India

Corporate income tax (CIT) rate for foreign companies reduced to 35%

The CIT rate applicable for foreign companies (for incomes other than identified streams of income, such as royalty or fee for technical service [FTS]) was 40% (plus applicable surcharge and cess). Finance Act, 2024 has amended the domestic tax law provisions to reduce the applicable CIT rate on foreign companies to 35% (plus applicable surcharge and cess).

Abolishment of angel tax

The angel tax provisions were introduced by the Finance Act, 2012 to tax a company on the issue of shares for a consideration higher than the fair market value (FMV), as prescribed under the income tax rules. This was extended to include investments from non-resident investors in 2023.

Finance Act, 2024 has abolished the angel tax for all categories of investors with effect from 1 April 2024.

Taxation of buyback of shares brought on equal footing with dividend

In 2013, the Indian government introduced special provisions relating to tax on distributed income of a domestic company from the buyback of shares. Therefore, an Indian company was subject to tax at the rate of 20% on the distributed income on the buyback of shares. This scheme of taxation was in line with the then dividend distribution tax (DDT), under which any dividend distribution was taxed in the hands of the distributing Indian company. In 2020, DDT was removed, and the dividend was made taxable in the hands of shareholders.

A sunset clause has been inserted in the extant provision under which the aforesaid tax was levied making it inapplicable from 1 October 2024. Therefore, the aforesaid 20% tax shall not be applicable to any buyback that takes place after 30 September 2024.

Further, as per the Finance Act 2024, the proceeds from buyback have now been treated as deemed dividend, on a gross basis. The cost of acquisition of shares bought back is to be treated as capital loss in the hands of the shareholder and allowed to be set off against any capital gains. The withholding tax (WHT) provisions applicable on dividend income have also been amended to provide that taxes shall also be required to be withheld at the rate of 10% for such deemed dividend. The amended provisions are applicable with effect from 1 October 2024.

Rationalisation of capital gains tax provisions

Finance Act, 2024 has rationalised the capital gains tax regime. These amended provisions are applicable for transfers made on or after 23 July 2024. The provisions amended by Finance Act, 2024 have been provided as follows:

• Period of holding for determining nature of capital gains:
• All capital assets are to be treated as long-term capital assets if they are held for a period of more than 24 months.
• All listed securities are to be considered as long-term capital assets if they are held for more than 12 months.
• Applicable tax rate:
• Tax on short-term capital gains on transfer of listed securities that are subject to securities transaction tax (STT) shall be levied at 20%.
• Tax on long-term capital gains on all assets shall be levied at 12.5%. The benefit of indexation while computing long-term capital gains has been abolished.
• The exemption limit on long-term capital gains on transfer of listed securities is increased to 125,000 Indian rupees (INR).
• Income on transfer, redemption, or maturity of unlisted debentures or unlisted bonds on or after 23 July 2024 is to be deemed as short-term capital gains.

The indexation benefit, which allows shareholders to adjust their purchase price for inflation, has been removed for all taxpayers except individuals and Hindu undivided families (HUFs).

The aforementioned amended provisions are applicable for transfers made on or after 23 July 2024.

Reduced period of limitation for re-assessment proceedings under income tax

The provisions related to re-assessment proceedings under domestic tax laws were substantially revamped in 2021. Besides the procedure, the general limitation period for initiating the re-assessment proceedings was significantly reduced to three years.

However, in certain cases, this timeline could be extended to ten years if the tax authorities possess documentary evidence that there is an escapement of income. To further rationalise these provisions, vide Finance Act 2024, the time period for initiating the re-assessment proceedings in the above-mentioned specified cases is reduced to five years from ten years.

Indian government notifies lower royalty and FTS tax-rate in India-Spain Double Tax Avoidance Agreement (DTAA)

The Ministry of Finance has issued a notification on 19 March 2024 permitting the benefit of the Most Favoured Nation (MFN) clause under the India-Spain DTAA. The Indian government amended the India-Spain DTAA by importing a lower tax rate of 10% for royalty and FTS from the India-Germany DTAA. The lower tax rate shall be applicable from financial year 2023/24 corresponding to tax year 2024/25.

Government notifies list of payments to International Financial Services Centre (IFSC) units on which no taxes are required to be withheld

The Indian government has notified the list of payments made by any payer to the IFSC units on which no taxes are required to be withheld by the payer. The list includes 14 different kinds of IFSC units where taxes are not required to be withheld by the payer on various payments, subject to fulfilment of conditions prescribed in the said notification. This notification is effective from 1 April 2024.

Abolishment of equalisation levy applicable on non-resident e-commerce operators

Finance Act, 2020 had amended the provisions related to the equalisation levy to provide that non-resident e-commerce operators, providing e-commerce supply or services beyond a specified threshold, shall be required to pay equalisation levy at the rate of 2%.

Finance Act, 2024 has now abolished the equalisation levy on non-resident e-commerce operators with effect from 1 August 2024.

It may be noted that the equalisation levy at the rate of 6% continues to apply on specified services, i.e. on online advertisement, any provision for digital advertising space, or any other facility or service for the purpose of online advertisement, which includes any other service as may be notified by the Central Government in this regard.

Relief to eligible start-ups

The domestic tax laws provide certain tax deductions to eligible start-ups, provided such eligible start-up is incorporated on or before 31 March 2023. The sunset clause of 31 March 2024 has now been extended to 31 March 2025.

Further, eligible start-ups can now carry forward and set off the losses for a period of ten years as compared to the earlier limit of seven years.

Tax Amnesty Scheme, 2024

In order to settle the pending disputes, Finance Act, 2024 has introduced the Direct Tax Vivad se Vishwas Scheme, 2024 (Scheme). The disputed tax matters pending till a specified date can be settled under the Scheme by paying disputed taxes. The Scheme provides that no interest or penal implications shall arise in the hands of the taxpayer for the matters settled under the Scheme. The scheme is applicable with effect from 1 October 2024.