Tax Reforms and incentives in Union Budget 2024

The Union Budget 2024 contained many measure that are focused towards providing incentives for businesses, and tax reforms. These measures can provide the required push to the private sector to kickstart their stalled investments to boost economic and job growth.

Some measures are small, but others can have far reaching consequences. Let us look at some of the tax reforms and how they could impact businesses.

Angel tax repealed

One of the major positive tax reforms that came out of Union Budget 2024 was the abolishing of angel tax. Startups ran the risk of having to pay tax on funds raised from investors, if the fair value of such shares were far lower than the amount received by these companies. For nearly the past decade, startups have been facing demand orders, and even impounding of bank accounts by the Income Tax Department to recover tax dues.

The law in question was written to ensure money laundering by inflating a company’s share price while raising money could be targeted. But the actual impact was on the fast-growing startup ecosystem which saw many companies facing income tax cases and recovery action by the authorities. This law has been repealed, but prospectively only. The government said that it would use its Vivad se Vishwas dispute settlement scheme to ensure cases previously filed to recover angel tax are settled once and for all.

Tax rate on foreign companies reduced

Companies domiciled in India always got a preference under India’s income tax law. This included a lower corporate tax rate for those companies that chose to forego a bunch of allowable deductions (like the new income tax regime for individuals), or the lower tax rates for Indian companies that invested in setting up a manufacturing between October 1, 2019, and March 31, 2023.

Now, the government has sought to reduce the delta between the tax rate for an Indian domiciled company and a foreign company is lower at 35%, down from the earlier 40%

Streamlining TDS rates

In a move that can free up a lot of working capital for startups and other businesses, the government reduced the TDS rates on various payment to 2% from earlier 5%. This is expected to free up funds for companies that usually got locked till a refund was claimed in the future.

Additionally, TDS levied on e-commerce operators has been cut to 0.1% from earlier 1%.

These moves will primarily help loss-making companies (mainly startups) that used have their funds locked up till they filed returns to claim refund of the TDS paid. The reduction of rates is expected to free up a lot of funds that were tied down as TDS on the payments they received from customers.

Now, let us move to other measures and incentives that the government announced in Union Budget 2024 relating to the MSME sector.

Incentives for micro, small and medium enterprises (MSMEs)

There was an entire section that pertained to the MSME sector, and the slew of measures could give a fillip to their growth. This whole package covers financing and regulatory changes to help them compete in the global marketplace. Let us look at some of these measures—

• Credit guarantee scheme for MSMEs to help facilitate term loans for MSMEs to help them purchase machinery and equipment without the need to for a collateral or third-party guarantee.

• A self-financing guarantee fund to provide each applicant a guarantee cover of up to ₹100 crore.

• A new credit assessment model for to be created by public sector banks in-house to assess creditworthiness of MSMEs using non-traditional metrics just like many fintech startups employ.

• Credit support to MSMEs during stress period by postponing categorising them as NPA through a guarantee from a government supported fund.

• The threshold for turnover to get working capital from TReDS bill discounting platform to be reduced to ₹250 crore from the current ₹500 crore.

• Small Industries Development Bank of India or SIDBI branches will be set up in MSME clusters. In 3 years, all major MSME clusters will be covered by these SIDBI branches and provide them direct credit.

• Enable MSMEs and artisans to sell their products in international markets. E-commerce export hubs to be set up for this purpose in public-private partnership mode.

As we can see, there are extensive measures in terms of tax reforms and incentives announced in Union Budget 2024. These measures will go a long way to help MSMEs, startups and various other businesses grow at a fair clip, and to promote investment by the private sector.