Tax cuts and customs duty reductions to boost India’s economic appeal

The Union Budget 2024-25, presented by Finance Minister Nirmala Sitharaman, introduces pivotal changes in corporate taxation and customs duties, aiming to enhance India’s economic landscape. A key highlight is the reduction of the corporate tax rate for foreign companies from 40% to 35%, designed to boost FDIs and integrate India more closely with global markets. Additionally, the Angel Tax, a longstanding impediment for startups, has been abolished, promising a more supportive environment for early-stage investments and fostering innovation.

The budget also implements significant customs duty reductions to promote domestic manufacturing and export competitiveness. These measures align with the government’s broader goals of reducing production costs and supporting the ‘Make in India’ initiative, thereby positioning India as an attractive destination for global business investments.

The Union Budget 2024-25, presented by Finance Minister Nirmala Sitharaman, brings significant changes in corporate taxation and customs duties. These reforms aim to bolster economic growth, enhance industry competitiveness, and attract foreign investment. This article delves into the specifics of these changes, examining their potential impacts on various sectors.

In a strategic move to enhance India’s appeal to foreign investors, the government has reduced the corporate tax rate for foreign companies from 40% to 35%. This adjustment is designed to create a more competitive business environment, particularly in light of global economic shifts.

Source: India Budget

This reduction is expected to stimulate foreign direct investment (FDI) and drive economic activity by lowering the tax burden on international firms operating in India. It aligns with the broader objective of integrating India more deeply into global supply chains.

The budget further streamlined capital gains taxation, the TDS structure, and the direct tax regime for charities. There will be a combined tax exemption system for charities. When units are repurchased by mutual funds or UTI stands are withdrawn, the 5% TDS on multiple payments will be combined into 2% TDS and 20% TDS.

The TDS rate for online retailers was lowered from 1% to 0.1%. TCS credit will now be given on TDS deducted from salaries. The budget decriminalised TDS payment delays up to the due date for filing the TDS statement. Soon, a standard operating procedure will be developed to simplify and rationalise compounding guidelines for TDS defaults.

Short-term capital gains from certain financial assets will now be taxed at a rate of 20%. Long-term capital gains on all financial and non-financial assets will be taxed at 12.5%. The capital gains exemption limit has been increased to ₹1.25 Lakh per year to benefit lower and middle-income individuals. Long-term assets are listed financial assets that have been held for more than a year, as well as unlisted assets (both financial and non-financial) held for more than two years. Unlisted bonds and debentures, debt mutual funds, and market-linked debentures will continue to be subject to capital gains tax.

Union Finance Minister Smt. Nirmala Sitharaman acknowledged that GST has reduced tax incidence on the common man and described it as a massive success. She also stated that GST has reduced the compliance burden and logistics costs for trade and industry. The government now plans to simplify and rationalise the tax structure before expanding it to other sectors. Over the next two years, the budget also proposed further digitising and making paperless the remaining Customs and Income Tax services, including rectification and order enforcement of appellate orders.

Abolishment of Angel Tax

The Finance Minister also announced that the Angel Tax would be abolished in the Union Budget 2024-25, a significant shift for the Indian startup ecosystem. The proposed abolition of the decade-old tax regime was hailed by venture investors as “a massive reform.”

Harsh Bhuta, Partner, Bhuta Shah, and Co LLP, said that removing Angel Tax marks a transformative moment for India’s startup ecosystem, creating a more robust and supportive investment environment. This move aligns with the government’s Startup India initiative, reinforcing its commitment to fostering innovation and entrepreneurship and driving economic growth towards the US$ 5 trillion economy goal. By removing a significant funding obstacle, startups can access investments more freely, boosting job creation and innovation across various sectors.”

Experts noted that this tax imposed an additional burden and uncertainty on investors, particularly angel investors who provided early-stage funding. This discouraged potential investors and stifled the growth of startups.

The removal of the angel tax from the budget is expected to have a significant impact on India’s startup landscape. It addresses long-held concerns among startups and investors, paving the way for a more vibrant and dynamic entrepreneurial ecosystem. This move is consistent with the country’s overall goals of promoting ease of doing business and cultivating an innovative culture.

Customs Duty Reductions

The budget has introduced a series of customs duty reductions aimed at various sectors to promote manufacturing and export competitiveness. These customs duty reduction rates have been streamlined to simplify the tariff structure. Customs duties have been rationalised and revised to facilitate trade and reduce disputes. Giving relief to cancer patients, the budget fully exempted three more cancer-treating medicines from customs duties, Trastuzumab Deruxtecan, Osimertinib, and Durvalumab. Basic Customs Duty (BCD) will be reduced on X-ray machines, tubes, and flat panel detectors.

BCD on mobile phones, printed circuit board assemblies (PCBAs), and mobile chargers was reduced to 15%. To encourage the processing and refining of critical minerals, the Budget exempted 25 rare earth minerals, including lithium, from customs duties and reduced BCD on two of them.

The budget proposed exempting capital goods for the manufacture of solar panels. To increase India’s seafood exports, BCD on broodstock, polychaete worms, shrimps, and fish feed was reduced to 5%. The budget will increase the competitiveness of Indian leather and textile exports. BCD was reduced from 7.5% to 5% in Methylene Diphenyl Diisocyanate (MDI), which is used to manufacture spandex yarn.

Customs duties on gold and silver were reduced to 6%, and on platinum to 6.4%. BCD on ferro nickel and blister copper have been removed, while BCD on ammonium nitrate has been increased from 7.5 to 10% to support existing and new pipeline capacity. Similarly, BCD on PVC flex banners increased from 10% to 25%, taking into account the environmental risk. To encourage domestic manufacturing, the BCD on PCBA for specific telecom equipment was increased from 10% to 15%.

These reductions are expected to lower production costs, enhance export potential, and support the ‘Make in India’ initiative by making raw materials and intermediate goods more affordable for domestic manufacturers.

The Union Budget 2024-25’s emphasis on reducing corporate tax rates for foreign firms and cutting customs duties across various sectors underscores the government’s commitment to fostering a conducive business environment. These measures are expected to drive investment, enhance competitiveness, and support sustainable economic growth. By simplifying the tax structure and lowering barriers to trade, the budget aims to position India as a favourable destination for global business.