Union Budget 2024: Streamline direct tax rules for firms, start-ups to make India a $5 trillion economy

There has been a recent trend for Indian start-ups to onshore headquarters back to India.

In the wake of global economic slowdown and supply chain disruptions, India remains steadfast in its path to becoming a $5 trillion economy. As opportunities open on the global stage, a stable and certain tax regime will be key to propelling India’s growth story forward. While interim budgets are usually an exercise in policy restraint, discussions around Interim Budget, 2024 are an important segue into the full Budget that should look to promote India’s broader tax policy goals.

As the world continues its search for a new manufacturing hub, the government should consider extending the 15 percent concessional tax rate available to manufacturing companies, which is set to expire on March 31, 2024. Clarity around permanent establishment, transfer pricing and GST related issues that are attendant with toll manufacturing arrangements will also complement in promoting ‘Make in India’.

There has been a recent trend for Indian start-ups to onshore headquarters back to India. Tax outflows can be a big disincentive for re-domiciliation, which looks to bring value back into India. The government should consider extending tax neutrality to re-domiciliation of businesses to India, so long as there is continuity of interest. Relatedly, the risk of tax losses lapsing in tax-neutral mergers and intra-group corporate reorganisations continues to bear heavily on transactions that are aimed at enhancing business efficiencies and should be addressed through legislative amendments.

Streamlining capital gains tax rates and provisions across asset classes and investors has been a long-standing request from the industry. Complex legacy provisions enhance tax uncertainty and need to be revamped in line with the development of the Indian capital markets. Similarly, taxation of earn-outs, deductibility of ESOP expenses and taxation of ESOP trusts also require legislative clarity.

Reduce tax uncertainty

In the recent past, the reliance of foreign investors on treaty benefits has increased manifold with the abolition of the dividend distribution tax and higher domestic tax rates on interest, royalties, and fees for technical services. Foreign investors continue to grapple with tax uncertainty around treaty interpretation. Examples include the recent MFN controversy and notices by the tax authorities challenging tax residence certificates. The application of treaty benefits to hybrid entities also remains an ambiguous area. The government should look at legislative measures, administrative practices, and settlement mechanisms to improve tax certainty and consistency in treaty application.

The extension of angel tax to non-residents has complicated basic transactions in foreign investment, despite the lenience offered by way of exemptions to certain categories of investors, safe harbours, and a broader set of valuation methodologies. The government should reassess the benefit of such tax rules in addressing the mischief of round tripping versus the tax complexity faced in genuine cases of foreign investment.

As the government looks to prioritise fiscal prudence, any corporate tax cuts or immediate tax holidays or incentives seem unlikely. However, the two-phased budgetary process this election year should allow for deeper tax policy deliberations aimed at incentivising manufacturing, infrastructure, clean energy and digital economy.

Puri is Partner & Sinha is Principal Associate at Shardul Amarchand Mangaldas & Co.