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Budget 2025: Several other issues within the capital gains tax framework still require attention and rationalisation
Anticipated Reforms in capital gain and other direct tax landscapes
The government of India has been actively pushing for reforms to modernize the tax regime and the ecosystem. After the rationalisation of the capital gains tax regime in Budget 2024, there are strong indications that further refinements will follow, especially in the wake of the introduction of the new Direct Tax Code (DTC) in the previous Budget. While a comprehensive overhaul of the DTC may still be on the horizon, early steps towards its implementation could feature prominently in this Budget. These changes are likely to focus on simplifying the tax structure, enhancing clarity, and rationalise the existing system to promote equity and ease of compliance. Given the government’s commitment to creating an efficient and equitable tax system, it is crucial to examine the likely impact of these changes on taxpayers and businesses across India’s diverse economic spectrum.
The taxation of capital gains has already been rationalised and simplified to a certain extent in the last Budget. Major parameters where the rationalisation took place was:
- The holding period (where only 2 holding periods were retained, viz. 1 year and 2 years); and
- Doing away with indexation, for ease of computation with simultaneous reduction of rate from 20% to 12.5%.
However, several other issues within the capital gains tax framework still require attention and rationalisation which are as follows:
Lack of clarity regarding the taxation of contingent. Ideally, this may be taxed fairly in the year of receipt of the contingent consideration.
Additionally, India imposes a capital gains tax on non-residents for indirect transfers—where the transfer of an asset indirectly results in the transfer of a capital asset situated in India. On the international front, many countries provide exemptions for indirect transfers within the same corporate group, as such transactions typically do not generate real income. To align with global practices, India may consider introducing a similar exemption for intra-group indirect transfers, provided adequate safeguards are implemented to prevent misuse, such as ensuring continuity of ownership. Such measures would not only bring clarity and alignment with global practices but also significantly enhance investor confidence in India.
Other amendments that might be brought in from an overall direct tax perspective are as follows:
New tax regime
The government is likely to streamline and incentivize the new tax regime further, making it more attractive compared to the old system. Further, efforts could also be taken to reduce tax rates for the middle-income group (with earnings of INR 10–20 lakh per annum) to encourage compliance and taxpayer’s satisfaction. Thus, it is likely to result in increased disposable income and more spending capacity thereby, promoting the retail sector, as it would stimulate demand.
Concessional tax regime for the manufacturing sector
Before the last Budget, it was expected that the 15% concessional corporate tax rate for manufacturing and power generation companies would be extended beyond 31 March 2024 as there were lot of projects which were delayed due to land acquisition issues, evacuation issues, etc. However, no such extension was announced. Budget 2025 may revisit this, potentially granting a retrospective extension from 1 April 2024. Such a move would reaffirm India’s position as a prime destination for manufacturing investments, offering new opportunities for investors planning or considering ventures in the country.
Boost to start-ups
For start-ups, tax holidays are likely to be extended, accompanied by a simplified compliance framework to foster entrepreneurship. This will boost entrepreneurship, attract investments, create jobs, drive innovation, and strengthen India’s position as a global start-up hub.
Extending Tax Benefits to Global Capability Centres in India
India has seen significant growth in Global Capability Centres (GCCs) over the past few years, with a marked increase in their numbers and revenue generation. This growth highlights the substantial potential for further expansion, both in terms of revenue and job creation. To support this, extending the concessional 15% corporate tax rate to GCCs could provide a strong incentive, encouraging their continued growth and reinforcing India’s position as a global hub for such centres.
Rationalisation of withholding tax rates
Streamlining withholding tax rates into fewer categories and eliminating redundant provisions can reduce administrative complexity, enabling businesses to concentrate on growth and innovation.
Information Technology shaping of the taxation landscape
Significant tax compliance simplifications are anticipated through advanced technology. The government is likely to expand the use of AI and machine learning for faceless assessments and improved detection of tax evasion. Initiatives like dispute resolution committees and Vivad Se Vishwas schemes aim to reduce litigation by resolving long-pending cases. Additionally, enhanced e-filing systems will further streamline interactions between taxpayers and authorities.
As Budget 2025 draws near, the anticipation surrounding its impact on India’s tax landscape continues to grow. The potential reforms outlined above, could change the game for businesses across the country. How these proposed changes unfold in the upcoming Budget will be crucial in shaping India’s economic future, providing new opportunities for growth, innovation, and global competitiveness.
Written By: Authors are Jimit Devani, Partner; Rachna Unadkat, Director; Sannidhi Shah, Manager, Deloitte India
Disclaimer:The views expressed in this article are those of the author and do not represent the stand of this publication.