Government may introduce new generation of tax policy in EU budget 2024

The United Nations’ June briefing showed new levels of optimism, with the global economy now forecast to grow by 2.7% in 2024 (up 0.3 percentage points from the January forecast) and 2.8% in 2025 (up 0.1 percentage points).

For India, FY2024 was also a year of reckoning as the economy, which had been struggling with demand volatility, was able to grow close to 8 percent. The RBI’s growth estimates for FY2025 are promising to start with as it projects an annual GDP growth of ~8 percent for the rest of the current decade, which is sustainable. From a fiscal health perspective, tax collections were solid almost throughout the year. Both direct and indirect tax collections grew faster than the previous fiscal year, at ~11 percent and 21 percent, respectively.

One could argue that these macroeconomic trends do create an encouraging backdrop for the government to get straight to work on its reform agenda, picking up where it left off just before the general election. Overall, the industry expects the government to likely treat this year’s budget as an opportunity to lay out a solid core of policies for the economy to propel itself forward in the fast lane for the next decade, requiring structural reforms across the board; tax policies and regulations should not be left out in the process.

Case for renovation

From a tax policy perspective, the case has long been made for a major overhaul of the direct tax legislation, which has not only become a monolithic document for decades but has also often struggled to keep up with emerging businesses. Replacing the existing legislation with a new Direct Tax/Income Tax Code to simplify the legislation itself but more importantly eliminate archaic provisions of the law should be inevitable as priorities are set by the budget team in the North Block.

To visualize the new version of the legislation, it should be formulated in a simplified legal language, with fewer tax exemptions/exceptions, a uniform tax system that promotes capital accumulation and investment in long-term infrastructure/industrial projects of priority importance. Even more importantly, the new version of the tax law must provide for a dispute resolution mechanism to discourage frivolous litigation and instead promote voluntary compliance.

That said, legislating is a time-consuming business even with the best intentions and efforts. It would not be unfair, therefore, for the government to make another round of changes to the current legislation to move the needle on two key priorities – first, to double down on encouraging voluntary compliance by taxpayers (both new and old) and second, to promote long-term capital investment (both equity and debt) across a range of sectors, notably manufacturing, infrastructure, new energy and climate projects, research and development, and other emerging sectors such as space.

Think long term

The overriding motive for many of these changes should be certainty of outcomes for taxpayers and businesses in the longer term. It will be good if the changes introduced are not temporary, intended for a limited period of one or two years, as has been the case in several recent cases.

One such much-anticipated demand from India Inc. is the extension of the concessional corporate tax regime (15 per cent) for new manufacturing companies, which expired recently in March 2024. Over the last four years, the benefits of a lower tax rate have been a key element in reviving India’s manufacturing sector. It would make sense to restore the lower tax rate for eligible companies, even without a sunset clause, so that companies can plan their schedules in a tax-neutral manner. A complementary tax policy that provides production-linked incentives to priority sectors can be a net positive for economic growth.

The aforementioned pass-on of the benefit of lower tax rate will also promote investment in the power generation sector. This is crucial for India to achieve its target of 500 GW of non-fossil fuel capacity by 2030 and other domestic contributions, towards the net zero emission target. More such tax incentives will be needed for comprehensive green and sustainable development in the country; one of them is a preferential tax rate on interest on foreign loans, which could be linked to sustainability benchmarks such as green bonds, to be used for notified purposes namely. generation of energy from renewable sources, waste-to-energy, green hydrogen.

India can be predicted to emerge as a global R&D hub based on a number of factors. The implementation of a tax regime that promotes large-scale investment can easily be considered as one of these drivers. While India is already a thriving destination for MNEs setting up Global Capability Centres, a combination of measures such as accelerated recovery of original capital cost and a tax holiday for 5 to 7 years could tip the scales in favour of India becoming one of the most desirable destinations for new R&D activities.

Globally, the tax policy landscape has been dynamic as countries have been implementing the Organisation for Economic Co-operation and Development’s Global Minimum Tax Rules into their domestic tax laws. Multinational enterprises are slowly preparing to comply with the Globe Information Return and accounting disclosure requirements. It would be logical for the government to provide a clear roadmap for the implementation of Pillar 2 in the Indian context as the global compliances will come into effect in the next 12 months.

Improving the dispute resolution mechanism

One of the attributes of a modern tax law is to have a progressive framework built in for faster and frictionless resolution of disputes. Indian tax laws have largely failed to meet this requirement. It will make a huge difference if the tax dispute resolution framework is reconsidered to provide an alternative solution. While amnesty/settlement schemes were in vogue in the past which undoubtedly resolve the dispute effectively, there is a dire need to reduce the number of tax disputes by providing a higher income threshold for litigation.

More importantly, disputes arising out of interpretation of a bilateral tax treaty need to be grouped and resolved expeditiously to prevent the Indian tax system from being misunderstood as draconian. One such case is the recent decision of the Supreme Court in the case of Nestle SA, on how to interpret a protocol to a bilateral tax treaty, as the case had far-reaching ramifications at the central level. While formal guidelines on how to interpret protocols to treaties between India and various countries will be welcome, a well-balanced pattern of dispute resolution in the past can provide relief and certainty to taxpayers, while strengthening tax collection from a tax administration perspective.

As B-Day approaches, expectations may rise as the economy resets to a higher growth trajectory. Sensibly, if the budget delivers on several key fiscal policy priorities and sets a course for further policy intervention, it will already be a great start.

(The authors are partners at Deloitte India. The views expressed here are personal)