Against the backdrop of the introduction of a new tax bill, the Union Budget 2025 brings a series of tax amendments. While some changes benefit startups and foreign investors, others could make mergers and restructurings less tax-friendly. Here’s a comprehensive look at what these changes mean for India Inc.
One of the key changes is the restriction on the carry-forward of business losses in a corporate restructuring. Until now, companies could start afresh with an eight-year period to carry forward losses pursuant to an amalgamation. However, under the proposed amendment, which will be effective 2025-26, this period will be capped at the remaining balance of the original eight years. This means that if a predecessor company incurred losses five years ago, the successor company will have only three more years to claim them. Given that Section 72A already excludes several industries including NBFCs, technology and service firms, this tightening of rules may make M&A less attractive.
Read More: Limiting carry forward of loss can make distressed deals less attractive
On the startup front, the government has extended the sunset clause under Section 80-IAC. Startups incorporated until April 1, 2030, will now be eligible for a 100% deduction on profits for any three consecutive years within their first ten years of operations, subject to a turnover cap of Rs 100 crore. By extending the sunset clause by five years, the government aims to encourage innovation and entrepreneurship.
The Budget also brings clarity to the taxation of business trusts such as REITs and InvITs. While income from dividends, interest and rentals continues to be taxed at the unit-holder level, it has now been clarified that the special rate on capital gains derived from listed shares with grandfathering benefits (cost of acquisition as of January 31, 2018) will remain available.
Another notable change is the removal of tax collected at source (TCS) on the sale of specified goods, including shares. Previously, sellers had to collect TCS at 0.1% under Section 206C(1H). This change is expected to streamline cross-border transactions where tax credit lapsed for foreign buyers who do not have an Indian presence or an Indian source of income. However, buyers with a turnover exceeding Rs 10 crore will still need to deduct tax at source (TDS) under Section 194Q at 0.1% for purchases exceeding Rs 50 lakh.
Read More: Budget 2025 Highlights - Higher tax exemptions, TDS relief, startup boost
Category I and II AIFs and FPIs will now have certainty regarding the classification of income from securities transactions. Effective 2025-26, any securities held by these funds will be treated as capital assets. This ensures that income from their transfer is taxed as capital gains, reducing disputes related to the characterization of income. For long-term capital gains on securities not covered under Section 112A, Category III AIFs and FPIs will now be subject to 12.5%, up from 10%.
To further enhance India’s position as a global financial hub, IFSC (International Financial Services Centre) units have received several benefits. The sunset period for certain tax exemptions, such as income from aircraft leasing and offshore banking investments, has been extended to March 31, 2030. Additionally, life insurance policies issued by IFSC insurance offices will be exempt from tax, irrespective of the premium amount. Ship leasing activities have also been brought under the tax exemption umbrella, similar to the existing benefits for aircraft leasing. These measures are expected to attract significant foreign capital to IFSC, strengthening India’s offshore financial ecosystem.
Foreign technology providers will benefit from the introduction of a presumptive taxation regime for non-residents providing services to the electronics manufacturing sector. Under the new Section 44BBD, 25% of receipts will be deemed taxable income, promoting collaborations between Indian manufacturers and global technology providers.
Shipping businesses, particularly those operating inland water transport vessels, are also set to benefit. The tonnage tax regime, previously limited to ocean-going vessels, will be extended to include inland vessels under Section 115VD. This change is expected to attract more investments in India’s inland water transportation sector, fostering infrastructure growth and improving logistics efficiency.
Read More: Rationalisation of transfer pricing provisions to 3 years will benefit GCCs, IT firms
Transfer pricing provisions, often a source of extensive litigation, will see the introduction of a multi-year arm’s length pricing mechanism. Under the proposed change, once the arm’s length price (ALP) for a transaction is determined for a particular year, it will automatically apply to similar transactions for the following two years, subject to approval. This reduces compliance efforts for businesses and allows tax authorities to focus on more significant issues.
Sovereign Wealth Funds (SWFs) and pension funds will benefit from the extension of the sunset clause for tax exemptions under Section 10(23FE) until March 31, 2030. Long-term capital gains, even if reclassified as short-term gains under the newly introduced Section 50AA, will continue to remain tax-exempt for such investors. This change is expected to boost foreign investments in India’s infrastructure projects.
The Budget also addresses a potential conflict between the concept of 'significant economic presence' and exemptions for non-residents purchasing goods for export. Section 9 has been amended to ensure that such transactions do not inadvertently fall under the significant economic presence category, protecting exporters from unintended tax implications.
While Budget 2025 brings relief in areas such as startup incentives, IFSC expansion, and reduced compliance burdens, stricter rules on loss carry-forwards and higher capital gains tax rates for non-residents may require companies to reassess their tax planning strategies. While corporate India keenly awaits the introduction of the new tax bill, the Union Budget has once again overlooked several critical tax reforms for M&A, leaving businesses to navigate hurdles that dampen deal-making potential.
These challenges include clarifying the definition of 'undertaking' in tax-neutral demergers to reflect modern corporate structures (such as those operating through SPVs), extending grandfathering benefits under Section 55(2)(ac) to mergers and demergers involving listed companies, and rationalizing the taxation of deferred and contingent consideration to align with cash flows and deal realities. Additionally, businesses have been calling for exemptions for bona fide commercial transactions from the punitive scope of Section 56(2)(x) and for expanding loss set-off provisions under Sections 72A and 79 to cover a broader range of sectors and intra-group restructurings.
(Binoy Parikh is Executive Director, Katalyst Advisors)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
