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The eighth Budget of Finance Minister Nirmala Sitharaman continued to focus on ‘GYAN’ (Garib, Youth, Annadata, Nari) to maintain a consistent and coherent strategy initiated over the years in pursuing the government’s vision for Viksit Bharat.
The approach, characterised by incremental yet impactful steps, aims to create a compounding effect over time.
A new Income Tax Bill is to be tabled next week and promises tenets of simplification for both the taxpayer and the administration.
Alongside, Budget 2025 proposals introduced significant reforms to reduce the tax burden on the middle class by Rs 1 trillion, make International Financial Services Centre (IFSC) more attractive, bring in measures to reduce litigation, rationalise compliance burden and facilitate overall ease of doing business.
Key direct tax proposals include -
Personal and corporate taxes
Personal tax proposals took the limelight as the finance minister gave a shot in the arm to the new tax regime by providing a 70 per cent increase in the threshold for nil taxes.
Individuals (estimated to be 10 million) earning up to Rs 12 lakh annually will be fully exempt from paying Income Tax.
The measure is designed to reduce the tax burden on middle-income earners, thereby boosting their purchasing power and stimulating economic growth.
Benefits and amenities received by employees earning up to Rs 50,000 per annum would not be taxed as perquisites.
Also, costs covered by employers for medical treatment-related travel outside India for employees or their family members are not considered perquisites for employees earning up to Rs 2,00,000 per annum.
These thresholds will now be revised and notified by the central government.
Two house properties owned by an individual can be considered unoccupied for any reason and not just for employment or business considerations.
The annual value for such properties would be nil.
The scope of deduction on contribution and withdrawal under the old taxation regime for contributions made by a parent or guardian to the National Pension System (NPS) account of any minor child, up to two children, under the NPS-Vatsalya scheme is proposed to be expanded.
This aims to further encourage savings for retirement and financial security.
Unit-Linked Insurance Policies (ULIPs) where premium exceeds 10 per cent of the policy or which are issued after February 1, 2021, and premium exceeds Rs 250,000 are not exempt on redemption.
ULIPs are proposed to be treated as capital assets and hence, taxed similar to mutual funds.
Corporate taxes remain unchanged for domestic and foreign companies.
IFSC
IFSC is a jurisdiction that provides financial services to non-residents and residents.
In order to promote further development, following incentives have been proposed:
Sunset clause for tax concessions towards i) income earned by investment division of off-shore banking units, ii) royalty, interest income earned by non-residents on lease of aircraft, ship to IFSC units, and iii) gains on transfer of aircraft, ship by IFSC units, have been extended to March 31, 2030.
Exemption for non-residents on capital gains from equity shares and units in IFSC engaged in ship leasing business.
Exemption for IFSC units in ship leasing receiving dividends from similar units.
Income of FPIs from transferring non-deliverable forward contracts, offshore derivatives, or related income from IFSC offshore units to be exempt.
Loans between group entities, where one is a finance company/init in an IFSC as a corporate treasury center, are not treated as deemed dividends if the parent company is listed abroad, subject to specified conditions.
Insurance proceeds received from IFSC issued policies would be exempt.
Tax neutral relocation extended to retail mutual funds and ETFs in IFSC; sunset date extended to March 31, 2030.
Sunset date for exemption to Sovereign and Pension Funds for specified income extended to investments made by March 31, 2030.
Gains from capital assets by these funds are not treated as short-term.
Investment incentives
It is proposed that eligible startups incorporated before April 1, 2030, can now claim a deduction of 100 per cent of business profits for any three consecutive assessment years within a 10-year period.
This benefit was earlier available only for startups incorporated before April 1, 2025.
Alternate investment funds have received clarity that the securities held by them would continue to be classified as a ‘capital asset’, thereby avoiding any potential dispute due to taxation of the same as business income.
To promote India as a global hub for electronics system design and manufacturing a presumptive taxation scheme has been proposed for non-residents who provide technology and support services for setting up an electronics manufacturing facility or in connection with manufacturing or production of electronic goods, articles or things in India.
Irrespective of the actual profits, income of such non-residents will be deemed to be 25 per cent of the amount they receive or are due to receive and taxed as business income without set off of losses.
The presumptive scheme of tonnage taxation is now proposed to be extended to inland vessels using water transportation in the country to attract more investments in this sector.
International taxation and transfer pricing
Harmonising with the scope of business connection, it is clarified that significant economic presence will not be triggered for non-residents engaged solely in purchasing goods in India for export.
This provides clarity on taxable income when activities in India are limited and builds trust with the business community.
Transfer pricing assessments have resulted in significant litigation over the past several years for overseas groups having operations in India.
A block assessment concept has been proposed to allow the Arm’s Length Price (ALP) to be determined in one year to be applied to similar transactions in the following two years.
The option is to be availed by the taxpayer and specified conditions are to be met.
This option does not apply to search cases.
Guidelines would need to be issues for clarity on the implementation of this new way of audit.
This is a welcome move as it minimises the need for repeated assessments, supplements the APA and MAP programmes, improves predictability and potentially reduces litigation.
Simplification for reducing litigation
Court-issued stays create challenges in calculating the limitation period for these assessments.
Clarity is now proposed; the limitation period excludes time from when a stay is granted by the court until the Principal or Commissioner receives the Court order vacating it.
New lease of life for accumulated business losses of a predecessor company through amalgamations was often seen as an unfavorable outcome by the tax administration, although blessed by courts.
It is now proposed that the accumulated loss of an entity shall be carried forward for not more than eight years from the year of occurrence of the loss even following an amalgamation or business reorganization like conversion to LLP.
Search and requisition cases are already assessed under a block assessment mechanism. Changes have been proposed to bring clarity and uniformity:
Streamlining penalties and prosecutions proposals
Central government can now issue guidelines beyond March 31, 2025, for implementation of faceless scheme.
Ease in compliance
Updated returns facility has attracted nearly 9 million taxpayers who opted to correct tax returns and pay additional tax liability.
The compliance period is now extended from existing 24 months to 48 months.
The additional tax payable would be 60 per cent and 70 per cent of the aggregate tax and interest if the updated return is filed past 24 months but prior to 36 months and 48 months respectively.
However, this option is not available if reassessments are initiated and proceeded with.
To further ease of doing business and simplify compliances, TDS rates and thresholds have been rationalised.
TCS will not be applicable in the case of sale of specific goods wherein TDS also applies.
Increased TDS/TCS rates for non-filers are omitted to ease capital flow and reduce compliance burden, but higher rates remain for non-PAN cases.
Other proposals
Specified Charitable trusts can now obtain registration up to 10 years from the current 5 years, subject to conditions. Incomplete applications or errors will not result in automatic cancellation; another opportunity will be provided.
Crypto assets like NFTs are included in the definition of virtual digital assets and transactions in such assets are required to be reported in a prescribed statement.
To sum up, the Budget presents a progressive vision for stimulating development across the powerful engines of agriculture, MSME, investment and exports from various standpoints.
However, few expectations of providing sops and timeline extensions to the manufacturing sector or certain growing sectors like green energy, artificial intelligence, space exploration and other technology and innovation areas like Global Capability Centers were untouched.
Additionally, a prescribed framework for implementing Pillar Two is conspicuous by its absence.
Hopefully, further proposals for improvements in tax litigation administration including speedy disposal of appeals, procedural enhancement to current faceless assessments, enhanced taxpayer-focused tax demand recovery mechanisms, rationalisation of alternative dispute resolution options, further decriminalisation of withholding tax provisions will find its way in the new bill on the anvil.
By Pallavi Singhal, Subject Matter Expert
