The Finance Minister, as part of the Union Budget 2024-25, has announced a number of direct tax and indirect tax proposals/ amendments. Below is a high-level summary of key direct and indirect tax amendments/ proposals introduced by the Finance Bill, 2024 (“Finance Bill”):

A.     DIRECT TAX 

1.     Rationalization of the capital gains tax regime

i.      The capital gains tax regime in India has been a fairly complicated one. The applicable capital gains tax rate on a transfer of a capital asset was dependent upon various factors like period of holding, nature of the asset, tax residency of the transferor etc. As an example, depending upon the nature of the capital asset, it qualified as a long-term capital asset if it was held for a period exceeding 12 months, 24 months or 36 months, as the case may be. Similarly, while the long-term capital gains tax rate arising to a non-resident transferor on transfer of unlisted equity shares of an Indian company was 10% (as increased by applicable surcharge and cess), similar gains were taxable in the hands of an Indian tax resident at the rate of 20% (as increased by applicable surcharge and cess). Accordingly, certain amendments have been proposed to simplify the existing capital gains tax regime.

ii.    Period of holding

The Finance Bill proposes to amend section 2(42A) of the Income-Tax Act, 1961 (“IT Act”)

iii.    Rate of tax

iv.    Discontinuation of indexation benefit

Second proviso to section 48 of the IT Act provides for indexation benefit, while calculating the cost of acquisition of certain long-term capital assets like immovable property, gold and certain other unlisted assets, for the purposes of computation of taxable capital gains.

v.     Gains arising from transfer of unlisted debentures and bonds

Currently section 50AA of the IT Act provided that any gains arising from transfer of a unit of a Specified Mutual Fund or a Market Linked Debenture was taxable as short-term capital gains. The Finance Bill proposes to extend the scope of this provision to include any gains arising from transfer of unlisted debentures and bonds as well, in addition to amending the definition of “Specified Mutual Funds”.

vi.    Clarificatory amendment in respect of cost in OFS transactions

Section 55 of the IT Act is proposed to be amended to provide clarification on determination of cost of acquisition in case of transfer of equity shares in an Offer for Sale in an Initial Public Offer. This amendment is proposed to be effective retrospectively from AY 2018-19 onwards.

vii.    Except for paragraph (vi), all the above amendments are proposed to be effective from July 23, 2024.

2.     Amendment to section 47(iii): Taxation of “gifts”

Section 47(iii) of the IT Act provided that any transfer of a capital asset under a gift or will or an irrevocable trust is exempt from capital gains tax in the hands of the transferor. The Finance Bill proposes to restrict the scope of this exemption to transfers by individuals or HUF alone. This amendment is effective from AY 2025-26.

3.     Increase in Securities Transaction Tax (“STT”) rates

The above changes are proposed to be effective from October 1, 2024.

4.     Abolition of Angel Tax

i.     Section 56(2)(viib) of the IT Act originally provided that where a company, in which public are not substantially interested, received consideration for issue of shares from an Indian resident in excess of the face value of such shares, the difference between the “fair market value” of such shares and the consideration so received by the company was taxable in the hands of the issuer company (commonly known as “Angel Tax”). Subsequently, the scope of this provision was enhanced to cover consideration received by a company for issue of shares from non-residents as well.

ii.     The Finance Bill proposes to abolish this Angel Tax with effect from AY 2025-26.

5.     Taxation of buyback of shares

i.      Section 115QA of the IT Act provided that in case of a “buy back” of shares by a company, the difference between the consideration paid by the company to its shareholders for the “buy back” and the amount received by the company for issue of such shares was taxable in the hands of the company at the rate of 20% (as increased by applicable surcharge and cess). The Finance Bill proposes to discontinue this scheme of buyback taxation under section 115QA.

ii.    Additionally, it is proposed that “any payment by a company on purchase of its own shares from its shareholders in accordance with section 68 of the Companies Act, 2013” will be deemed to be “dividend” and taxable in the hands of such shareholders. The shareholder will not be allowed any deduction of expenses against such dividend income.

iii.   Further, the full value of consideration received by such shareholder for the purposes of computation of gains under section 46A shall be deemed to be “nil”. Accordingly, the cost of acquisition of such shares would generate a capital loss in the hands of the shareholder.

iv.   The above changes are proposed to be effective from October 1, 2024.

