Highlights of Union Budget 2024-25

This budget focused on four themes namely Employment, Skilling, MSMEs, and the Middle class.

1. MSME - Special attention is given to MSMEs and manufacturing, particularly labour-intensive manufacturing

a) Credit Guarantee Scheme for MSMEs in the Manufacturing Sector

For facilitating term loans to MSMEs for the purchase of machinery and equipment without collateral or third-party guarantee, a Credit Guarantee Scheme is introduced. The scheme will operate on the pooling of credit risks of such MSMEs. A separately constituted self-financing guarantee fund will provide, to each applicant, a guarantee covering up to ₹ 100 crore, while the loan amount may be larger. The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance.

b) New assessment model for MSME credit

Public sector banks will build their in-house capability to assess MSMEs for credit, instead of relying on external assessment. They will also take the lead in developing or getting developed a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy. This is expected to be a significant improvement over the traditional assessment of credit eligibility based only on asset or turnover criteria. That will also cover MSMEs without a formal accounting system.

c) Mudra Loans

The limit of Mudra loans will be enhanced to ₹ 20 lakh from the current ₹ 10 lakh for those entrepreneurs who have availed and successfully repaid previous loans under the ‘Tarun’ category.

d) Enhanced scope for mandatory onboarding in TReDS

To facilitate MSMEs to unlock their working capital by converting their trade receivables into cash, the turnover threshold of buyers for mandatory onboarding on the TReDS platform is reduced from ₹ 500 crore to ₹ 250 crore. Medium Enterprises will also be included in the scope of the suppliers.

e) MSME Units for Food Irradiation, Quality & Safety Testing

Financial support for setting up of 50 multi-product food irradiation units in the MSME sector will be provided. The setting up of 100 food quality and safety testing labs with NABL accreditation will be facilitated.

e) E-Commerce Export Hubs

To enable MSMEs and traditional artisans to sell their products in international markets, E-Commerce Export Hubs will be set up in public-private-partnership (PPP) mode. These hubs, under a seamless regulatory and logistic framework, will facilitate trade and export-related services under one roof.

2. Internship (at least half the time should be in actual working experience/job environment, not in the classroom) & CSR

Internship opportunities (Youth aged between 21 and 24 will be eligible to apply) will be provided in 500 top companies (Participation of companies is voluntary) to 1 crore youth in 5 years. They will gain exposure for 12 months to real-life business environments, varied professions, and employment opportunities. An internship allowance of ₹ 5,000 per month along with a one-time assistance of ₹ 6,000 will be provided. Companies will be expected to bear the training cost and 10 % of the internship cost can be paid out of their CSR funds.

The Government has also revised the Model Skill Loan Scheme to facilitate loans of up to ₹ 7.5 lakh with a guarantee from a government-promoted fund, that’s expected to help 25000 students every year.

3. Angel Tax- Section 56 (2) (vii b)

This Tax was introduced in 2012 to curb Money laundering practices which provides that when a privately held company issues a share at a particular price that is greater than the Fair Market Value (FMV), tax is chargeable to the amount received in excess of FMV. This provision is applicable for the issue of shares to both Residents and Non-Residents.

This Budget for 2024-25 reads that provisions of this clause shall not apply on or after the 1st day of April 2025. This abolition of the Angel Tax will certainly encourage more investment in the start-ups fostering innovation and growth.

However, few experts have warned that in case of unexplainable premium, it is not ruled out that the Assessing Officer (AO) may issue notice u/s 68 of the Income Tax Act. Section 68 concerns cases where the books of accounts have monetary credits that are unexplained or have no commercial substance. The responsibility is cast on the taxpayer to prove the legitimacy of such credits. Section 68 covers a range of credits, including advances, deposits, gifts, and loans. However, credits already covered by other provisions like Section 41 or Section 56(2) are not included. Section 68 is for preventing the misuse of listing non-existing entities as contributors to the company.

4. Buy Back Tax

Buy Back Tax was introduced in 2013 for unlisted companies and in 2019 it was extended to listed companies. As per section 10(34A) the profits on the sale of shares offered under a buyback scheme to which the shareholder tenders his shares is exempt from tax for resident individuals. However, for the buyback of shares, it will be taxed in the hands of the company.

However, with this Budget income from the buy-back of shares by companies be chargeable in the hands of the recipient investor as Dividend income, instead of the current regime of additional income tax in the hands of the company. Further, the cost of such shares shall be treated as a capital loss to the investor. These new provisions shall be appliable from 01^st October 2024, and a very little window till 30^th September 2024 is available to the Company to complete the Buy-Back so that the income from the buy-back of shares by companies is not chargeable in the hands of the recipient investor as dividend income.

Note-For the Company law purpose, this is not a dividend for which the applicability of provisions of Section 123 of the Companies Act is to be checked. This is a limited perspective for tax angle only.

Further , if a company that receives dividend income, declares dividends to its shareholders it can avail benefits of rollover and may not pay tax on dividend income.

These provisions raise questions about whether legally tax can be levied on income on the sale of shares or gain on the sale of shares.

