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Agenda- International Tax Proposals

Tax Rate Changes
Capital Gains rationalisation
Changes in Buy Back taxation regime
Presumptive Scheme for Foreign Cruise Operators
Abolishment of Equalisation Levy
IFSC/Gift City Specific Direct Tax Amendments
Changes in exempt transfers to exclude corporate gifts
Transfer Pricing Changes and Safe Harbour rules announcement
Procedural Changes

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Key International Tax Proposals

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Budget 2024- India Economic Landscape

Inflation - Successfully managed to keep retail inflation at 5.4% in FY 2023-24 & hence, interest rates should remain stable

In the backdrop of the Economic Survey, the Hon’ble Finance & Corporate Affairs Minister Mrs. Nirmala Sitharaman presented the Union Budget on 23 July 2024. This was the first Budget, post elections, by the re-elected government.

GDP Growth - FY 2023-24, 8.2%
Projected GDP Growth – FY 2024-25 6.5% to 7%

Infrastructure Thrust – Provision of an outlay of Rs. 11.11 lakh crores (~US$ 134 billion) for FY 2024-25

Fiscal Deficit - Down from 6.4% of GDP in FY 2022-23 to 4.9% of GDP in FY 2024-25

Foreign Direct Investment - US$ 71 billion in FY 2022-23 as well as FY 2023-24
Forex reserves – US$ 653 billion

Robust Direct Tax and GST collections

Key Economic Indicators & Highlights

The Budget proposals will be effective after the Finance (No. 2) Bill, 2024 (as finally approved by the legislature) receives assent of the Hon’ble President of India.

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Tax Rate Changes- Non-Residents

Changes in Slab Rates for Individuals under New Tax Regime

Increase in Standard deduction for Income under head salary from INR 50000 to INR 75000

Increase in Deduction for family pension income from INR 15000 to INR 25000

Reduction in maximum marginal tax rates for Corporates from 40% to 35%( no change in surcharge)

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Capital Gains Rationalization

Increase in rate for LTCG and STCG in case of transfer of listed shares, listed units of business trust and units of equity oriented mutual funds

Simplification of the holding period of capital assets for classification as short term or long term

12 months for listed securities and 24 months for other assets

Change in rate of long-term capital gain and removal of indexation benefit available on transfer of long-term capital assets (including unlisted shares)

Section 50AA – Deemed short term capital gains - Change in definition of specified mutual fund and inclusion of unlisted bonds and debentures

Applicable with respect to transfer of capital asset on or after 23 July 2024

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Capital Gains Rationalization- Current Period of Holding

Type of Asset	Current Short Term	Current Long Term
Listed equity share of an Indian company Listed debenture Unit of Unit Trust of India Unit of an equity oriented mutual fund Zero coupon bond	Less than 12 months	12 months or more
Immovable property Unlisted shares	Less than 24 months	24 months or more
All other assets including Units of business trust Unlisted bonds / debenture Gold	Less than 36 months	36 months or more

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Capital Gains Rationalization- Proposed Period of Holding (w.e.f 23-Jul-24)

Type of Asset	Proposed Short Term	Proposed Long Term
Any listed security on Indian stock exchange like listed equity share of an Indian company, listed debenture, units of business trust Unit of Unit Trust of India Unit of an equity oriented mutual fund Zero coupon bond	Less than 12 months	12 months or more
All other assets including Immovable property Unlisted shares Unlisted bonds / debenture Gold	Less than 24 months	24 months or more

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Capital Gains Rationalization- Tax Rates – Long Term Capital Gains (w.e.f 23-Jul-24)

Type of Asset	Non- Resident- Current	Non-Resident Proposed
Listed equity shares Units of equity oriented mutual fund Units of business Trust	10% (without indexation and foreign exchange fluctuation benefit)	12.5% (without indexation and with foreign exchange fluctuation benefit)
Unlisted equity Shares	10% (without Indexation and foreign exchange fluctuation benefit )	12.5% (without indexation and with foreign exchange fluctuation benefit)
Unlisted bonds / debentures	10% (without indexation	Deemed as STCG taxable at applicable Rates
Immovable property	20%	12.5%

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Capital Gains Rationalization- Tax Rates – Short Term Capital Gains (w.e.f 23-Jul-24)

Type of Asset	Non Resident- Current	Non-Resident Proposed
Listed equity shares Units of equity oriented mutual fund Units of business trust	15%	20%
Other Assets	No Change- STCG Taxable as per slab rates

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Capital Gains Rationalization- Tax Rates – Taxation of Unlisted Bonds/Debentures (w.e.f 23-Jul-24)

The Bill proposes to amend section 50AA of the ITA to deem the capital gains arising on transfer or redemption or maturity of unlisted bonds or debentures to be STCG in nature.

