Finance (No. 2) Act, 2024 Enacts New Tax Rates and Amends Direct and Indirect Tax Laws

The Finance (No. 2) Act, 2024, an Act of Parliament, received the assent of the President on August 16, 2024, and was subsequently published for general information on the same day. This comprehensive legislation was enacted to give effect to the financial proposals of the Central Government for the financial year 2024-25. While sections 2 to 87 of the Act were deemed to have come into force on April 1, 2024, sections 114 to 157 will become effective on a date to be appointed by the Central Government through a notification in the Official Gazette. Other provisions within the Act have specific effective dates, including October 1, 2024, April 1, 2025, July 23, 2024, August 1, 2024, September 1, 2024, January 1, 2025, and October 1, 2023.

The Act introduces significant changes across both direct and indirect tax regimes. In direct taxes, it specifies income tax rates for the assessment year 2024-25, including applicable surcharges and a four percent Health and Education Cess, which is an additional surcharge levied for funding health and education services. Notable amendments to the Income-tax Act, 1961, include a revised definition of "dividend" to encompass buy-back of shares, effective October 1, 2024, and a reduction in the holding period for certain short-term capital assets from thirty-six to twenty-four months, retrospectively effective from July 23, 2024. Exemptions were introduced for foreign companies receiving lease rentals from cruise ships operating in India, effective April 1, 2025. The legislation also streamlines the approval process for charitable trusts and introduces a new section, 12AC, to facilitate mergers of such trusts under specific conditions, effective April 1, 2025. For taxpayers opting for the new tax regime under Section 115BAC, the standard deduction for salaried individuals and pensioners was increased to seventy-five thousand rupees, effective April 1, 2025, and new tax slabs were introduced for the assessment year 2025-26. The Act clarifies that income from letting out residential property will be taxed under "Income from house property" rather than "Profits and gains of business or profession," effective April 1, 2025. Employer contributions to the National Pension System (NPS) eligible for deduction were increased from ten percent to fourteen percent, effective April 1, 2025. Furthermore, the Act overhauls the reassessment procedures under Sections 148 and 148A and introduces a new Chapter XIV-B for assessment in search cases, both effective September 1, 2024. A new Section 194T mandates tax deduction at source (TDS) on payments to partners of firms, effective April 1, 2025. Capital gains tax rates for short-term and long-term assets were also adjusted for transfers occurring on or after July 23, 2024.

A key component of the legislation is the introduction of the Direct Tax Vivad Se Vishwas Scheme, 2024, aimed at resolving direct tax disputes. This scheme defines various terms such as "appellant" (a person with a pending appeal or application before an appellate forum), "appellate forum" (Supreme Court, High Court, ITAT, etc.), and "tax arrear" (aggregate of disputed tax, interest, and penalty). It outlines the amounts payable by declarants to settle disputes, with different rates depending on the date of declaration. Upon filing a declaration and receiving a certificate, pending appeals are deemed withdrawn, and declarants must waive their right to further remedies. The scheme grants immunity from prosecution, penalty, or interest for settled tax arrears, though it does not apply to certain cases like those involving undisclosed foreign income or assets, or where prosecution has already been initiated under specific laws.

In the realm of indirect taxes, the Act amends the Customs Act, 1962, to clarify "proof of origin" and allows the Central Government to specify manufacturing processes not permitted in warehouses. It also provides retrospective effect to certain Customs notifications. The Central Goods and Services Tax Act, 2017, saw amendments including the inclusion of un-denatured extra neutral alcohol for human consumption under GST. A new Section 11A empowers the government to waive recovery of GST not levied or short-levied due to general practice. Input Tax Credit (ITC) provisions were modified for past financial years and cancelled registrations. A new Section 74A was inserted to govern the determination of tax for financial year 2024-25 onwards, replacing the existing Sections 73 and 74 for future periods, and establishing specific timelines and penalties. Additionally, a new Section 128A provides for the waiver of interest and penalty related to demands raised under Section 73 for the period from July 1, 2017, to March 31, 2020, subject to conditions. Activities related to co-insurance and re-insurance were included in Schedule III, classifying them as neither supply of goods nor services. Similar amendments were made to the Integrated Goods and Services Tax Act, 2017, and the Union Territory Goods and Services Tax Act, 2017. The Goods and Services Tax (Compensation to States) Act, 2017, was also amended to introduce a similar power not to recover short-levied cess. Miscellaneous provisions include extended timelines for explanations under the Prohibition of Benami Property Transactions Act, 1988, and the introduction of immunity from prosecution for benamidars under certain conditions, both effective October 1, 2024. Securities Transaction Tax (STT) rates for options and futures were increased, effective October 1, 2024, and an exemption was provided under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, for assets (other than immovable property) not exceeding twenty lakh rupees, effective October 1, 2024.

The legislative intent behind the Finance (No. 2) Act, 2024, is primarily to implement the Central Government's financial proposals for the current fiscal year and to refine the existing tax framework. The Act aims to enhance tax compliance, reduce litigation, and provide clarity on various tax provisions. By introducing the Direct Tax Vivad Se Vishwas Scheme, 2024, the government seeks to address the backlog of direct tax disputes, offering a mechanism for taxpayers to settle their cases with specified concessions on disputed tax, interest, and penalties. This initiative is designed to improve ease of doing business and foster a less adversarial tax environment. The amendments to the Income-tax Act, such as the revised capital gains rates and the new tax slabs under the optional tax regime, reflect a policy rationale to adjust the tax burden and encourage certain economic activities or provide relief to specific taxpayer categories. The clarification regarding income from residential property and the increased employer contribution to NPS aim to remove ambiguities and support social security measures. The overhaul of reassessment procedures and the new chapter for search assessments are intended to streamline tax administration, making it more efficient and transparent. In the indirect tax domain, the amendments to the Customs Act and Customs Tariff Act seek to align trade practices with regulatory requirements and provide retrospective validation for certain notifications, addressing past legal uncertainties. The changes to the Central Goods and Services Tax Act, including the power not to recover short-levied tax due to general practice and the waiver of interest/penalty for past Section 73 demands, are aimed at rectifying issues that arose during the initial years of GST implementation. These measures address statutory gaps and limitations in the earlier legal position, particularly concerning input tax credit and the determination of tax liabilities. The introduction of Section 74A for future tax determinations signifies a move towards a more structured and time-bound adjudication process for GST disputes. The inclusion of co-insurance and re-insurance activities in Schedule III clarifies their tax treatment, resolving a long-standing issue for the insurance sector. Overall, the Act introduces new rights and obligations for taxpayers, while also strengthening enforcement mechanisms and providing statutory timelines for various tax processes. The legislation provided: “An Act to give effect to the financial proposals of the Central Government for the financial year 2024-25.” This overarching objective underpins the diverse amendments across direct and indirect taxation, aiming for a comprehensive update to India's fiscal laws.

Keywords: Finance Act 2024, Income Tax, GST, Direct Tax Vivad Se Vishwas Scheme, Capital Gains, Tax Rates, Reassessment, TDS, Customs, Benami Property, India Tax Law Geo Tags: India, Delhi District: Not Applicable