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Mint
4 days ago
- Business
- Mint
India's Income Tax law revision: Why well begun is still only half done
Ketan Dalal The draft of India's 2025 Income Tax Bill simplifies the language of the complex 1961 Act. This is welcome. But the effort must not end there. We also need changes that go beyond form to address key aspects of substance. Given the Simplification Committee's mandate, it has done well to simplify the law's language, but at least some structural changes are needed. Gift this article There has been significant press coverage of India's Income Tax Bill, 2025, which was introduced in Parliament on 21 July. As readers would recall, a committee was set up in October 2024 for the simplification of the Income Tax Act; the panel's mandate was ring-fenced to simplification of language, reduction of litigation and the compliance burden, and the removal of redundant or obsolete provisions. In that sense, the committee was restrained by its limited mandate. There has been significant press coverage of India's Income Tax Bill, 2025, which was introduced in Parliament on 21 July. As readers would recall, a committee was set up in October 2024 for the simplification of the Income Tax Act; the panel's mandate was ring-fenced to simplification of language, reduction of litigation and the compliance burden, and the removal of redundant or obsolete provisions. In that sense, the committee was restrained by its limited mandate. A Lok Sabha Select Committee was set up to look at the draft Income Tax Bill framed by the Simplification Committee, which has submitted its report with 285 recommendations, a majority of which seem to find favour with the government; the net result is that the bill framed by the simplification panel will likely be passed into law with some changes. However, there are some key aspects that need to be discussed. The Income Tax Act of 1961 has been amended dozens of times, and with some 4,000 amendments, its language had turned complex; in this context, the simplification panel has made a good attempt to offer clarity. For example, several tables and explanations have been added and the number of sections has been brought down from 819 to 516. However, there are concerns over several aspects; for example, there has been a tendency to delegate rule-making to the Central Board of Direct Taxes (CBDT)—like in the case of faceless assessments—whereby, compared to existing provisions, the CBDT would gain greater scope to make legislative -type changes without parliamentary oversight. This is worrisome. There are apparent errors and omissions in the existing law that should have been corrected. For example, in the context of the 'deemed gift' provision u/s 56(2)(x), the definition of 'relative' for tax exemption does not expressly include reciprocity, or whether the relationship is mutually applicable for gifting; this aspect should have been explicitly clarified (even under the existing law, the CDBT should have issued such a circular). It impacts gifting between taxpayers and nephews, for example, if the tax exemption for relatives applies only one-way. Also, the tax neutrality provision for a 'demerger' does not include 'fast track demerger,' because that concept came later. Representations were received by the Select Committee and both these aspects were pointed out to the ministry, but were apparently brushed aside; surprisingly, the common-sense point that relationships should be reciprocal (or two-way) was met with a response from the ministry that this is 'in the nature of a major policy change"! Although the Committee's mandate was limited, the larger concern is that once the bill is enacted, the government would be reluctant to make substantive changes. Here are some we badly need. Individual taxation: The limit of annual income beyond which the maximum tax rate kicks in is only ₹ 15 lakh, which seems too low and needs to be addressed. Also, medical expenses have gone through the roof in the last few years, as have education costs; both these are critical, and even relatively well-off Indians are struggling to meet these costs. The bill should allow a higher deduction for mediclaim and medical expenses and provide for a meaningful deduction for education (the latter could help address the skill gaps we face). Real estate costs have also shot up, while the deduction of interest on housing loans is too low at ₹ 2 lakh per year. This badly needs an upward revision. Corporate taxation: India's corporate tax rate is very reasonable at 25%; however, some aspects that need to be addressed relate to mergers and acquisitions (M&As), including group restructuring. Some specific aspects that could be looked at even at this stage have been long-standing demands. The definition of a 'demerger' for tax neutrality is highly restrictive and needs rationalization. The commercial reality of M&A transactions involves earn-outs and deferred amounts, and the Act does not have contemporary provisions on the year of taxability, which causes uncertainty and litigation. Losses of merging companies are allowed to be carried forward only in restricted circumstances, primarily if the merging company is in manufacturing; this is a relic from a bygone era, since several service companies also have losses and the