6.     Tax incentives relating to IFSC

i.     Section 94B of the IT Act (commonly known as “Thin Capitalization Rule”) provides for a restriction on deduction of interest expense in respect of any debt issued by a non-resident to its AE. Section 94B(3) excludes certain companies from the scope of this provision. The Finance Bill proposes to enlarge the scope of the abovesaid exclusion to include “Finance Company” located in any IFSC from the scope of the said provision.

ii.   Section 10(4D) of the IT Act exempted certain income arising to a “Specified Fund”. The definition of “Specified Fund” is proposed to be amended to include a retail scheme or an exchange traded funds which are regulated under the IFSCA (Fund Management) Regulations.

iii.   Similarly, section 10(23EE) of the IT Act exempted specified income of a Core Settlement Guarantee Fund set up by “recognized clearing corporation”. The Finance Bill proposes to extend this benefit to Core Settlement Guarantee Funds set up by recognized clearing corporations as defined under the IFSCA (Market Infrastructure Institution) Regulations, 2021.

iv.   Till now, the provision of section 68 of the IT Act, which deals with cash credits, were not applicable to a VCF or VCC registered with SEBI. It is proposed to extend this relaxation to a VCF registered under the IFSCA Regulations

v.     The above amendments are proposed to be effective from AY 2025-26.

7.      Changes to Equalization Levy

The Finance Bill proposes to withdraw the 2% Equalization Levy, currently levied on e-commerce supply or services with effect from August 1, 2024. Equalization Levy on other services continues to operate.

8.     Change in tax rate – Foreign Companies

It is proposed to reduce the tax rate applicable to foreign companies to 35% (as increased by applicable surcharge and cess). This change is effective from AY 2025-26.

9.     Rationalization of TDS rates

The Finance Bill proposes to reduce applicable TDS rates on specified payments. As an example, the rate of TDS on payments by e-commerce operator to e-commerce participant stands reduced from 1% to 0.1% with effect from October 1, 2024.

10.   Changes in assessment/ reassessment/TDS default provisions

i.     Reassessment can now be initiated within 5 years from the end of relevant assessment year where income escaping assessment is more than INR 50 Lakhs. In all other cases, 3-year time-limit to apply.

ii.    Search cases removed from the purview of reassessment. The mechanism of block assessment re-introduced albeit with some amendments.

iii.   Modification to time-limit for proceedings under section 201 of the IT Act – Time-limit reduced from 7 years to 6 years from the end of relevant financial year. Time-limit to apply notwithstanding whether payments are made to resident or non-resident.

11.    Changes in dispute resolution mechanism

i.      Introduction of Direct Tax Vivad Se Vishwas Scheme, 2024 for disputes pending as on July 22, 2024.

ii.    Appeals before Income Tax Appellate Tribunal to be filed within two months from the end of the month in which the order appealed against is communicated to the assessee or to the PCIT/CIT. The said amendment would be effective from October 1, 2024.

iii.   Monetary limits for filing of appeal increased before various forums – INR 60,00,000 for appeals to Tribunal, INR 2,00,00,000 for appeals to High Court and INR 5,00,00,000 for appeals to the Supreme Court.

iv.   Amendment in Provisions related to Advanced Rulings – One-time allowance to withdraw pending application before Board of Advance Ruling by October 31, 2024.

12    Changes in allied laws

i.     It is proposed to amend the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“Black Money Act”) to provide for Amendment to Sections 42 and 43 of the Black Money Act – Immunity from penalty (of INR 10 Lakh) for non-disclosure, inaccurate particulars in the return of income if such non-disclosure or incorrect disclosure is with respect to any asset (other than immovable property) where the aggregate value of such assets does not exceed twenty lakh rupees.

ii.    New sections inserted in the Prohibition of Benami Property Transactions Act, 1988 (“PBPT Act”) to provide immunity from prosecution to the benamidar, or any other person (not being the beneficial owner), on the condition that the benamidar or such other person makes full and true disclosure of the whole circumstances of the benami transaction.

iii.   These amendments are proposed to be effective from October 1, 2024.

