Corporate Tax Reforms: What the Finance Act 2024 Means for Large Corporations

Article by Yashashri Bhat

The Finance Act 2024, notified on July 23, 2024, represents a significant transformation in India's corporate tax regulations. This legislation introduces substantial changes aimed at modernizing tax practices, enhancing compliance, and fostering economic growth. For large corporations, these reforms come with both challenges and opportunities, impacting tax obligations, compliance expenses, and strategic planning[1]. This article explores the primary elements of the Finance Act 2024 and their implications for major corporations.

1. Changes to Corporate Tax Rates

One of the most significant updates in the Finance Act 2024 is the adjustment to corporate tax rates:

·         Reduction for Foreign Companies: The tax rate for foreign companies is reduced from 40% to 35%. This modification is intended to make India a more attractive destination for international investments, potentially increasing foreign direct investment (FDI) and encouraging multinational corporations to expand their presence in India.

·         Domestic Corporations: For domestic large corporations, the tax rate remains unchanged. However, a new tiered structure adjusts the effective tax burden based on operational scale and profitability. This new framework aims to distribute the tax load more equitably across various sectors and promote growth in areas crucial for national development. Consequently, large corporations with substantial revenues may face higher tax liabilities, prompting a need to reassess tax strategies and financial planning.

2. Expanded Tax Deductions and Incentives

The Finance Act 2024 introduces several important updates to tax deductions and incentives:

·         Broadened R&D Tax Credits: The Act expands the scope of tax credits available for R&D expenditures, making it more attractive for companies investing in technological and scientific advancements.[2] This change encourages greater investment in R&D and fosters a culture of innovation within large enterprises.

·         New Investment Incentives for Green Technologies: New allowances are introduced for capital expenditures on green technologies and sustainable practices. Corporations investing in renewable energy, energy-efficient technologies, or eco-friendly infrastructure can now benefit from increased deductions. This measure aligns with global sustainability objectives and supports the government’s focus on promoting green development.

·         Increased Pension Contribution Deductions: The allowable deduction for employer contributions to pension schemes is raised from 10% to 14% of an employee's salary. This adjustment benefits large corporations by reducing taxable income and enhancing employee benefits.

3. Streamlined Capital Gains Taxation

The Finance Act 2024 simplifies capital gains taxation by revising asset holding periods:

·         Updated Holding Periods: The previous 36-month holding period for asset classification is removed. New periods are established: 12 months for listed securities and 24 months for other assets. This simplification aims to make the capital gains tax system more transparent and manageable.

·         Revised Capital Gains Tax Rates: The tax rate for short-term capital gains on listed equity shares, equity-oriented funds, and units of business trusts increases from 15% to 20%. Conversely, the long-term capital gains exemption limit for equity shares and equity-oriented units is raised from Rs. 1 lakh to Rs. 1.25 lakh, with the tax rate adjusted from 10% to 12.5%. These changes are significant for corporations with substantial holdings in these assets and may require a reassessment of investment strategies.

·         Abolition of Indexation Benefit: The removal of indexation benefits for long-term capital assets simplifies tax calculations but could lead to higher tax liabilities for assets held over extended periods. Corporations will need to factor this change into their asset management and tax planning strategies.

4. Adjustments to TDS Rates and Compliance

The Finance Act 2024 introduces important modifications to Tax Deducted at Source (TDS) regulations:

·         Reduction in TDS Rates: TDS rates on payments such as insurance commissions, life insurance policies, and lottery ticket commissions are reduced from 5% to 2%, effective from October 1, 2024. This reduction aims to ease the tax burden on businesses and improve compliance.

·         New TDS Requirement for Partner Payments: A new provision (Section 194T)[3] requires firms to deduct tax at 10% on payments to partners exceeding Rs. 20,000. This change impacts large partnerships and limited liability partnerships (LLPs), necessitating updates to payroll and accounting processes.

·         Higher Limits for Partner Remuneration: The Finance Act increases the permissible limits for partner remuneration under Section 40(b), allowing for higher deductions. This adjustment provides large partnerships with more flexibility in designing compensation packages.

5. Removal of Angel Tax

The Finance Act 2024 proposes the abolition of Angel Tax provisions under Section 56(2)(viib).[4] Previously, Angel Tax taxed the excess of issue price over the fair market value of shares issued by startups, creating challenges for emerging companies seeking funds. The removal of this tax is expected to reduce compliance burdens and stimulate investment in startups, thereby invigorating the entrepreneurial ecosystem.

6. Enhanced Anti-Avoidance Measures

To address tax avoidance and improve compliance, the Finance Act 2024 introduces several measures:

·         Strengthened Transfer Pricing Regulations: The Act enhances transfer pricing rules to ensure fair taxation of intercompany transactions. Large multinational corporations will need to comply with stricter documentation requirements and pricing guidelines.

·         Introduction of Controlled Foreign Corporation (CFC) Rules: New CFC rules target income shifting to low-tax jurisdictions, impacting large corporations with global operations. Adherence to these rules will be crucial to avoid penalties and ensure fair tax practices.

·         Revised Procedures for Reopening Income Tax Returns: The Act limits the reopening of income tax returns to cases where escaped income exceeds Rs. 50 lakh, reducing the timeframe for reassessing previous returns. This change will affect how large corporations manage tax audits and disputes.

7. Implications for Large Corporations

The Finance Act 2024 introduces several key changes with implications for large corporations:

·         Higher Compliance Costs: The introduction of new reporting requirements and stricter compliance measures, along with the removal of certain benefits, is expected to increase administrative and compliance costs. Corporations will need to invest in advanced tax reporting systems and advisory services to navigate these changes effectively.

·         Need for Strategic Adjustments: With revised tax rates, simplified capital gains taxation, and updated incentives, large corporations will need to reassess their financial strategies. This may involve restructuring investment portfolios, revising tax planning strategies, and optimizing the use of new deductions and credits.

·         Opportunities for Growth: The enhanced R&D credits, new investment allowances for sustainable practices, and removal of Angel Tax provide significant growth opportunities. By leveraging these provisions, companies can drive innovation, expand operations, and align with broader economic and environmental goals.

Conclusion

The Finance Act 2024 represents a critical shift in India's corporate tax landscape, implementing extensive reforms that affect large corporations in various ways. These changes, while presenting new challenges such as increased compliance costs and adjusted tax liabilities, also create opportunities for significant growth and innovation. To successfully navigate this evolving environment, large corporations must remain agile, adapt their strategies to manage tax obligations, and capitalize on new incentives. This overhaul promises long-term advantages, fostering a more transparent and equitable tax system that could enhance economic competitiveness and reinforce corporate accountability in India.

[1] Finance Act, No. 30 of 2024, (India)

[2] Ministry of Finance, Government of India, Report on the Finance Act 2024, (July 23, 2024)

[3] Finance Act, 2024, Sec 194T (India), https://www.indiabudget.gov.in/doc/Finance_Bill.pdf.

[4] Finance Act, 2024, § 56(2)(viib) (India), https://www.indiabudget.gov.in/doc/Finance_Bill.pdf.