03 February 2025

India releases Union Budget 2025

  • The Finance Minister of India presented the Union Budget for 2025 on 1 February 2025.
  • Proposed changes to tax law aim to promote ease of doing business in India, provide certainty and reduce litigation and continue to encourage corporations and individual to utilize the International Financial Service Center.
  • The Finance Minister also proposed that a new Income Tax Bill, which is expected to be concise and easier to understand, will be tabled the week of 03 February.
 

Executive summary

Key highlights of India's tax proposals include:

  • A new presumptive tax regime for nonresident service providers in electronics manufacturing
  • Tax incentives extended for start-ups, sovereign wealth funds and pension funds
  • An increased focus on promoting the International Financial Service Center (IFSC), with strengthening of incentives, including exemption for deemed dividend to treasury centers
  • A simplified transfer pricing (TP) controversy process through introducing an optional block scrutiny concept and widening the coverage of safe harbor provisions
  • No specific communication on Base Erosion and Profit Shifting (BEPS) Pillar Two, which nonetheless continues to be an area to watch
  • Modified customs duty rates to create incentives in semiconductor and clean energy space

This Alert summarizes the key budget proposals.

Key direct tax proposals

New Income Tax Bill

A new Income Tax Bill is set to be introduced during the week beginning 03 February 2025. The text of the new Bill is expected to be concise and easy to understand with an aim to promote tax certainty and reduce potential for litigation.

Corporate tax rates, tax incentives and updated tax return

No changes are proposed to the corporate tax rates.

The Bill would extend, from 31 March 2025 to 31 March 2030, the sunset dates for: (1) tax exemptions on eligible income from investments made by sovereign wealth funds and pension funds; and (2) incorporation of start-ups to claim a tax holiday.

Taxpayers can currently file "Updated" tax returns with additional tax payments to declare additional income for up to three years after the financial year. Under the Bill, this period would be extended to five years, subject to conditions.

Tax Collection at Source (TCS) on the sale of goods would be abolished.

International tax and transfer pricing

Significant Economic Presence (SEP) provides rules for creating taxable presence in India. The Bill amends the definition of SEP to exclude purchase of goods by nonresidents in India for purposes of export.

A new presumptive tax regime would be introduced for nonresidents providing services or technology to Indian companies engaged in electronics manufacturing subject to conditions. Deemed income, amounting to 25% of gross receipts, would be taxed on a presumptive basis, resulting in an effective tax rate of approximately10%.

With the objective of streamlining TP controversy process and providing an alternative to annual TP audits, the concept of "block assessments" for TP has been proposed. This will provide an option for taxpayers and will cover a period of three financial years under a single TP audit.

Safe Harbor Rules would be expanded to provide more certainty to taxpayers and reduce litigation.

Base Erosion and Profit Shifting (BEPS) — Pillar Two

The Budget makes no mention of Pillar Two implementation, despite global expectations.

IFSC

The sunset date is to be extended to 31 March 2030 for various tax incentives related to IFSC activities, including aircraft and ship leasing, investment IFSC Banking Unit, and fund relocation.

Deemed dividend rules trigger taxation on inter-group advances among corporate groups. It is now proposed that such deemed dividend rules do not apply to entities set up as a corporate treasury center under the IFSC (subject to certain conditions), thereby simplifying inter-company lending/borrowing with the IFSC unit.

Other IFSC-related incentives have also been proposed (including extension of certain exemptions to ship leasing units, exemptions for derivative contracts and life insurance policies).

Capital gains and business restructuring

To provide certainty to Category I and Category II Alternative Investment Funds, securities held by the funds would be treated as "capital assets" only and income arising from such securities would be in the nature of "capital gains."

Long-term capital gains tax on certain securities held by Foreign Institutional Investors and specified business trusts would be rationalized (i.e., amended) to 12.5% (plus applicable surcharge and cess).

In certain amalgamations, losses have been eligible to be carried forward and set-off for a new eight-year period from the year of amalgamation. It is now proposed that losses transferred to the successor entity on amalgamation can only be carried forward for up to a total of eight years from the original year in which they were first recorded.

The process for approving mergers for companies will be streamlined, making it easier for businesses to restructure efficiently. Additionally, the scope of fast-track mergers will be expanded, reducing regulatory hurdles and compliance burdens.

Key indirect tax proposals

Goods and Services Tax (GST)

A pre-deposit of the 10% of penalty amount would be required when filing an appeal before the First Appellate Authority and GST Tribunal.

Customs duty rationalization

The Bill proposes to reduce the customs duty on raw materials used in electronics and semiconductor manufacturing.

Further, exemptions for clean energy components would be extended to boost local production of EV batteries.

Implications

The Indian government remains committed to simplifying tax laws and enhancing certainty for taxpayers, helping to minimize tax disputes and controversies.

The new Income Tax Bill will require clients to reassess their tax positions comprehensively. While this review is necessary, the bill is designed to promote transparency, ease of compliance and certainty, and in the long run, is expected to make the law taxpayer friendly.

Several proposals focus on boosting manufacturing in India, fostering a more attractive environment for investment and economic expansion.

The government continues to strengthen IFSC incentives, helping to reinforce its status as a globally competitive financial hub.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young LLP (India)

Ernst & Young LLP (United States), Indian Tax Desk

Ernst & Young Solutions LLP, Indian Tax Desk, Singapore

Ernst & Young LLP (United Kingdom), Indian Tax Desk, London

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

Document ID: 2025-0389