B.     INDIRECT TAX

I.      Customs

1.     Key legislative changes to the Customs Act, 1962 (“Customs Act”) – to take effect from the date of enactment of the Finance Bill.

i.     Section 28 DA prescribes the procedure for claiming preferential rate of duty under trade agreement(s). The said section is being amended to enable the acceptance of different types of proof of origin provided in trade agreements in order to align the said section with new trade agreements, which provide for self-certification.

ii.    Section 65 allows for manufacturing and other operations in a customs bonded warehouse. The said section is being amended to empower the Central Government to exclude certain manufacturing and other operations in relation to a class of goods from the ambit of the said section.

2.     Key legislative changes to the Customs Tariff Act, 1975 (“Customs Tariff Act”)- to take effect from the date of enactment of Finance Bill.

i.     Section 6 of the Customs Tariff Act provided for levy of protective duties in certain cases by the Central Government on the recommendations of the Tariff Commission. The said section is being omitted, due to winding up of Tariff Commission in terms of resolution dated June 1, 2022 by the Government of India.

3.     Indicative list of import items on which Basic Customs Duty (“BCD”) has been increased^[1]

 Note: The rate changes take effect from July 24, 2024 (unless otherwise specified)

4.     Indicative list of import items on which BCD has been reduced^[2]

Note: The rate changes take effect from July 24, 2024  

5.     Other miscellaneous amendments

Note: The following change shall take effect from the date of enactment of the Finance Bill

i.     Imports in Special Economic Zone (“SEZ”) by SEZ units or developers for authorized operations would be exempted from levy of Goods and Service Tax Compensation Cess with effect from July 1, 2017.

Note: The following changes take effect from July 24, 2024

ii.    Presently, articles of foreign origin can be imported into India for repairs subject to their re-exportation within 6 months extendable to 1 year. The duration for export in the case of aircraft and vessels imported for maintenance, repair and overhauling is being increased from 6 months to 1 year, further extendable by 1 year.

iii.   The time-period of duty-free re-import of goods (other than those under export promotion schemes) exported from India under warranty is being increased from 3 years to 5 years, further extendable by 2 years.

iv.    Exemption from whole of Special Additional Duty (“SAD”) on import of specified goods for subsequent sale when Integrated Goods and Services Tax (“IGST”), State Goods and Services Tax (“SGST”), Central Goods and Services Tax (“CGST”) paid by importer, would lapse from September 30, 2024.

v.     Exemption from whole of SAD on specified goods cleared from SEZ to Domestic Tariff Area, would lapse from September 30, 2024.

6.     Indicative list of import items on which exemption from BCD is being extended up to March 31, 2026^[3]

7.     Indicative list of import items on which conditional exemption from BCD is being extended up to March 31, 2029^[4]

8.     Indicative list of import items on which BCD exemption shall lapse with effect from September 30, 2024^[5]

9.     Indicative list of critical mineral import items on which whole of the Social Welfare Surcharge (SWS) is being exempted^[6]

Note: The exemption takes effect from July 24, 2024

10.    Indicative list of import items on which Agricultural Infrastructure and Development Cess (“AIDC”) is being reduced^[7]

Note: The exemption takes effect from July 24, 2024

II     Goods and Services Tax

11.   Key legislative changes to the CGST Act – to take effect from the date to be notified by the Central Government (unless otherwise specified)

i.     Sub-section (1) of Section 9 of the CGST Act is being amended to take extra neutral alcohol used for manufacture of alcoholic liquor for human consumption, out of the purview of Goods and Services Tax (“GST”).^[8]

ii.    A new Section 11A is being inserted in the CGST Act to empower the government to regularize, on recommendation of the Goods and Services Tax Council, the non-levy or short levy of GST on any supply due to any general practice prevalent in trade.^[9] Further, a new Section 8A is being inserted in the Goods and Services Tax (Compensation to States) Act, 2017 to empower the government to also regularize the non-levy or short levy of cess in such cases.

iii.   Sub-section (3) of Section 13 of the CGST Act is being amended, to provide for time of supply of services where the invoice is required to be issued by the recipient of services (i.e., self invoice) in cases of reverse charge (“RCM”) supplies.

