Union Budget 2025 | Key Takeaways for Corporate Taxation and Foreign Taxation

The Hon’ble Finance Minister presented the Union Budget 2025 on 1st February 2025. The Budget brought some perks for Domestic corporates, Non-residents, and IFSC units, including a higher threshold limit to deduct TDS, extended time limit for charitable trusts, presumptive taxation for non-residents, extension of threshold limit on foreign remittance, etc.

A. CORPORATE TAXATION

1. Changes in TDS Rates

• Considering the higher taxable limit and lower income tax liability proposed, the Union budget has proposed to increase the threshold limit for TDS deduction under the following sections:

2. Extended Sunset Clause up to 31st March, 2030

• Under the Income Tax Act, the following start-up entities are eligible for tax holidays subject to the commencement of operations with effect from 1st April 2025/ 2026. The Union budget has proposed to extend the sunset clause till 31st March 2030:
  • Entitles under Section 80-IAC which are eligible for deduction of 100% of profits from eligible business for 3 consecutive assessment years;
  • Income arising from the transfer of an aircraft or a ship by an IFSC unit under section 80LA;
  • Income of a non-resident by way of royalty or interest from the lease of an aircraft or a ship paid by an IFSC unit under section 10(4F);
  • Income of a non-resident or an IFSC Unit (engaged in leasing of an aircraft) by way of capital gains arising from the transfer of equity shares of the domestic company being an IFSC unit (engaged in the business of leasing of an aircraft) under section 10(4H);

3. Other Amendment under Corporation Tax:

3.1 Tonnage Taxation Scheme:

• Inland vessels shall be eligible for the Tonnage Taxation scheme under Section 115VD;
• The time limit for approval of an application for opting tonnage taxation scheme has been extended from before the expiry of 1 month from the end of the month in which the application was received to 3 months from the end of the quarter in which such an application is received.

3.2 Charitable Trust and Institution

• The Union budget has proposed that the period of registration of charitable trust shall be extended from 5 years to 10 years if the total income of such trust or institution does not exceed INR 5 Crores, without giving effect to provisions of Section 11 and 12, during each of 2 previous years preceding the year in which application is made.
• Incomplete application for registration shall not be considered a “Specified Violation” and accordingly, the registration can’t be cancelled on such grounds.
• The definition of specified person for Section 13(3) has been to threshold limit to total contribution exceeding INR 1,00,000/- during the previous year or aggregate total contribution up to the end of the relevant previous year exceeds INR 10,00,000/-. Relatives of such persons shall not be considered as specified persons.

3.3 Time limit to carry forward loss in case of Amalgamation or Business reorganization

• The Union budget has proposed that 8 years for the carry forward of accumulated loss shall be computed from the year in which loss is incurred by the original predecessor entity. Earlier, the reorganised entity was allowed to carry forward such loss for 8 years from the year of reorganisation.

B. Foreign Taxation

1.  Presumptive Taxation for Non-Resident Assessee

• Union Budget has proposed to introduce new Section 44BBD in the Income Tax Act for presumptive taxation of non-resident assessee providing services or technology in India, to set up an electronics manufacturing facility or in connection with manufacturing or producing electronic goods, articles or things in India and services are provided to:
  • To a resident company engaged in operating an electronics manufacturing facility or producing electronic goods in India under a government-notified scheme; or
  • the resident company satisfies the conditions prescribed on this behalf

• In such case, 25% of the following total sum shall be considered as income under head PGBP:
  • Amount paid or payable to the non-resident assessee or to any person on his behalf on account of providing services or technology; and 
  • The amount received by the non-resident assessee or on behalf of the non-resident assessee.

• No set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year.

2. Significance of Economic Presence in India of Non-residents

• Explanation 2A to Section 9 defines the significant economic presence of a non-resident in India.
• Union Budget has clarified that the transactions or activities which are confined to the purchase of goods in India for export shall not constitute a significant economic presence in India.

3. TCS on Foreign remittance

• As per Section 206C(1G), TCS is required to be collected @ 5% by the authorised dealer on foreign remittances made under the Liberalised Remittance scheme if the aggregate amount remitted does not exceed INR 7 Lakhs.
• The Union Budget has proposed to increase the threshold limit to INR 10 Lakhs.
• Further, no TCS shall be collected if the amount is remitted for loan repayment obtained for education purposes.

4. Applicability of Arm’s Length Price determined for 2 following years:

• As per Section 92CA(1), in respect of an international transaction or specified domestic transaction, the Assessing officer may refer the computation of the ALP of such transaction to the Transfer pricing officer (TPO) under section 92C.
• As per Section 92CA(3), The TPO, after considering all evidence and material, shall determine the ALP in respect of such transaction.
• Union Budget as proposed to insert Sub-section (3B) which provides that the ALP determined in respect of an international transaction or the specified domestic transaction shall apply to a similar transaction for the two consecutive following previous years subject to the condition that the exercises an option to this effect and the TPO declare that such option is valid subject to the specified conditions.
• Such option shall not apply to any proceedings to Assessment of “Search Cases”

5. Safe harbour for offshore funds managed by Indian managers

• As per Section 9A, Fund management activity carried out by an eligible fund manager for an eligible investment fund shall not constitute a business connection of such fund in India.
• In the Eligible Investment fund, aggregate participation or investment in the fund by persons resident in India does not exceed 5% of the corpus of the fund.
• The Union budget has proposed that the condition of 5% should be checked on two dates, i.e., 1st April and 1st October of the year.
• Conditions of 5% shall be deemed to be satisfied if it is satisfied within four months of the 1st of April or the 1st of October.

6. Increase in the Tax rate on long-term capital gain 

• As per Section 115AD, Income tax on long-term capital gain on the sale of securities is taxable in the hands of Foreign Institutional Investors @ 10%. The Union Budget has proposed to increase such rate to 12.5%.

C. International Financial Services Centre (IFSC)

1. Deemed dividend does not apply to Loans between Finance Company or Finance Unit:

• As per Section 2(22)(e), any loans or advances paid by a closely held company to a shareholder, holding not less than 10% of the voting power or to any concern in which such shareholder has a substantial interest, shall be considered as dividends.
• Union budget has provided that dividend shall not include any loans or advances between two group entities where:
  • one of the group entity is a “Finance company” or a “Finance unit”; and 
  • the parent entity of such a group is listed on the stock exchange in a country or territory outside of India

2. Capital Gain from the transfer of a Ship or Aircraft to a Non-resident or an IFSC Unit

• As per Section 10(4F), any income of a non-resident by way of royalty or interest on leasing of aircraft or ship to a unit of an IFSC shall be exempted if such unit has commenced its operations on or before 31.03.2025. 
• Budget proposed to extend the date of commencement of operations till 31.03.2026
• Union budget has proposed to exempt capital gain to non-resident or an IFSC Unit (engaged primarily in the business of leasing of a ship) arising from the transfer of equity shares of a domestic company, being a Unit of an IFSC (engaged primarily in the business of leasing of a ship) and has commenced operations on or before 31 March 2030.

3. Other Amendments:

• Income of IFSC unit by way of dividends from another IFSC unit to be exempt if both entities are primarily engaged in the business of ship leasing in IFSC;
• Tax exemption for non-residents in the below cases has been extended to all IFSC-based FPIs as counterparties:
  • Transfers/ distributions of ODI contracts. 
  • Transfer of non-deliverable forwards or over-the-counter derivatives.