India’s annual financial budget for 2024-25 was dripping with change. Presented for the ninth time by Finance Minister Nirmala Sitharaman, the announcements included better rules and taxes for foreign investors, an increase in capital gains tax, new employment generators, a focus on the agriculture supply chain, revival of effective debt recovery systems, and a reduction in customs to promote the local manufacturing sector.
In line with previous budgets, the government has announced a significant increase in capital expenditure, particularly focused on infrastructure building, both physical and digital. This is expected to rejuvenate economic growth and foreign investment in the sector and increase opportunities for project financing.
The budget also has a substantial increase in expenditure towards agricultural development, including farm credit availability, building supply chain infrastructure, increased credit availability and creation of markets.
Continued privatisation of strategic public sector assets is expected to bring more investment opportunities to the market. Lastly, the budget also emphasises the importance of green and sustainable growth and finance, aligning increasingly towards global ESG trends.
“The union budget has largely been positive for the Indian debt market. The fiscal deficit of 4.9 percent is better than market expectations of 5.1 percent, while the borrowing estimate was maintained. The continued fiscal glide path over the next two years (4.5 percent fiscal deficit by FY26) remains a key positive,” says Pankaj Pandey, head of research at ICICI Direct.
Legal experts discuss some of the salient features of the budget, and how they change the market.
Higher capital gains tax on equity markets
Markets have been falling across the country after Sitharaman announced a higher long-term capital gains tax for all assets and higher short-term capital gains tax on specified financial assets.
“The FM proposes to hugely simplify the capital gains taxation regime. Short-term gains on certain financial assets will now attract a tax rate of 20 percent, 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 and non-financial assets will attract a tax rate of 12.5 percent. Listed financial assets held for more than a year will be classified as long-term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term,” explains SR Patnaik, head of Cyril Amarchand Mangaldas’ tax practice explains.
This change is likely in response to the government’s fear of a bubble with respect to the stock market’s currently highly inflated valuations.
“In the economic survey announced yesterday, the government expressed concern about the rapid growth of the Indian stock market, particularly in terms of valuations. The adjustment in capital gains taxation, both long-term and short-term, aims to address these market concerns,” says Ankit Jain, a partner at Ved Jain & Associates.
While increasing capital gains tax does help prevent bubble-like valuations from frequently popping up, the move is likely to have long-term consequences for long-term investments in the India equity market.
“Increase in capital gains tax regime would be a dampener for the market as a whole,” says Ritika Nayyar, a partner at Singhania & Co. “Over the long term, the higher LTCG tax rate may discourage long-term investments in equity markets, as the after-tax returns would be lower. This could affect the overall growth and liquidity of the market.”
JSA direct tax partner Kumarmanglam Vijay says the increase in long-term capital gains tax may not impact M&A activity.
The hike in long-term, short-term tax and STT might have received negative reactions from the market, but it is a move to improve the tax collection to cover overall expenditure needs, says Pandey at ICICI Direct.
Another concern pointed out by Jain was the lack of clarity on the retrospective applicability of the increased capital gains tax on existing long-term investments.
“The FM did not announce any grandfathering of gains accumulated to date. This means the higher rate of 12.5 percent will apply to all capital gains accrued over the years, not just those from now onward, effectively increasing an investor's tax burden by 20 percent. I believe the government should act fairly and at least allow for grandfathering of capital gains accumulated so far,” Jain said.
Tax reforms focus on stimulating growth
The budget promises a much-needed overhaul of the country’s income tax regime and makes a string of changes across tax and regulatory regimes in an effort to promote foreign investment, including notably, the reduction of corporate income tax from 40 percent to 35 percent.
“Reduction in corporate tax rates for foreign companies from 40 percent to 35 percent, reducing the limitation period for tax assessment and introduction of a new tax settlement scheme will promote investor confidence in the Indian market,” says Gouri Puri, a tax-focused partner at Shardul Amarchand Mangaldas & Co.
“While the major overhaul in the tax code is work in progress, some big wins this budget include the abolition of angel tax, which had made private equity and venture capital investments in startups difficult,” Puri adds.
Amid a funding winter, the removal of the tax on angel investors is a huge impetus for the nation’s burgeoning startup industry, as well as early-stage investors domestically and abroad.
“The abolishment of the angel tax is a major win for the Indian startup ecosystem. Especially for young companies, securing early-stage funding is crucial for growth and innovation. This should be especially helpful for attracting investment from outside India. Non-resident investors have been facing double trouble in complying with the angel tax and FEMA valuation rules, after extension of the angel tax regime to non-resident investors recently. This change simplifies things and makes India a more attractive destination for startup capital,” says Kunal Savani, a partner at Cyril Amarchand Mangaldas.
Sidharrth Sankar and Vikram Raghani, co-chairs of JSA Advocates & Solicitors’ corporate practice agree: “The sluggish startup growth may pick up with certain dedicated relief announcements for startup such as abolishment of angel tax for all classes of investor is a welcome step, this may end the funding winters.”
