Finance Minister Nirmala Sitharaman presented the union budget 2025 yesterday focusing on unlocking India's potential for prosperity and enhancing global standing. This budget was presented in the backdrop of slowdown in India’s GDP growth to 5.4 per cent in Q2 FY25 from 6.7 per cent in Q1, attributed to weak manufacturing sector and weak consumption. This coupled with earnings slowdown led to foreign portfolio investors (‘FPI’) selling Indian securities exceeding USD 30 billion in last 4 months leading to more than 10 percent drop in Indian indices, despite strong support from domestic institutions.
To address these challenges and boost growth, FM announced several measures including key taxation reforms. A new income-tax bill emphasising simplification, providing certainty in tax administration, and reducing litigation, is proposed to be introduced shortly.
This Budget has increased Foreign Direct Investment (‘FDI’) limit for Insurance companies from 74 per cent to 100 per cent, along with an indication to revisit extant conditions around FDI. This will attract foreign investments, drive innovation, improve market efficiency and increase insurance penetration. In addition to entry of new insurance players, existing foreign players may increase their stake and give monetisation opportunity for non-strategic Indian shareholders and Public Sector banks. Post increase in the FDI limits, modifications in associated legislations such as FEMA regulations, FDI policy, etc. is also expected.
Considering the importance of long-term infrastructure investments, FM proposed extending the last date for making investments, in specified infrastructure sector by Sovereign Wealth Funds (‘SWFs’)/ Pension Funds (‘PFs’), by 5 years i.e., 31 March 2030. Further, the anomaly of deemed short-term capital gains, arising on sale of unlisted debt securities has been addressed and exemption has been duly granted to SWFs/PFs. These measures are likely to strengthen India's infrastructure landscape and foster sustainable economic growth.
Like last few years, this Budget has also given significant importance to IFSC. Currently, lot of exemptions in IFSC are linked to a sunset date and generally this date is extended by a year closer to the sunset date leading to uncertainty and concern amongst the taxpayers. Several representations were made requesting for a more predictable and certain tax environment by extending the sunset date by 3-5 years. Acceding to their request, FM has extended sunset date to 31 March 2030 for aircraft / ship leasing (in relation to royalty/interest payable to non-resident, captain gains on sale of aircraft/ship during tax holiday period, etc.) and investment division of offshore banking unit in IFSC. Further, dividend and capital gains tax exemption will be available on equity shares of a domestic company engaged in the lease of ships (earlier available only for units engaged in lease of aircrafts).
Borrowings between group entities and a corporate treasury center in IFSC of listed foreign company will be exempted from “deemed dividend” provisions, subject to conditions. Tax exemption on transactions of non-deliverable forward contracts, offshore derivative instruments (‘ODI’), over the-counter derivatives, and distribution of ODI income extended to non-banking units registered as FPIs in IFSC.
Tax neutrality for relocation of funds from overseas jurisdiction to IFSC has been extended to retail schemes and Exchange Traded Funds. Further, Life insurance policy bought from IFSC insurance intermediary office (looks like a typo and should be IFSC Insurance office) to be exempt in the hands of policyholders subject to the condition that the premium payable for any of the year during the term of policy should not exceed 10 per cent of the actual capital sum assured.
Long-term capital gains tax rate to be increased from 10 per cent to 12.5 per cent for FPIs for securities other than listed equity shares, units of equity-oriented funds and units of business trust (applicable from AY 2026-27). This was a miss in the last Budget when tax rates on long-term capital gains were increased to 12.5 per cent across the board.
Budget also proposed to decriminalise more than 100 provisions in various laws aimed at enhancing the ease of doing business. Further, to ease compliance burden, TDS / TCS rates / threshold limits, etc. has been rationalised. To streamline the transfer pricing litigations, a new scheme is proposed to be introduced whereby the taxpayer could opt for a multi-year determination (block period of three years) of the arm's length price for similar international transactions or specified domestic transactions.
Few key asks of the financial sector that missed FM’s attention include granting exemption from MAT provisions for IFSC branches set-up by non-resident, rationalisation of surcharge for non-corporate FPIs on interest income and addressing uncertainty in taxation for listed MF such as ETFs, FOF, Gold/Silver MF units sold upto 31 March 2025.
Overall , FM has tried to keep a fine balancing act by tweaking personal tax rates, thereby leaving more money in the hands of middle class, at the same time not compromising on capex outlay and sticking to fiscal prudence. The additional 1 lakh crore in the hands of taxpayer is expected to stimulate consumption and increase investments back into the economy. Lastly, the new income-tax bill which is scheduled to be introduced in a week’s time is keenly awaited by Corporate India. One hopes that it lives up to FM’s stated objective of simplification, providing certainty in tax administration, and reducing litigation.
A version of this article was published in Business World Magazine in Print and Online on February 03 2025. The same can be read here
