Insights

The Union Budget 2024, presented by Finance Minister Nirmala Sitharaman, introduces significant reforms aimed at enhancing the effectiveness of economic regulations and fostering a robust investment climate. Key changes span across the Insolvency and Bankruptcy Code (IBC), youth internship programs, taxation of share buybacks, and capital gains tax rates. These initiatives aim to streamline processes, increase transparency, and promote economic resilience. By addressing critical areas such as debt resolution, youth unemployment, corporate taxation, and capital gains, the budget seeks to create a more equitable and efficient financial ecosystem, driving sustainable growth and development in India.

IB
Finance Minister Nirmala Sitharaman promised a range of adjustments in the 2024 Budget to improve the effectiveness of debt settlement under the Insolvency and Bankruptcy Code (IBC). Finance Minister Nirmala Sitharaman emphasised the significance of the IBC, pointing out that more than 1,000 cases involving financially troubled companies had been settled, returning over ₹3.3 lakh crore for creditors. A crucial project is the creation of an Integrated Technology Platform that would connect all parties, including the Insolvency and Bankruptcy Board of India (IBBI), lenders, and tribunals. This platform aims to promote uniformity, openness, timely processing, and supervision in insolvency proceedings. Furthermore, the budget proposes establishing additional National Company Law Tribunals (NCLTs) some of which will be notified to decide cases exclusively to hear issues only under the Companies Act. 

To handle the substantial backlog of cases and expedite the debt recovery procedures, other reforms will involve the establishment of additional Debt Recovery Tribunals. Limited liability partnerships will now have access to the services offered by the Centre for Accelerated Corporate Exit, enabling voluntary closures more quickly. The ultimate goal of these initiatives is to create a more resilient credit culture and investment climate in the nation by fortifying the bankruptcy framework and promoting settlements outside of courts.

Internship and CSR
The Union Budget 2024 is introducing a program to fight youth unemployment and give young people employable skills. This project, which intends to reach 1 crore young people over five years, offers 12-month internships to those aged 21-24 who are jobless or engaged in full-time education, with the exception of top-tier graduates and those from tax-paying or government-employed families. Participating businesses will provide real-world work opportunities, either directly or through their supply chains. The government would cover ₹54,000 of the yearly stipend, with an additional ₹6,000 for incidentals. Companies will give 10% of the stipend and pay training costs with their CSR funding. Applications will be handled via an online platform, with a focus on those who receive lesser employer offers.

This initiative also raises practical concerns about its compatibility with existing apprenticeship obligations and the selection criteria for the top 500 corporations. It remains to be seen if voluntary internship participation will satisfy the legislative requirement under the Apprentices Act of 1961. Furthermore, the budget’s general reference to “500 top companies” without clarifying whether they must be listed organisations allows for additional explanation. Companies with huge workforces, like as TCS and Reliance, may be able to easily reach the objectives, whereas smaller enterprises may struggle. The program’s viability is dependent on corporations’ desire and capacity to reach these lofty goals, with further specifics and rules still to be finalised.

Buyback
The July 2024 Budget makes a big change by designating share buybacks as considered dividends, which substantially alters their tax status. Previously, buybacks were subject to a Buyback Tax at the corporate level, which was implemented in 2013 to prevent tax evasion. Buybacks will now be taxed in the hands of shareholders in the same way that dividends are. This adjustment aligns the tax treatment of buybacks and dividends, putting the tax burden directly on shareholders rather than the firm. Companies must follow stricter compliance and reporting standards to ensure transparency and compatibility with the new tax rules.

This modification has significant repercussions for both corporations and shareholders. Companies will have to rethink their financial strategy and capital allocation plans, balancing the tax consequences of buybacks versus regular dividends. Shareholders, particularly high-net-worth individuals and institutional investors, may see adjustments to their tax responsibilities and returns. For example, under the new framework, repurchase profits will be taxed based on individual tax slabs, possibly raising the overall tax burden. This amendment intends to combat tax evasion, promote tax equality, and generate more income for the government, resulting in a strategic shift in business financial management and investor behaviour.

Capital Gains
The July 2024 Budget brought about notable modifications to the capital gains tax system, as Finance Minister Nirmala Sitharaman declared a rise in the rates for both long-term and short-term capital gains taxes. The tax rate on short-term capital gains on certain financial assets has increased from 15% to 20%. The present tax rates on other financial and non-financial assets remain unchanged; this change solely affects the designated assets. The 10% rate for equity shares, equity-oriented mutual funds, and business trusts that paid securities transaction tax (STT) and the 20% rate with indexation for other assets will be replaced with a uniform 12.5% rate for long-term capital gains across all asset categories. The new regime also increases the annual exemption limit for long-term capital gains from ₹1 lakh to ₹1.25 lakh, offering some relief to middle and lower-income taxpayers.

The reform also suggests consistent holding periods—12 months for listed securities and 24 months for all other assets, such as bonds, debentures, and gold—to ascertain whether profits are long-term or short-term. The asset categorisation procedure has been made simpler by reducing the holding time from 36 months to 24 months. The elimination of indexation’s inflation-adjusted purchase price adjustment advantage, however, may result in higher long-term capital gains taxes on real estate, gold, and other unlisted assets. By reducing tax evasion tactics, this action seeks to increase government income, level the playing field between residents and non-residents, and simplify the tax code. For businesses and investors to properly handle these new tax ramifications, they must thus reevaluate their financial plans.

Conclusion
The Union Budget 2024’s comprehensive reforms mark a transformative step towards enhancing India’s economic framework. By refining the Insolvency and Bankruptcy Code, addressing youth unemployment through targeted internship programs, reclassifying share buybacks as deemed dividends, and adjusting capital gains tax rates, the budget aims to create a balanced and transparent financial environment. These measures are designed to promote fairness, streamline regulatory processes, and support sustainable growth. As businesses and investors adapt to these changes, the long-term impact will likely be a more resilient economy, fostering increased investment, innovation, and inclusive development across the nation.