mergers of such companies could save them from extinction and prevent job losses. India's problem of non-performing assets has reduced but is still substantial. In the context of takeovers that emerge from the official bankruptcy process, the provision in Section 28 that makes write-backs of haircuts taken by lenders taxable is a major dampener from the perspective of an acquirer that seeks to reduce its risk of acquiring an insolvent company to resurrect. The last two aspects have again been pointed out to the ministry, which appears not to see merit in these changes. Also Read: India's Income Tax Bill sets the stage for significant reforms Administrative dimensions: There have been simplifications in Tax Collected at Source (TCS) and Tax Deducted at Source (TDS), but the larger issue is that the deductor of tax is doing the government's job; from an Ease of Doing Business perspective, TDS provisions need to be shrunk, as opposed to language being simplified. Also, given the need to reduce tax litigation, a robust advance ruling mechanism needs to be put in place, so that tax disputes can be addressed upfront; all advance ruling mechanisms till now have failed, either because of faulty architecture or elongated time frames (or both), making the term 'advance' seem meaningless. Given the Simplification Committee's mandate, it has done well to simplify the law's language, but unfortunately, that's about form rather than substance; the issues outlined above still need to be addressed in the context of India's avowed intent to ease business. At least some structural changes are needed. A redraft of our tax law is useful and attractive, no doubt, but would be disappointing if it falls short of dealing with fundamental issues. The author is managing director, Katalyst Advisors Pvt Ltd. Topics You May Be Interested In
Economic Times
16-06-2025
- Business
- Economic Times
Sebi board to discuss changes in ESOP rules for startup founders and PSU delisting
The regulator is of the view that certain PSUs have a thin public float and weak financials. Sebi is considering allowing startup founders to retain ESOPs post-IPO, addressing concerns about dilution and aligning founder incentives with stakeholders. The regulator is also mulling a one-year cooling-off period for ESOP grants before IPOs to prevent misuse. Additionally, Sebi may permit voluntary delisting of PSUs with over 90% government stake, acknowledging their thin public float and potentially inflated market prices. Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads Mumbai: The Sebi board, which is scheduled to meet on June 18, is likely to discuss allowing startup founders to continue holding employee stock options even after taking their ventures public, and permitting voluntary delisting of public sector companies , among other proposals, said two people with knowledge of the rules mandate that founders be classified as promoters at the time of filing initial public offering ( IPO ) documents. Once listed as promoters, employee stock options (ESOPs) cannot be issued to capital market regulator believes the current rules do not clearly specify whether a founder holding ESOPs-who is subsequently categorised as a promoter-can exercise the granted options, both vested and of many new-age tech companies often receive ESOPs instead of cash-based remuneration in their early years, aligning their interests with those of other shareholders. However, as these companies raise funds from external investors, the founders' shareholding tends to get diluted."The proposed changes in ESOP rules recognise the 'skin in the game' incentive for such founders, with corresponding benefits to all other stakeholders," said Ketan Dalal, managing director, Katalyst Advisors."The issue of ESOPs has always been a contentious one, because the perception often is that it leads to dilution of public shareholding and may also be used as a tool for unjust enrichment of those in management."The regulator is also considering a one-year cooling-off period between the grant of ESOPs and the company's decision to pursue an IPO. It believes allowing share-based benefits shortly before IPO filing could be prone to misuse."The one-year period may need to be revisited, given that circumstances for making a public offer change rapidly, and a shorter period may be justified," Dalal Sebi board, chaired by Tuhin Kanta Pandey, is also likely to consider allowing public sector companies (PSUs) to voluntarily delist from stock exchanges through a separate carve-out mechanism-provided the government holds more than 90% regulator is of the view that certain PSUs have a thin public float and weak financials. Some, though currently profitable, may lack long-term prospects due to outdated product lines or government decisions to sell off a discussion paper released last month, Sebi noted that since the shares of these companies are held by the government, they tend to offer perceived security to investors. This often results in elevated market prices that may not reflect the actual book value. "If such PSUs are to undertake delisting, being frequently traded, the 60-day volume-weighted average market price would need to be considered. This would result in a higher floor price and, consequently, a greater budgetary outlay for the government," Sebi said.