iv.   A new sub-section (5) is being inserted in Section 16 of the CGST Act, retrospectively from July 1, 2017,[10] to carve out an exception to sub-section (4)^[11] and to regularize the availment of input tax credit (“ITC”) in respect of FY 2017-18 to FY 2020-21, where such ITC has been taken in any return under Section 39^[12] filed up to November 30, 2021. However, no refund will be admissible to the registered persons who have already paid tax / reversed ITC in this regard.

v.     A new sub-section (6) is being inserted in Section 16 of the CGST Act, retrospectively from July 1, 2017,^[13] to allow the availment of ITC in respect of an invoice or debit note in a return filed for the period from the date (or the effective date) of cancellation of registration till the date of order of revocation of cancellation of registration, filed within 30 days from the order of revocation of cancellation, subject to the condition that the such the time-limit for availment of such ITC should not have already expired under Section 16(4) on the date of order of cancellation of registration.

vi.   Clause (i) of sub-section (5) of Section 17 of the CGST Act is being amended, to restrict the non-availability of ITC in respect of tax paid under Section 74^[14] only for demands up to FY 2023-24. The amendment also removes the restriction to avail ITC in respect of tax paid in accordance with Sections 129 and 130.

vii.   Clause (f) of sub-section (3) of Section 31 of the CGST Act is being amended, to empower the government to prescribe the time period for issuance of self invoice by the recipient of supply in case of RCM supplies received from unregistered persons.

viii.   An Explanation is being inserted in sub-section (3) of Section 31 of the CGST Act to specify that a recipient of an RCM supply shall be required to issue a self invoice where supplier is solely registered under GST for deducting tax at source under Section 51.

ix.   Section 54 of the CGST Act is being suitably amended, to provide that no refund of unutilized ITC or of IGST shall be allowed in cases of zero-rated supply of goods where such goods are subjected to export duty.

x.     A new sub-section (1A) is being inserted in Section 70 of the CGST Act, to allow an authorized representative to appear on behalf of the summoned person during the summons proceedings.

xi.   A new sub-section (12) is being inserted in Sections 73^[15] and 74 of the CGST Act, to restrict the applicability of the said sections for determination of tax pertaining to the period up to FY 2023-24.

xii.  A new Section 74A is being inserted in the CGST Act, to provide for determination of tax not paid or short paid or erroneously refunded or ITC wrongly availed or utilised for any reason, in respect of demand(s) pertaining to FY 2024-25 onwards. This Section provides for a limitation period of 42 (forty-two) months [from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid ITC wrongly availed or utilised relates to], for issuing demand notices and a limitation period of 12 (twelve) months (from the date of issuance of notice) for passing the order, irrespective of whether the charges of fraud, wilful misstatement, or suppression of facts are invoked or not. In respect of penalty, while the section provides a penalty amounting to 100% of the tax amount in cases of fraud or any wilful-misstatement or suppression of facts, a penalty to the tune of 10% of the tax amount is provided for other cases.

xiii.  Sub-section (6) of Section 107 of the CGST Act is being amended to reduce the maximum amount of effective pre-deposit for filing an appeal before the appellate authority (i.e. the first appellate authority) from INR 50 Crores to INR 40 Crores.^[16]

xiv.  Sub-sections (1) and (3) of Section 112 of the CGST Act are being amended, so as to empower the Government to notify the date for filing an appeal before the GST Appellate Tribunal (i.e. the second appellate authority) and provide a revised time limit for filing appeals or application before the appellate tribunal. The said amendment is proposed to be given effect from August 1, 2024.^[17]

xv.   Sub-section (6) of Section 112 of the CGST Act is being amended, so as to enable the GST Appellate Tribunal to admit appeals filed by the department within 3 months after the expiry of the specified time limit of 6 months.

