Common Startup Compliance Mistakes & How to Avoid Them
This article on key budget 2024 highlights brings essential updates for companies. See how these shifts could shape your business strategy. Read more to stay informed and ready!
One of the key budget 2024 highlights is the significant reductions in TDS rates on specified payments. These changes are aimed at easing the tax burden on businesses and improving compliance. The new rates will be effective from either 1st October 2024 or 1st April 2025, depending on the type of payment.
For example, TDS on insurance commission payments under Section 194D has been reduced from 5% to 2%. Similarly, payments related to life insurance policies under Section 194DA will also see a reduction from 5% to 2%. These changes reflect the government's effort to streamline tax processes and reduce financial strain on companies.
Moreover, TDS on payments like commission on lottery tickets (Section 194G) and brokerage (Section 194H) has been slashed from 5% to 2%. The reduction in TDS rates will also apply to rent payments (Section 194-IB) and certain sums paid by individuals or HUFs (Section 194M).
A notable change is in the TDS rate for e-commerce transactions under Section 194-O. The rate will drop from 1% to 0.1%, significantly lowering the tax on these transactions. Additionally, TDS on repurchase of mutual fund units (Section 194F) is proposed to be omitted entirely.
These changes are designed to support businesses by lowering their tax liabilities and simplifying compliance. It's crucial for companies to stay updated on these revisions and adjust their financial strategies accordingly.
The below table gives a quick snapshot of revised rates of TDS:
|
TDS Sections |
Current TDS Rate |
Proposed TDS Rate |
Effective from |
|
Section 194D – Payment of insurance commission in case of other than company |
5% |
2% |
1st April 2025 |
|
Section 194DA – Payment in respect of life insurance policy |
5% |
2% |
1st Oct 2024 |
|
Section 194G – Commission on sale of lottery tickets |
5% |
2% |
1st Oct 2024 |
|
Section 194H – Payment of commission or brokerage |
5% |
2% |
1st Oct 2024 |
|
Section 194-IB – Payment of Rent by certain individuals or HUF |
5% |
2% |
1st Oct 2024 |
|
Section 194M – Payment of certain sums by certain individuals or HUFs |
5% |
2% |
1st Oct 2024 |
|
Section 194-O – Payment of certain sum by e-commerce operator to e-commerce participants |
1% |
0.1% |
1st Oct 2024 |
|
Section 194F – Payment on account of repurchase of units by mutual funds or UTI |
Proposed to be Omitted |
1st Oct 2024 |
|
The Budget 2024 introduced a new TDS provision under Section 194T. This applies to payments made by firms, including partnership firms and LLPs, to their partners. Payments such as salary, remuneration, interest, bonus, or commission are covered under this section.
Now, any payment exceeding Rs. 20,000 by a firm of this nature will be subject to TDS. The rate of TDS is set at 10% as per Section 194T. This move aims to ensure better tax compliance and transparency in partner remuneration.
The Budget 2024 has increased the limit for partner’s remuneration under Section 40(b). This change allows for higher compensation within partnership firms, offering more flexibility.
For the first Rs. 6,00,000 of book profit or loss, the limit is now Rs. 3,00,000 or 90% of the book profit, whichever is higher. For the remaining balance of book profit, the permissible limit is set at 60% of the book profit.
Let’s understand this with the help of an illustration:
Illustration 1: Let's assume a partnership firm has a book profit of Rs. 10,00,000.
Total Remuneration Allowed:
Total Remuneration = Rs. 5,40,000 + Rs. 2,40,000 = Rs. 7,80,000
So, in this case, the partners can be remunerated up to Rs. 7,80,000 based on the firm's book profit of Rs. 10,00,000.
This increase aims to ensure partners are fairly compensated, aligning with the firm's financial performance. It's a significant step towards better partner retention and motivation.
The Budget 2024 proposes the removal of the Angel Tax provisions under Section 56(2)(viib). This tax was previously imposed on companies issuing fresh shares to investors at a price above the company's Fair Market Value (FMV). The excess amount over FMV was taxed as Angel Tax.
This change will greatly benefit the startup ecosystem. It reduces the compliance burden and the time consumed during fundraising. Startups can now raise funds more freely, which encourages growth and innovation. The abolishment of Angel Tax is a significant relief for startups looking to attract investors.
The Budget 2024 proposes a reduction in corporate tax for foreign companies. Previously, the tax rate was 40%, but it has now been reduced to 35%. This reduction aims to attract more foreign investments into India. By lowering the tax burden, the government hopes to make India a more competitive destination for global businesses. This move is expected to boost economic growth and create a more favorable business environment.
The Budget 2024 introduces significant changes to the tax regime for share buybacks, effective from October 1, 2024. Under the new rules, the tax burden on buybacks will shift from companies to shareholders. Previously, companies paid a 20% tax on buyback proceeds, but now shareholders will be taxed based on their income tax slabs.
This change means that shareholders, especially high-income residents, may face higher taxes on the proceeds from buybacks. The entire buyback amount will be taxed as dividend income, which could result in a tax rate as high as 35.88% for top-bracket residents. Non-resident shareholders may benefit from lower tax rates under applicable treaties.
Additionally, shareholders can offset the cost of the shares bought back as a capital loss, which can be used to reduce future capital gains
|
TDS on Buyback of Shares Companies will need to withhold tax on buyback payments, applying a 10% rate for resident shareholders and 20% for non-resident shareholders. |
The Centre for Processing Accelerated Corporate Exit (C-PACE) will now extend its services to include the voluntary closure of Limited Liability Partnerships (LLPs). This initiative is aimed at reducing the time required to close LLPs by streamlining the strike-off process, as outlined in the LLP Rules, 2009.
C-PACE was initially set up following its announcement in the 2022 budget. The center, established by the Ministry of Corporate Affairs (MCA) on 17 March 2023, initially handled the voluntary closure of companies under Section 248 of the Companies Act, 2013. Now, with the extension of its services, LLPs can benefit from a faster and more efficient closure process.
The Budget 2024 has introduced safe harbour rates for foreign mining companies selling raw diamonds in India. These predetermined tax rates aim to simplify compliance and reduce tax disputes. The initiative is part of India's strategy to support the diamond industry, encouraging more foreign suppliers to operate in the country. This move is expected to attract increased investments and solidify India's position as a global leader in diamond processing.
Key budget 2024 highlights several significant reforms that will impact businesses in various sectors. From tax reductions to new compliance measures, these changes are designed to foster growth and streamline operations. Staying informed about these updates is crucial for navigating the evolving financial landscape and maximizing opportunities.
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