India’s Union Budget 2024–2025 confirms priorities of government’s 5-year term

The Indian government has enacted its Union Budget 2024. The Union Budget 2024 takes significant steps to address issues and promote sustainable economic development toward the goal of Viksit Bharat, or “Developed India,” by 2047. This long-term initiative focuses on improving India’s status as a developed nation by empowering farmers, women, youth, and the poor. The Union Budget aims to advance the nation toward the long-term goal via nine key priorities, such as:

• Innovations, research, and development
• Infrastructure
• Productivity and resilience in agriculture
• Employment and skilling
• Inclusive human resource development and social justice
• Manufacturing and services
• Urban development
• Energy security
• Next-generation reforms

Some of the most important initiatives that will be funded under this budget include:

Infrastructure development

The investment toward infrastructure development is expected to equal 3.4% of 2025 GDP or 11 trillion rupees (about $131.5 billion). Private sector infrastructure investment will be encouraged by viability gap funding as well as supportive laws and regulations.

Ease of doing business

The budget attempts to make it easier for businesses to start up and grow in the country. Building on the success of 2023’s Jan Vishwas, or “Amendment of Provisions” Bill, a Jan Vishwas Bill 2.0 is now under development by the government. The federal budget also provides incentives to states for increased digitalization and the execution of their Business Reforms Action Plans.

Employment and skilling

The government plans to increase the employment and productivity of its workforce through the following key initiatives:

• The government of India intends to introduce these three incentives to support employment growth through the country’s Employee Provident Fund Organization (EPFO):
  1. First-timers: There will be a direct benefit transfer of one month’s salary in three installments up to 15,000 rupees (about $179) to first-time employees who register with EPFO.
  2. Job creation in manufacturing: The government will provide direct incentives to both employees and employers via their EPFO contribution in the first four years of employment.
  3. Support to employers: The government will reimburse employers up to 3,000 rupees (about $36) per month of their EPFO contribution for two years for each additional employee hired by the organization.
• The budget includes plans to provide financial support in the form of loan grants up to 10 lakhs rupees (about $11,960) (one lakh is equivalent to 100,000 rupees) to make higher education in domestic institutions available to youth who haven’t been eligible for any benefit under previous government programs.

Promoting manufacturing

The Indian government plans to provide impetus to the manufacturing sector by announcing new credit eligibility assessment models and a credit guarantee program as support measures for micro, small, and medium enterprises (MSMEs). Twelve industrial parks will be approved for the National Industrial Corridor Development Program. “Cities as Growth Hubs” will be developed, particularly emphasizing transit-oriented advancement.

Promoting foreign direct investment (FDI)

The government has recommended coordination with the Reserve Bank of India to simplify current foreign direct investment and overseas investment rules and regulations in ways that would:

• Encourage foreign direct investments.
• Encourage prioritization.
• Encourage opportunities for using the Indian rupee as a currency for overseas investments.

Research and innovation activities

The Indian government plans to incorporate the Anusandhan National Research Fund (ANRF) to support fundamental research and prototype development activities. The ANRF aims to seed, grow, and promote research and development (R&D) and foster a culture of research and innovation throughout India’s universities, colleges, research institutions, and R&D laboratories.

In addition, per the announcement in the interim budget, the Indian government would establish a system with a funding pool of 1 trillion rupees (about $11.9 billion) to support private sector-driven research and innovation at the commercial level. A dedicated venture capital fund worth 0.01 trillion rupees has also been launched to grow the nation’s space economy five times over the next 10 years.

Tax developments

The Union Budget includes a significant number of tax developments such as:

• An increase in the standard deduction for salaried individuals from 50,000 to 75,000 rupees (about $598–$897).
• The basic corporate rate applied to the taxable net income of foreign companies in India is lowered from 40 to 35% (surcharge and cess excluded). There is no change in corporate tax rates for Indian companies.
• Nonresident e-commerce operators currently deposit an equalization levy of 2% with the tax authorities in India on the consideration received for the e-commerce supply of goods and services to Indian customers. The Union Budget withdraws the imposition of the equalization levy from Aug. 1, 2024.
• Investments in unlisted companies or startups that exceed the current fair market value of the business have essentially been treated as income from other sources under India’s “angel tax.” The 2024–2025 budget withdraws the angel tax to support the startup ecosystem and inspire the next generation of business owners.
• The Union Budget would work to rationalize the treatment of capital gains by modifying holding period rules as well as tax rates. There will be only two holding periods — 12 months for listed securities and 24 months for all other assets that would be used to distinguish between the long-term and short-term capital assets.
• The tax rates for residents and nonresidents on long-term and short-term capital gains are aligned under the new budget. For mutual fund units, business trust units, and STT-paid equity shares, the short-term capital gains rate has been increased from 15 to 20%. The long-term capital gains tax rate would be 12.5% regardless of asset type, reducing the complexity that had been generated by applying different rates based on asset type.
• The Indian government has introduced a new penalty provision for noncompliance in filing annual statements by nonresidents having a liaison office in India. The fines/penalty will be 1,000 rupees (about $12) for up to three months and a fixed penalty of 1 lakh rupees (about $1,196) thereafter. This amendment will be effective from April 1, 2024.
• In regards to transfer pricing, Indian law limits the tax deduction of interest expenses for any debt extended by a nonresident-associated enterprise to 30% of the Indian borrower company’s earnings before interest, taxes, depreciation, and amortization. This restriction does not apply to Indian companies or permanent establishments of foreign businesses involved in the banking or insurance industries or notified nonbanking financial companies. The Indian government has decided that the aforesaid restriction will not apply to finance companies set up in the International Financial Services Centre (IFSC) in India. Further, the Union Budget expresses the government’s interest in a further streamlining of transfer pricing assessment policies in due course.
• The Union Budget includes some significant adjustments to customs rates that are intended to strategically boost different economic sectors in line with India’s wider trade objectives. Notable changes include a 15% decrease in the Basic Customs Duty (BCD) on cellphone chargers and adapters and a 15% reduction in the BCD on gold and other precious metals.
• Additionally, BCDs on X-ray tubes and flat panel detectors for X-ray equipment are being reduced significantly in the healthcare industry. The BCD is currently lowered to 5% until March 31, 2025, and will gradually grow to 10% by April 2026.
• The government intends to maintain the fundamental differentiations in its goods and services tax (GST) but eliminate the protracted, frequently occurring, and contentious divergent timetables caused by show-cause notices and orders for fraud and nonfraud cases. Consequently, for the sake of efficiency, a common time frame of 42 months has been established for issuing the show cause notice and 18 months (including a six-month extension) for issuing the order. This maintains the distinction between fraud and nonfraud cases through differential penalties.
• The Union Budget amended the Income Tax Act by establishing new time limits for issuing notices. For income escaping assessment of 50 lakh rupees or more (about $59,800 or more), the notice must be issued within five years (earlier 10 years) from the end of the assessment year.
• The Union Budget also outlines plans for a thorough examination and revision of the Income Tax Act of 1961 in the next six months with the goal of streamlining tax administration and compliance, lowering litigation, and giving taxpayers more assurance.

Next steps for businesses operating in India

The budget has been passed and enacted as a bill after receiving the President of India’s consent on Aug. 16, 2024. Businesses with operations or interests in India should consult with their advisors to learn more about how the provisions could affect those operations and to find out what opportunities may exist for growth in the new programs that are outlined. Those who have been considering creating a presence in India should seek advice on whether any of these budget provisions would make expansion into the country more or less desirable.