xvi.  Sub-section (8) of the Section 112 of the CGST Act is being amended so as to reduce the effective pre-deposit for filing appeals before the GST Appellate Tribunal from the existing 20% to 10% of the tax in dispute capped at INR 40 Crores.^[18]

xvii.  A new Section 128A is being inserted in the CGST Act, to provide for a conditional waiver of interest and penalty in respect of demand notices issued under Section 73 of the CGST Act for FYs 2017-18, 2018-19 and 2019-20 and where the assessee pays the full amount of tax demanded by such demand notices, except the demands notices in respect of erroneous refund. However, in cases where interest and penalty have already been paid in respect of any demand for the said financial years, no refund shall be admissible for the same.

xviii.  A proviso and an Explanation are being inserted in sub-section (2) of Section 171^[19] of the CGST Act, so as to empower the Government to notify the date from which the authority under the said section will not accept any application for anti-profiteering cases. Explanation in the sub-section (3A) of the said section is being inserted, so as to include the reference of appellate tribunal in the authority under the said section so that the appellate tribunal may be notified by the Government to act as an authority under the said section.

xix.   A new paragraph 9 is being inserted in Schedule III to the CGST Act, so as to provide that the activity of apportionment of co-insurance premium by the lead insurer to the co-insurer for the insurance services jointly supplied by the lead insurer and the co-insurer to the insured in coinsurance agreements shall be treated as neither supply of goods nor supply of services, provided that the lead insurer pays the tax liability on the entire amount of premium paid by the insured.

xx.  A new paragraph 10 is being inserted in Schedule III to the CGST Act, so as to provide that the services by the insurer to the re-insurer, for which the ceding commission or the reinsurance commission is deducted from reinsurance premium paid by the insurer to the reinsurer, shall be treated as neither supply of goods nor supply of services, provided that tax liability on the gross reinsurance premium inclusive of reinsurance commission or the ceding commission is paid by the reinsurer.

12.    Legislative changes to the IGST Act (except the changes discussed above in reference to corresponding changes in CGST Act) – to take effect from the date to be notified by the Central Government.

i.     Sub-section (4) of Section 16 of the IGST Act is being amended to provide for notification of class of persons who may make zero rated supplies or class of goods or services which may be supplied on zero rated basis, and refund of IGST in respect of which can be claimed in accordance with Section 54 of the CGST Act, subject to prescribed conditions, safeguards and procedures.

ii.   Sub-section (5) is being inserted in Section 16 of the IGST Act to provide that no refund of unutilised ITC or of IGST paid on account of zero-rated supply of goods shall be allowed in cases where such is subjected to export duty.

[1] This list is indicative and not exhaustive.

[2] This list is indicative and not exhaustive.

[3] This list is indicative and not exhaustive.

[4] This list is indicative and not exhaustive.

[5] This list is indicative and not exhaustive.

[6] This list is indicative and not exhaustive.

[7] This list is indicative and not exhaustive.

[8] Similar amendments are also being made in sub-section (1) of Section 5 of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”) and sub-section (1) of Section 7 of the Union Territory Goods and Services Tax Act, 2017 (“UTGST Act”).

[9] Similarly, a new Section 6A is being inserted in the IGST Act and a new Section 8A is being inserted in UTGST Act.

[10] The amendment will come into force from the date of enactment of the Finance Bill.

[11] Sub-section (4) of Section 16 of the CGST Act, as applicable to the period prior to October 1, 2022, provided that the registered person shall be entitled to take input tax credit in relation to any FY only till the due date of furnishing of the return for the month of September following the end of such FY or furnishing of the annual return for such FY, whichever is earlier.

[12] The periodic GST returns (such as GSTR-3B, in case of regular taxpayers) are furnished under Section 39 of the CGST Act.

[13] The amendment will come into force from the date of enactment of the Finance Bill.

[14]  Section 74 of the CGST Act provides for determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any willful-misstatement or suppression of facts.

[15] Section 73 provides for determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-misstatement or suppression of facts.

[16] A similar amendment is also being made to Section 20 of the IGST Act.

[17] The amendment will come into force from the date of enactment of the Finance Bill.

[18] A similar amendment is also being made to Section 20 of the IGST Act.

[19] Section 171(2) of the CGST Act provides that the Central Government may, on recommendations of the GST Council, by notification, constitute an authority, or empower an existing authority constituted under any law for the time being in force, to deal with anti-profiteering cases.