We can see two examples for tax liabilities

Example 1

Fact- The shareholder has bought the share at ₹ 100 per share and under a Buy -Back offer from the Company, he tenders the share to the Company at ₹ 1000 per share.

Tax liability – ₹ 1000 is considered as Dividend Income and will be taxed. There shall be no deduction of ₹100 allowed for the acquisition cost of the share for this income.

Example 2

Fact- The shareholder has bought the share at ₹ 1000 per share and under a Buy -Back offer from the Company he tenders the share to the Company at ₹ 100 per share.

Tax liability – ₹ 100 is considered as Dividend Income and will be taxed. There shall be no deduction of ₹100 allowed for the acquisition cost of the share for this income. There is a commercial loss of ₹ 900 to the shareholder, however, ₹100 will be taxed as Dividend Income. Further, ₹ 1000 cost of acquisition is a capital loss that remains in limbo until he generates the capital loss.

5. Corporate Tax for Foreign Companies

To attract foreign capital for the development needs of India the corporate tax rate on foreign companies is reduced from 40% to 35 %. Foreign companies with branch offices are currently taxed at 40% on ordinary income. However, foreign companies having wholly owned subsidiaries formed in India and registered with the Ministry of Corporate Affairs in India shall have no impact as the same is treated as domestic companies.

6.Capital Gain Tax - There are two aspects (a )Period of holding & (b) Rate of Tax.

a) Period of Holding
Listed financial assets held for >1 year will be classified as long-term.
Unlisted financial assets and all non-financial assets will have to be held for at least 2 years to be classified as long-term.

b) Rate of Tax
Short Term Gains on certain financial assets shall henceforth attract a tax rate of 20% while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate. Long Term Gains on all financial & non-financial assets will attract a tax rate of 12.5 %. However, there is no benefit of indexation that will be available henceforth.

c) Irrespective of the Period of Holding –Unlisted bonds and debentures, debt mutual funds, and market-linked debentures will attract tax on capital gains at applicable rates.

d) Units of REITs and InVITs – They will now be treated as long-term capital assets if held for 12 months instead of 36 months.

7. Incentives to IFSC

The retail schemes and Exchange Traded Funds in IFSC, shall enjoy tax exemptions along similar lines as available to specified funds.
Certain income of Core Settlement Guarantee Fund set up in IFSC is exempted.
The applicability of section 94B to certain finance companies located in IFSC is excluded.
Venture Capital Fund (VCF) located in IFSC extends a loan / other amount to an assessee, it shall no longer be called upon to explain the source of funds.
Surcharge shall not apply on income-tax payable on income from securities by specified funds.

8. Other provisions

Standard Deduction-The standard deduction for salaried employees is increased from ₹50,000/- to ₹75,000/-. Similarly, deduction on family pension for pensioners is enhanced from ₹ 15,000/- to ₹ 25,000/-.
Voluntary closure of LLPs – The services of the Centre for Processing Accelerated Corporate Exit (C-PACE) will be extended for the voluntary closure of LLPs to reduce the closure time.
NCLT-Additional tribunals will be established, and some will be notified to decide cases exclusively under the Companies Act.
Variable Capital Company structure-For providing an efficient and flexible mode for financing leasing of aircrafts and ships, and pooled funds of private equity, there may be a change in the legislation to do the same through a ‘variable company structure’.
Foreign Direct Investment and Overseas Investment –The rules and regulations for Foreign Direct Investment and Overseas Investments will be simplified to (1) facilitate foreign direct investments, (2) nudge prioritization, and (3) promote opportunities for using Indian Rupee as a currency for overseas investments.
Simpler tax regime for foreign shipping companies– Simpler tax regime for foreign shipping companies operating domestic cruises in India. Presumptive taxation regime for cruise ship operations of non-residents. There is also an exemption provided for any income of a foreign company from lease rentals of cruise ships, received from a related company that operates such ship(s) in India.
ESOP-Non-Reporting-by-Indian-Employees –Indian professionals working in multinationals get ESOPs and invest in social security schemes and other movable assets abroad. Non-reporting of such small foreign assets has penal consequences under the Black Money Act. However, such non-reporting of movable assets up to ₹ 20 lakh is proposed to be de-penalised.
Capital Gain on Gift of capital assets ( Other than from LLP or Company)-Transfer of capital under a Gift or Will or an Irrevocable Trust, by an entity other than an individual or a Hindu undivided family (HUF) only, shall be regarded as transfer for the purpose of calculation of capital gain. As LLP and Company cannot Gift out of love and affection, the provision does not apply to it.
Inclusion of taxes withheld outside India for purposes of calculating total income: Income tax paid outside India by way of deduction is deemed to be income received for the purpose of computing the income of the Assessee.
Definition of Fair Market Value (FMV): It is proposed to provide for a method of calculation of fair market value on 31 January 2018 under section 55(2) (ac) in the case of sale of unlisted equity shares in an offer for sale in an initial public offer.
Securities Transaction Tax (STT)- There will be an increase in the rates of STT on the sale of an Option in securities from 0.0625% to 0.1% of the Option premium, and on the sale of a Futures in securities from 0.0125% to 0.02%. This will be made effective from 1st October 2024