As 2024 draws to a close, India experienced significant tax reforms aimed at fostering economic growth, creating employment, and improving the ease of doing business. These reforms sought to simplify the tax structure, reduce compliance burdens, and address tax disputes. However, their effects on Indian businesses have been a mixed bag.
Major Tax Reforms in 2024
1. Angel Tax
Angel tax, a long-standing challenge for startups raising funds at premium valuations, was abolished in 2024. This reform removed the uncertainty in investor communities, granting businesses greater flexibility in fundraising without needing to justify valuations. The move significantly enhanced the ease of doing business in India.
2. Capital Gains Tax
Capital gains tax rates were standardized across asset classes, with short-term capital gains (STCG) taxed at 20% and long-term capital gains (LTCG) at 12.5%, excluding indexation benefits. While some taxpayers faced challenges with the removal of indexation, relief was granted to individuals and HUFs for immovable properties acquired before July 23, 2024. This simplification in tax computation was a welcome change despite certain drawbacks.
3. Share Buy-Back Tax
Effective October 1, 2024, the 20% tax on share buy-backs was abolished, aligning its tax treatment with dividends taxed at slab rates. This led to a surge in buy-backs before September 30, particularly by private company promoters. However, equating buy-back taxation with dividends may reduce its appeal in the future, as both mechanisms serve distinct shareholder rewards.
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4. International Taxation
The elimination of the 2% equalization levy on e-commerce transactions with foreign entities marked a significant step. Initially introduced as a temporary measure under BEPS Pillar 1 and 2, the levy’s ambiguity in applicability and compliance overshadowed its benefits, leading to its abolition.
5. Tax Disputes
Tax disputes surged, with direct tax appeals growing from 51,567 cases (Rs. 6.64 lakh crores) in FY 2021-22 to 64,311 cases (Rs. 14.21 lakh crores) in FY 2023-24. Additionally, 5.8 lakh cases remained pending at lower appellate levels.
Despite measures like raising monetary limits for appeals and the Vivad Se Vishwas Scheme 2.0, the growing pendency highlights the need for more decisive action. A committee to expedite issue reviews, policy clarifications, and withdrawal of select appeals could help reduce litigation costs, bolster investor confidence, and enhance India’s image as a predictable investment destination.
Outlook for 2025: A Path to Growth
Following the Union Budget 2024, the Central Board of Direct Taxes (CBDT) formed a committee to overhaul the Income Tax Act, emphasizing simplicity, clarity, and reduced litigation. Public suggestions have been invited to address redundant provisions and streamline compliance.
The reforms initiated in 2024 are expected to yield long-term benefits for businesses in 2025, particularly in the startup and innovation-driven sectors. Simplified tax laws and reduced compliance burdens will allow businesses to focus on growth and innovation, paving the way for a promising economic future.
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