The Finance Act, 2023 has amended section 43B of the IT Act with respect to the payment made to micro or small enterprises registered under MSMED Act and sub-clause (h) inserted therein. In accordance with the provision of section 43B(h) of Income Tax, 1961, if an amount payable to micro or small enterprises (registered under MSMED Act) remains outstanding beyond the period (15 days or 45 days, as applicable) specified in section 15 of MSMED Act, by the buyer, such amount is disallowed in the year of delay. However, the buyer can claim deduction in the year in which liability is actually paid under section 43B(h) of the IT Act, 1961.
Based on the current provisions, the entire amount payable to such micro or small enterprises is disallowable if it is not paid within the aforesaid timeline and is allowable in the year of payment. This provision has received mixed response as several large enterprises are reluctant to deal with micro or small enterprises particularly in businesses the credit period is much longer. As such, to achieve a balance, the disallowance may be restricted to those cases where the payments is delayed beyond a period of 90 days. This will also reduce administrative burden for the businesses.
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