Corporate Tax Changes in Budget 2025
With the introduction of the new Income Tax Bill, the government has implemented significant changes across various sectors. However, this article focuses solely on the revisions in corporate tax. Here, you'll gain valuable insights into the key changes affecting corporate taxation.
Restrictions on Carrying Forward Business Losses
A major change affecting corporate restructuring is the revised restriction on carrying forward business losses post-amalgamation. Previously, companies had an eight-year window to set off losses. However, from fiscal year 2025-26 onwards, the acquiring company can only carry forward the losses for the remaining period of the original eight-year allowance. For example, if a company incurred losses five years before restructuring, the acquiring entity will have only three years left to claim them. This restriction, combined with existing limitations under Section 72A (which excludes industries such as NBFCs, technology, and service firms), may reduce the attractiveness of mergers and acquisitions.
Extension of Section 80-IAC for Startups
To foster the startup ecosystem, the government has extended the Section 80-IAC sunset clause. Startups incorporated before April 1, 2030, can now claim a 100% tax deduction on profits for any three consecutive years within their first ten years of operation, provided their turnover does not exceed Rs 100 crore. This five-year extension highlights the government’s commitment to promoting entrepreneurship and innovation.
Tax Treatment for Business Trusts (REITs & InvITs)
The Budget clarifies that income from dividends, interest, and rentals will continue to be taxed at the unit-holder level. Additionally, the special tax rate on capital gains from listed shares, with grandfathering benefits based on the cost of acquisition as of January 31, 2018, will remain applicable.
Removal of TCS on Certain Goods Sales
The requirement for sellers to collect tax at source (TCS) on the sale of specified goods, including shares, has been abolished. Earlier, a 0.1% TCS was levied under Section 206C(1H). This change simplifies international transactions, particularly for foreign buyers without an Indian tax presence. However, businesses with an annual turnover exceeding Rs 10 crore must still deduct tax at source (TDS) at a rate of 0.1% under Section 194Q for purchases exceeding Rs 50 lakh.
Clarification on Taxation of AIFs and FPIs
Alternative Investment Funds (AIFs) (Categories I & II) and Foreign Portfolio Investors (FPIs) will now have a uniform tax treatment. Starting in FY 2025-26, securities held by these funds will be classified as capital assets, meaning all gains will be taxed as capital gains. Additionally, for Category III AIFs and FPIs, the long-term capital gains tax rate on securities not covered under Section 112A will increase from 10% to 12.5%.
Incentives for IFSC Units
To enhance India’s status as a global financial hub, the government has extended tax exemptions for IFSC (International Financial Services Centre) units until March 31, 2030. Benefits apply to income from aircraft leasing, offshore banking investments, and ship leasing (which now enjoys the same exemptions as aircraft leasing). Moreover, life insurance policies issued by IFSC insurance offices will be tax-exempt, regardless of premium size. These measures are expected to attract significant foreign investment.
New Presumptive Taxation for Foreign Tech Providers
A presumptive taxation regime under Section 44BBD has been introduced for foreign technology providers serving India’s electronics manufacturing sector. Under this, 25% of their receipts will be deemed as taxable income, facilitating smoother business collaborations with Indian manufacturers.
Expansion of Tonnage Tax Regime to Inland Vessels
The tonnage tax regime, previously applicable only to ocean-going vessels, will now include inland vessels under Section 115VD. This expansion aims to boost investment in India’s inland waterways, improving infrastructure and logistics efficiency.
Multi-Year Arm’s Length Pricing for Transfer Pricing
To reduce disputes, a multi-year mechanism for determining arm’s length pricing (ALP) in transfer pricing has been introduced. Once an ALP is established for a transaction in a given year, it will automatically apply to comparable transactions for the next two years, subject to approval. This reform reduces compliance burdens and enables tax authorities to focus on complex cases.
Extension of Tax Exemptions for Sovereign Wealth and Pension Funds
The tax exemption for Sovereign Wealth Funds (SWFs) and pension funds investing in India, granted under Section 10(23FE), has been extended to March 31, 2030. Even if long-term capital gains are reclassified as short-term gains under the new Section 50AA, they will remain tax-exempt for these investors. This extension is expected to drive more foreign investment into Indian infrastructure projects.
Clarification on Significant Economic Presence for Non-Resident Exporters
An amendment to Section 9 clarifies that non-residents purchasing goods for export will not be deemed to have a significant economic presence in India. This change ensures that exporters remain free from unintended tax implications.
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Frequently Asked Questions
Q- How does the new restriction on carrying forward business losses impact companies?
Under the revised rule, companies undergoing amalgamation can only carry forward losses for the remaining period of the original eight-year allowance. If losses were incurred five years before restructuring, the acquiring company would have only three years left to claim them.
Q- How has the tax treatment for REITs and InvITs changed?
The Budget confirms that income from dividends, interest, and rentals will continue to be taxed at the unit-holder level. Additionally, the special capital gains tax rate for listed shares will remain, with grandfathering benefits based on acquisition cost as of January 31, 2018.
Q- Is TCS still applicable on the sale of shares and other goods?
No, the requirement for sellers to collect TCS under Section 206C(1H) on certain goods, including shares, has been removed. However, businesses with an annual turnover above Rs 10 crore must still deduct TDS at 0.1% under Section 194Q for purchases exceeding Rs 50 lakh.
Q- How does the Budget impact taxation of Alternative Investment Funds (AIFs) and FPIs?
From FY 2025-26, all securities held by AIFs (Categories I & II) and FPIs will be classified as capital assets, ensuring gains are taxed as capital gains. Additionally, the long-term capital gains tax rate for Category III AIFs and FPIs on securities not covered under Section 112A has increased from 10% to 12.5%.
Q- What new tax incentives have been introduced for IFSC units?
Tax exemptions for IFSC units on aircraft leasing, offshore banking investments, and ship leasing have been extended until March 31, 2030. Life insurance policies issued by IFSC insurance offices will also be tax-exempt, regardless of premium size.
Q- What is the new presumptive taxation for foreign technology providers?
Section 44BBD introduces a presumptive taxation regime for foreign technology providers servicing India’s electronics manufacturing sector, deeming 25% of their receipts as taxable income.
Q- How does the expansion of the tonnage tax regime benefit inland waterways?
The tonnage tax regime, previously limited to ocean-going vessels, now includes inland vessels under Section 115VD, promoting investment in India's inland waterways and improving logistics efficiency.
Q- What is the new multi-year arm’s length pricing mechanism for transfer pricing?
Once an arm’s length price (ALP) is determined for a transaction in a given year, it will automatically apply to similar transactions for the next two years, reducing compliance burdens and minimizing disputes.