x

Analysing Budget 2024 from the lens of Ease of Doing Business

08 八月 2024

by Noorul Hassan Aman Gupta

India has recently witnessed the Union Budget presented by Finance Minister in the Parliament session. Presently, India is ranked 63 out of 190 chosen countries in the Ease of Doing Business rankings released by the World Bank.[1] Out of ten parameters of Ease of Doing Business introduced by the World Bank, this fiscal the budget has focused on a certain few namely, Starting a Business, Getting Credit, Paying Taxes, Resolving Insolvency, and to an extent Registering Property. There are yet certain parameters where we have staggered for growth due to comprehensive legislation as well as internal checks and balances.

Building on that, this year’s budget is another attempt to streamline the focus to strengthen the nation’s economy and improve at Ease of Doing Business world rankings. 

Analysis of Budget proposals

Attracting foreign investments

India as a manufacturing and services hub is expected to multiply its foreign investment in the upcoming fiscal. Accordingly, the budget has proposed liberalization in Foreign Direct Investment (FDI) and Overseas Investment (OI) regulations. We may expect inclusive amendments with more policy, procedural, and conditional relaxations on the flow of investments. Although, in the Economic Survey 2023-24 (prior to the presentation of the budget), a recommendation for reviewing ‘Press Note 3’[2] to reconsider Chinese investments was laid down, however, the Ministry of Commerce and Industry has recently clarified that there is no rethinking at present to support Chinese investments in the country.[3]

Taxation benefits

To benefit the companies, the budget has announced the most awaited abolition of the ‘Angel Tax’ effective from FY 2024-25, providing relief, especially to startups. Going ahead, these companies would be exempt from tax payment towards the issuance of shares on premium to the investors i.e., above the fair market value. This will ease the working capital pressure on the companies. To cater to the taxation benefits, the government has simplified Long Term Capital Gains (LTCG) reducing it from 20% to 12.5% (without indexation benefits) on immovable properties to horizon on long-term investments. Overall, we have witnessed a hike in other classes of assets for payment of LTCG and also towards Short Term Capital Gains (STCG) on specified financial assets.

On the taxation front, the biggest development to attract foreign capital is to reduce the Corporate Tax from 40% to 35% for foreign companies. Further, specific sectors have been focused on, such as foreign shipping companies and the diamond industry for tax relaxation to attract more tourism and hence foster business opportunities. Equalisation levy of 2% on e-commerce supply and services has also been abolished to boost online trade and transactions.

Evolution in insolvency resolution

Evolved in 2016, the insolvency legislation in India is measuring steady recovery rates every fiscal, while so, there is still a need to revitalize the resolution process. Recently, the CRISIL Report, declared that India witnessed 42% growth in FY 2024 with 269 cases getting the NCLT nod for resolution plans over 189 cases in the last fiscal year.[4] In this regard, it is proposed to set up new NCLTs and strengthen the existing appellate tribunals. Further, new tribunals are to be established, which shall be exclusively dealing with cases under the Companies Act. This will ease the pressure on the NCLTs and also speed up the process of the matters filed before the NCLTs under the Companies Act.

Flexible company structures

As of today, Indian company law has provided various corporate structures for the business to operate. Borrowing from the jurisdiction of Singapore and the UK, this budget has proposed a new ‘variable company structure’ to pool funds of private equity. It provides options for entrepreneurs and especially fund managers to explore and expand the fund management industry in India. It unleashes the capability to bring India to the pedestal of one of the most attractive destinations for international fund management especially in the APAC region.

Credit enhancement

The budget proposed that MSMEs can now avail up to INR 100 crore of term loans without collateral/third-party guarantees for infrastructure development and credit guarantee to MSMEs even at the stage of Special Mention Account. This will not impede MSMEs' focus on business development while handling their financial arrangements. More SIDBI branches in MSME clusters and E-commerce export hubs to enable MSMEs to sell their products in international markets are some other proposals to reinforce the MSME sector.

Easy exits

The office of the Centre for Processing Accelerated Corporate Exit (C-PACE) was established in May 2023 to centralise the strike-off process of companies, which was a move towards ease of doing business and ease of exit for the Companies. It is proposed that these services would also be extended for the voluntary closure of Limited Liability Partnerships (LLPs) to reduce the closure time.

Decriminalisation of offences

Owing to the positive response of the Jan Vishwas (Amendment of Provisions) Act of 2023 for decriminalising and rationalising offences to enhance trust-based governance for ease of living and doing business, the budget announced Jan Vishwas Bill 2.0 to seek further congruence of rationalisation and governance for ease of doing business. Unnecessary litigation may see a recall with the introduction and enactment of the bill, which shall put the burden off the companies and streamline efforts toward business.

Stamp Duty

Last but not the least, the Budget has indicated the government’s proposal to incentivize states if they lower the Stamp duty rates, especially for properties being purchased by a woman. This shall boost women entrepreneurship directly and to an extent cater to one of the parameters of property registration.

The outlook and way forward

From the varied budget proposals, we understand that while the government has streamlined its proposal towards attracting investments in India and overseas investment, obtaining credit, taxation benefits to a certain extent and especially towards startup ecosystem, and liberalization towards insolvency resolution, there are yet certain parameters such as Ease of Starting Business (rank 136), Registering Property (rank 154), Paying Taxes (rank 115), Trading across Borders (rank 68), and Enforcing Contracts (rank 163) where we lag behind and that need to be focused upon to improve individual rankings. India may analyze the implications, challenges, and solutions adopted by other jurisdictions to better its position.  

Through this budget, we may sense the government’s approach more towards free market economics where the budget attempts to meet the demands of the economy. We are yet to witness corresponding amendments to various legislation to incorporate these demands.

[The authors are Partner and Senior Associate, respectively, in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]

 

[1] World Bank Report available here

[2] Press Note 3 available here

[3] Press Note 3 was released during COVID-19 times prohibiting opportunistic acquisition of Indian entities by entities from land-bordering nations.

[4] CRISIL Report is available here.

Browse articles