While the detailed proposal to abolish the 2 percent equalisation levy would need to be examined in detail, the FM seems to have provided much-needed relief to foreign e-commerce operators and crypto exchanges.
“Foreign crypto exchanges may breathe a sigh of relief due to the proposal to remove equalisation levy on e-commerce supply of goods and services, but their tax obligations might not be entirely gone. A thorough review under SEP rules is necessary to determine their tax liabilities in India. This could involve factors like user base and business activities within the country,” Savani says.
While these changes bring much-needed impetus to India’s business market, the budget did not meet expectations of salaried individuals in the country, apart from the usual tax slab reform.
“While all these are certainly welcome moves, the salaried and middle class of India was expecting some more noticeable direct tax benefits other than the slight increase in standard deduction and slabs in the new regime,” adds Nayyaar at Singhania.
Changes in customs rates to facilitate manufacturing
The FM reduced the basic customs duty (BCD) on mobile phones, mobile PCBA and chargers, noting a three-fold increase in domestic production and 100-fold increase in export of mobile phones in the last six years.
The government’s changes are directed towards stimulating a slow-growing manufacturing sector, particularly in electronics, semiconductors and technology.
Nupur Maheshwari, an executive partner at Lakshmikumaran & Sridharan, says the amendments to customs laws are geared towards ease of doing business, promote domestic manufacturing, support local value addition and increase the competitiveness of Indian goods in the international market.
“The rates of customs duties have been significantly reduced on the inputs used in India’s major export sectors such as sea food, leather and textiles (garments and footwear) to provide further fillip to these sectors. Export duty on rawhides and skins is being rationalised,” Maheshwari says.
“To promote ‘make in India’, the customs duties on the inputs used in manufacturing of PCBAs of mobile phones, connectors for manufacture of certain electronics, critical minerals which are used in important and strategic sectors is proposed to be reduced. The FM also proposed a phased manufacturing program for manufacture of X-ray tubes and flat panel detectors in the medical sector. The time period of re-import and re-export of goods for use in warranty and repairs is proposed to be increased from 6 months to 1 year and 3 years to 5 years, respectively,” she adds.
Revamp of the IBC, NCLT
The budget also made long-awaited announcements in relation to reinvigorating its Insolvency and Bankruptcy Code and reform tribunals like the National Company Law Tribunal (NCLT) in order to speed up resolution timelines and bring back investor confidence to India’s stressed-asset market.
An “integrated technology platform” will also be set up for improving the outcomes under the Insolvency and Bankruptcy Code, 2016.
Further, an announcement of new NCLT benches to deal exclusively with Companies Act matters is a huge relief to corporate litigators, who have been saying for years that the NCLT’s focus on the IBC has hampered corporate litigation before the tribunal.
Today, merger and demerger cases, and oppression and mismanagement cases have taken a back seat in light of regulatory push to the IBC, says Deep Roy, managing partner at Equilex.
“This measure will definitely improve the time taken for non-IBC companies act cases, and oppression and mismanagement cases, which require very detailed hearings not being provided by the existing benches. This move will allow such cases to be heard in detail,” he adds.
Notes Dhananjay Kumar, head of insolvency and restructuring at CAM: “The new NCLTs for Companies Act matters and strengthening NCLT with more members is the need of hour for IBC and Companies Act to function speedily. This move is laudable.”
The new budget highlights the government's commitment to ensuring a robust and transparent insolvency process, which is crucial for maintaining financial stability and promoting a healthy business environment, says Alay Razvi, a partner at Accord Juris. “The success of the IBC in recovering substantial amounts reaffirms its pivotal role in the economic rejuvenation of the country,” he adds.
A shift towards international standards
The introduction of a long-awaited climate finance taxonomy will help accelerate the country’s net zero transition, says Bose Varghese, senior director – ESG at Cyril Amarchand Mangaldas.
“Lack of a taxonomy is often cited as the biggest hurdle in attracting climate finance to India and properly accounting for green finance domestically,” he adds. “Disappointing to note that the budget sets no timeline for transitioning from the legacy PAT scheme to the Indian carbon market that is expected to set emission reduction targets for hard-to-abate industries.”
Sankar and Raghani at JSA point out that the Foreign Direct Investment and Overseas Investments laws are going to be simplified to facilitate foreign direct investments and promote opportunities for using the Indian rupee as a currency for overseas investments.
They note that the agri-supply chain is one of the biggest beneficiaries of this budget, adding that “sectors such as space, aviation, digital infrastructure, hospitality, e-commerce hubs/ warehouses, plug and play industrial parks, mining, power and MSMEs are also expected to gain from this budget.”
Aarushi Jain, head of CAM’s media, education and gaming practice, also adds: “This is a forward-looking budget from education sector perspective. There is an increased focus on skilling, training and job creation – all much needed for the progress of the country. The budget also provisions for skilling and education loans, with an aim to facilitate access to education. The next few years will likely see a lot of industry-academia–government collaboration to make the various schemes a success.”