Accordingly, any payment received by an investor on transfer or redemption or maturity of unlisted bond or debenture will be characterized as STCG and tax rate of such gains will be the tax rate applicable to such investor depending on its form and residency.

In case of non-residents, where redemption premium is specifically included in definition of interest under the relevant tax treaty, one will have to analyze whether (i) non-resident can offer such amount received on redemption of bonds / debenture as interest (instead of STCG under section 50AA) or (ii) can claim exemption (if any) under capital gains article.

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Capital Gains Rationalization- Tax Rates – Specified Mutual Funds-50AA (w.e.f 23-Jul-24)

Finance Act, 2023 deemed the capital gains arising from transfer of unit of a ‘specified mutual fund’ to be in nature of STCG.

In this regard, ‘specified mutual fund’ was defined to mean a mutual fund (by whatever name called) which invests not more than 35% of its total proceeds in equity shares of domestic companies.

The consequence of the amendment by Finance Act, 2023 was that capital gains arising from both debt and non-debt oriented mutual funds were deemed to be STCG in nature, taxable at applicable rates in hands of investor. Further, there was ambiguity on whether fund-of-funds will also be covered within the ambit of ‘specified mutual funds’.

Considering the above, the Bill proposes to amend the said definition to provide that specified mutual fund means (a) a mutual fund (by whatever name called) which invests more than 65% of its total proceeds in debt and money market instruments or (b) a fund which invests 65% or more of its total proceeds in units of a fund referred to in clause (a).

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Capital Gains Rationalization- Tax Rates – Specified Mutual Funds-50AA( w.e.f FY 2025-26)

Type of Asset	Current Taxability	Proposed Taxability
Debt Mutual Funds	Deemed STCG as per applicable rates	Deemed STCG as per applicable rates
Hybrid Funds/Arbitrage Funds /FOFs/ETFs where less than 35% in equity but not more than 65% in Debt or Money Market Instruments	Deemed STCG Taxable as per slab rates	Taxable as per period of holding(24) and applicable LTCG/STCG rates(12.5%/Slab rate)

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Capital Gains Rationalization- Immovable Property Transactions( w.e.f 23-Jul-24)

Particulars	Capital Asset being Immovable Property (Land / Building) (Period of Holding = 24 months)
	Before 23 July 2024 (Pre-amendment)		On or after 23 July 2024 (Post-Amendment)		Remarks
	Short Term	Long Term	Short Term	Long Term
Tax Rate	Slab Rates	20%	Slab Rates	12.5%	The rate of tax in case of long-term gains has been reduced to 12.5% by simultaneously withdrawing the indexation benefit*.
Indexation Benefit on Cost	NA	Available	NA	Withdrawn

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Changes in Buyback Taxation- S.2(22)(f),10(34A), 46A, 57, S.115QA,194 (w.e.f. 01^st Oct-2024)

Particulars	Existing Provisions (before 1 October 2024)	Proposed Provisions (on or after 1 October 2024)
Taxability	In the hands of Company - Taxable @ 23.296% under section 115QA of the Act. The effective tax rate was 18.89%. b) In the hands of shareholders - Exempt under section 10(34A) of the Act	In the hands of Company - Not applicable b) In the hands of shareholders - Considered as deemed dividend under section 2(22)(f) of the Act and taxable at applicable rates
Treatment of cost of shares bought back in the hands of shareholders	Not applicable	The cost of acquisition of the shares bought back would be treated as capital loss (short term / long-term depending on the period of holding of shares) in the hands of the shareholders eligible for set-off / carry forward against other capital gains as applicable.
TDS applicability	Not applicable	Company is liable to deduct tax @ 10% under section 194 of the Act

What happens to section 80M benefit for recipient of buy-back consideration and company declaring buy-back?

Does treaty rate apply to non-residents?

What if no capital gain in year of buy-back?

Dividend v. Buy-back – what is beneficial?