Time of India
16-06-2025
- Business
- Time of India
Sebi board to discuss changes in ESOP rules for startup founders and PSU delisting
Mumbai: The Sebi board, which is scheduled to meet on June 18, is likely to discuss allowing startup founders to continue holding employee stock options even after taking their ventures public, and permitting voluntary delisting of public sector companies , among other proposals, said two people with knowledge of the matter. Currently, rules mandate that founders be classified as promoters at the time of filing initial public offering ( IPO ) documents. Once listed as promoters, employee stock options (ESOPs) cannot be issued to them. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Discover the best air conditioner unit prices in the Philippines 2024 Air Condition | Search Ads Search Now Undo The capital market regulator believes the current rules do not clearly specify whether a founder holding ESOPs-who is subsequently categorised as a promoter-can exercise the granted options, both vested and unvested. Founders of many new-age tech companies often receive ESOPs instead of cash-based remuneration in their early years, aligning their interests with those of other shareholders. However, as these companies raise funds from external investors, the founders' shareholding tends to get diluted. "The proposed changes in ESOP rules recognise the 'skin in the game' incentive for such founders, with corresponding benefits to all other stakeholders," said Ketan Dalal, managing director, Katalyst Advisors. Live Events "The issue of ESOPs has always been a contentious one, because the perception often is that it leads to dilution of public shareholding and may also be used as a tool for unjust enrichment of those in management." The regulator is also considering a one-year cooling-off period between the grant of ESOPs and the company's decision to pursue an IPO. It believes allowing share-based benefits shortly before IPO filing could be prone to misuse. "The one-year period may need to be revisited, given that circumstances for making a public offer change rapidly, and a shorter period may be justified," Dalal said. PSU Delisting The Sebi board, chaired by Tuhin Kanta Pandey, is also likely to consider allowing public sector companies (PSUs) to voluntarily delist from stock exchanges through a separate carve-out mechanism-provided the government holds more than 90% stake. The regulator is of the view that certain PSUs have a thin public float and weak financials. Some, though currently profitable, may lack long-term prospects due to outdated product lines or government decisions to sell off assets. In a discussion paper released last month, Sebi noted that since the shares of these companies are held by the government, they tend to offer perceived security to investors. This often results in elevated market prices that may not reflect the actual book value. "If such PSUs are to undertake delisting, being frequently traded, the 60-day volume-weighted average market price would need to be considered. This would result in a higher floor price and, consequently, a greater budgetary outlay for the government," Sebi said.
Time of India
22-04-2025
- Business
- Time of India
Second among equals? Yes, say CCOs. Not by paycheck, counter cos
Mumbai: A recent Sebi circular designating a company secretary or chief compliance officer (CCO) at one level below the managing director or CEO has sparked both celebration and concern - cheered by compliance heads but viewed warily by several listed companies. Industry insiders say the change has prompted some CCOs to seek parity with chief financial officers (CFOs) in terms of hierarchy and pay. In many mid-sized firms, CFOs often report directly to the MD or CEO, commanding salaries more than double that of CCOs. People said compliance chiefs of a mid-sized IT firm and two chemical companies have formally asked their boards to elevate their roles to the same level as CFOs, along with corresponding hikes in compensation. India Inc is urging the market regulator to clarify that the circular's intent is to strengthen reporting lines and not to redefine organisational structures or remuneration frameworks. This is since companies are fearing that the directive could inadvertently disrupt internal hierarchies, creating HR and pay-scale challenges, especially in those where roles differ sharply in scope and scale across functions. "The position of a CCO is undoubtedly very important, especially in the context of the regulatory heavy environment, but this is more so in case of companies which have heavy sectoral regulatory oversight such as banks, NBFCs and insurance companies," said Ketan Dalal, managing director, Katalyst Advisors. "However, it is important for Sebi to clarify that the dispensation is more in the context of reporting, and not necessarily in terms of the HR organisation structure or compensation levels." The regulatory amendment - issued on April 1- modifies Regulation 6 of the Listing Obligations and Disclosure Requirements (LODR), 2015. It mandates that a listed company's compliance officer must be a full-time employee and occupy a position one level below the MD or a whole-time director, if these individuals sit on the company's board. This shift marks a broader rethinking of compliance - no longer a box-ticking role, but a core strategic function. By elevating the CCO's stature, Sebi aims to ensure they are empowered to flag lapses directly to top management, enhancing corporate oversight. "Sebi's intent is to empower CCOs to perform their duties fearlessly and ensure adherence to regulatory norms, not to mandate changes in their compensation structures," said Shailesh Haribhakti, chairman, Shailesh Haribhakti and Associates. "When it comes to remuneration, each company will make its own decision based on the scope and complexity of the compliance function." That said, others see the move as a much-needed step in the evolution of corporate governance in Indian companies. "With regulatory scrutiny on the rise, the consequences of non-compliance can be just as damaging as financial mismanagement, making the CCO's role equally strategic," said Zubin Morris, partner at Little & Co.