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Changes in Buyback Taxation- S.2(22)(f),10(34A), 46A, 57, S.115QA,194 (w.e.f. 01^st Oct-2024)

Consideration received by shareholders on buy-back of shares treated as deemed dividend

Buy-back consideration treated as a deemed dividend regardless of accumulated profits, without any deduction with respect to the issue price of such shares

Company undertaking buy-back must withhold taxes as applicable to dividend distribution

Cost of acquisition of the shares bought-back is allowed as a capital loss to shareholders

Capital losses cannot be set-off against any income other than capital gains

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Changes in Buyback Taxation- �S.2(22)(f),10(34A), 46A, 57, S.115QA,194 (w.e.f. 01^st Oct-2024)

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Changes in Buyback Taxation- S.2(22)(f),10(34A), 46A, 57, S.115QA,194 (w.e.f. 01^st Oct-2024)

No clarification regarding shares held as stock-in-trade

Corresponding amendments proposed under Section 57 of the IT Act, restricting deduction of any expenses in relation to buy- back of shares

Buy-back distribution tax and tax exemption to shareholders will be withdrawn

Beneficial rates under tax treaties should be available for non-resident shareholders

Buy-backs likely to become extinct in the listed company space

Amendments applicable from October 1, 2024

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Presumptive Scheme for Foreign Cruise Operators-44BBC , 10(15B) (w.e.f. FY 24-25)

20% of the gross receipts from cruise operations will be deemed as business income

Existing presumptive regime for foreign ships u/s 44B will not be applicable to foreign cruse operators

Exemption from the leasing income of a foreign company from lease rentals of cruise, if such foreign company and the non-resident cruise ship operator have the same holding company

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2% Equalization Levy Removed ( S.165A FA 2016 and 10(50) IT Act,1961)(w.e.f. Aug 01, 2024)

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IFSC/Gift City related Amendments�� 94B/68/10(4D)�(w.e.f. FY 24-25)

Relaxation of Thin Cap Rules
A Finance Company located in the International Financial Services Centre (IFSC) is proposed to be excluded from the purview of Thin Cap Rules
A ‘Finance Company’ refers to a unit set up in an International Financial Services Centre and which is engaged in rendering
financial services in respect of any financial product, provided:`

It does not accept public deposits from residents or non-residents
It is not registered with the Authority as a Banking Unit

Explanation of Source of Funds
Any sum credited in the books of an assessee, including a loan, borrowing, or other liability, can be taxed as income if the nature and source cannot be satisfactorily explained
This requirement does not currently apply if the creditor/ lender or the investor is a regulated entity, such as a Venture Capital Fund (VCF) or Venture Capital Company (VCC) registered with SEBI
Similar relaxation is proposed to be extended to ‘Venture Capital Funds’ set up in IFSC under Regulation 18 of the IFSCA (Fund Management) Regulations, 2022

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IFSC/Gift City related Amendments�94B/68/10(4D)��(w.e.f. FY 24-25)

Expanded definition of a ‘Specified Fund’

A Specified Fund enjoys several tax benefits such as:

Exemption from capital gains tax on transfer of securities on a recognized stock exchange in the IFSC, where the consideration is payable in foreign currency and the income does not accrue/ arise in India;
Lower tax rate on interest/dividend from investment in securities prescribed under Section 115AD
Exemption from the applicability of AMT provisions to Specified Funds, incorporated as trusts or LLPs

‘Specified Fund’ currently includes a Category III AIF set up in IFSC, in which all the unitholders (other than the units held by the

sponsor and manager) are non-residents

Definition of ‘specified fund’ to include a retail scheme and an exchange traded fund, regulated set-up in the IFSC

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Change in Definition of Exempt Transfer- S.47(w.e.f. FY 24-25)

Under section 45 of the ITA, only gains arising from the transfer of a capital asset are subject to capital gains tax.

Section 47(iii) of the ITA states that a ‘transfer’ of a capital asset under a gift or will or an irrevocable trust will not amount to a transfer as required under section 45. Currently, section 47(iii) does not provide any restrictions with respect to who / what can make or receive a gift.

Accordingly, even though under the Indian Contract Act, 1872, gifts are to be made out of natural love and affection between parties, taxpayers have argued in the past that the transfer of shares (or other capital assets) by or to a company without consideration amounts to a gift under section 47(iii) of the ITA and is therefore not subject to capital gains tax.

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Change in Definition of Exempt Transfer- S.47(w.e.f. FY 24-25)

This stance has led to increased litigation, tax uncertainty and possible tax avoidance and tax base erosion. To address these concerns, the Government has proposed to limit section 47(iii) to only those transfers of capital assets under gift, will or irrevocable trust executed by individuals of HUFs.

Once the amendment takes effect on April 1, 2025, companies, LLPs and other corporate entities will no longer be able to claim exemption from capital gains tax for the gift of any capital asset, including shares of a company.

Moreover, the settlement of shares into irrevocable trusts which are commonly used by companies to facilitate the granting and vesting of ESOPs (i.e. ESOP Trusts) may also become taxable.

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Transfer Pricing Proposals

Transfer Pricing Officer (TPO) is now empowered to adjudicate on Specified Domestic Transaction (SDTs) which have not been referred by assessing officer (AO) or which have not been reported in the audit report under section 92E. This amendment will be effective from financial year starting 1 April 2024.

Taxpayers who have undisclosed income pursuant to a search not eligible to file objections before Dispute Resolution Panel (DRP) against variations proposed to the income by the Assessing officer. Taxpayers in this category are only permitted to file an appeal with the Commissioner of Income Tax (Appeals) [CIT(A)]. This amendment will be effective from 1 September 2024.

With a view to reduce litigation and provide certainty in international taxation, Finance Minister in the speech has intended to expand coverage of safe harbour rules and streamline TP assessment procedures.

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Key Proposals related to Startup Sector

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Agenda- Startup related Proposals

Removal of Angel Tax
Capital gains rationalisation for unlisted securities
Reduced Withholding tax rates on domestic payments
Mechanism to obtain lower withholding tax certificate on sale/purchase of goods
Changes in Partnership Taxation

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Budget 2024 Vision for Startups

Over the past decade, India has transformed into a global economic powerhouse, with nominal GDP rising from INR 113.5 trillion in FY14 to INR 273.1 trillion in FY23 (10.25% CAGR).

With over 100,000 startups and more than 100 unicorns, the startup ecosystem shows immense potential for growth.

Budget 2024 aims to build on this progress, address challenges, and cement India’s position as a global innovation hub.

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Removal of Angel Tax�(W.e.f FY 24-25)

Since the extension of Angel Tax to non-residents, startup funding has dipped 62% YoY, the lowest amount raised in 6 years.

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Removal of Angel Tax�(W.e.f FY 24-25)

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Removal of Angel Tax�(W.e.f FY 24-25)

The Bill proposes to abolish angel tax from FY 2024-25. Elimination of angel tax will increase capital availability with companies and simplify investment structures.

It is a positive step towards creating a conducive environment for companies especially startups in India.

However, this amendment is prospective in nature and angel tax provisions will continue to apply for past investments.

Provisions of Section 68 continues to apply

The issuer Indian company will continue to comply with valuation guidelines prescribed under FEMA

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Capital Gains on Unlisted Securities

Previously, unlisted equities were subject to a long-term capital gains tax rate(20%) that was double that of their listed counterparts.

The budget's decision to equalise the tax rates for listed and unlisted securities(12.5%) is a significant boost for startups.

This change encourages greater rupee capital participation and reduces the preference for mutual funds and listed equities over startups.

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Reduced Withholding Tax Rates on Domestic Payments (W.e.f 01^st Oct-2024)

Section	Provisions	Existing TDS rate	Proposed TDS rate
194H	Payment of commission or brokerage	5%	2%
194-O	Payment of certain sums by e-commerce operator to e-commerce participant	1%	0.1%

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Lower TDS/TCS Certificate on Sale/Purchase of Goods- S.194Q/S.206C�(w.e.f 01^st Oct-2024)

Scope of Section 197/206C(9) expanded to include the application for lower TDS rate u/s 194Q

Many of the companies are in loss making stage and deduction of TDS on gross value of sales/purchases creates working capital blockage

To ease the compliance burden and work capital relief, provisions amended to include application for lower TDS rate

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Changes in Partnership Taxation (w.e.f FY 24-25)

Increased limit of remuneration to partners of a firm for FY 2024-25 & onwards

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Changes in Partnership Taxation(w.e.f FY 24-25)

Introduction of withholding tax provisions

10% tax withholding by the firm on payment salary, remuneration, commission, bonus or interest to a partner

Taxes withheld on payment/ accrual or transfer to partner's capital account

Withholding obligations continue even on interest/ salary payments above specified limits

No withholding tax on the distribution of the share of profits to partners

Amendment applicable on sums paid/ credited from April 1, 2025 (FY 2025-26) – clarity required

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