With the new financial year progressing, taxpayers should prepare for the significant changes that will come into effect on October 1, 2024. These amendments, introduced in the Union Budget 2024 and later passed in the Finance Bill, target several aspects of taxation, including Securities Transaction Tax (STT), Aadhaar-PAN linkage, and taxation on share buybacks. The aim of these reforms is to streamline tax compliance, address misuse of tax-related provisions, and generate additional revenue for the government.

Here’s an in-depth look at the key changes that will affect individuals, investors, and businesses starting October 1, 2024.

1. Securities Transaction Tax (STT) Hike

The Union Budget 2024 introduced a hike in Securities Transaction Tax (STT), primarily impacting the trading of Futures & Options (F&O). This move is expected to increase revenue collection from financial market activities, particularly from active traders and institutional investors.

Key Details:

• STT on Futures: Effective October 1, 2024, STT on futures transactions will increase to 0.02%, up from the previous rate.
• STT on Options: For options contracts, the STT rate has been raised to 0.1%.

This increase will directly affect traders in the derivatives market, as these taxes are collected at the time of the transaction. The additional cost burden on high-frequency traders and institutional players may slightly reduce speculative activities, but it is not expected to significantly affect long-term investors.

Furthermore, income from share buybacks will now be taxed at the shareholder level, a departure from the previous system where the company bore the tax burden. This new taxation rule on share buybacks will bring the treatment of such income in line with the taxation of dividends, where shareholders are liable for tax.

Impact on Investors:
Investors participating in the F&O market will now face higher transaction costs, potentially impacting trading volumes, especially for retail investors. Moreover, shareholders receiving income from buybacks should prepare for a direct tax liability, which could reduce the net gain from such transactions.

2. Changes to Aadhaar and PAN Linkage Rules

To strengthen the integrity of the tax system and reduce fraud, new rules regarding the use of Aadhaar in tax filings and PAN applications will come into force from October 1, 2024. These rules aim to eliminate misuse and duplication of PAN (Permanent Account Number) cards, which are crucial for tax identification.

Key Changes:

• Elimination of Aadhaar Enrollment IDs: Effective from October 1, individuals will no longer be allowed to use an Aadhaar Enrollment ID in place of an Aadhaar number when filing Income Tax Returns (ITR) or applying for a PAN card. Previously, individuals who had applied for Aadhaar but had not yet received their Aadhaar number could use the Enrollment ID for these purposes.
• Aadhaar in ITRs: For filing tax returns, taxpayers will now be required to quote a valid Aadhaar number rather than the Aadhaar Enrollment ID. This step is expected to reduce inaccuracies and fraudulent practices, ensuring a higher degree of accuracy in taxpayer identification.

Impact on Taxpayers:
Taxpayers who have not linked their Aadhaar with their PAN, or those relying on their Enrollment IDs, must now update their records with the correct Aadhaar number. Non-compliance with these provisions may result in delays or complications in tax filing and PAN issuance.

3. Taxation on Buyback of Shares

Starting October 1, 2024, the taxation structure for buybacks will undergo a significant shift. Previously, companies buying back shares were required to pay a tax on the distributed income from buybacks. However, with the new rules in place, the tax liability will now shift to shareholders, bringing the treatment of buybacks closer to that of dividends.

Key Changes:

• Shareholder-Level Taxation: Under the revised rule, the income shareholders receive from a share buyback will be taxed in their hands. This marks a shift from the company being taxed, meaning investors will now bear the brunt of taxation on buyback transactions.
• Capital Gains Consideration: Additionally, when calculating the capital gains or losses from a buyback, the shareholder’s acquisition cost of the shares will be factored in. This means the original price paid for the shares will be taken into account to determine any gains or losses, which will influence the tax payable.

Impact on Investors:
This change will increase the tax burden for investors involved in share buybacks, particularly those in higher tax brackets. The shareholder-level taxation could discourage some investors from participating in buyback offers, especially if the net returns are significantly impacted after factoring in taxes. However, the inclusion of acquisition cost in capital gains calculations provides some relief by ensuring that investors are only taxed on the actual gains made from the transaction.

4. Revised TDS Rates

Apart from the aforementioned changes, there are several revisions to the Tax Deducted at Source (TDS) rates, set to take effect from October 1, 2024. These changes are part of the government’s effort to align tax collections with actual income received and minimize tax evasion.

While specific details of the revised TDS rates across various categories are yet to be clarified, taxpayers should expect certain increases in TDS rates on payments such as interest, rent, and contractual payments. The updated TDS rates will primarily affect individuals and businesses engaged in financial transactions where TDS is applicable.

Impact on Taxpayers:
Individuals and businesses must stay updated on the new TDS rates and ensure compliance to avoid penalties. For instance, a higher TDS rate could affect cash flows for businesses and individuals receiving payments subject to TDS, as a larger portion of the payment will be withheld upfront. It is also advisable for taxpayers to review their TDS deductions to ensure accurate tax credit claims when filing returns.

5. Direct Tax Vivad Se Vishwas Scheme 2024

The 2024 Budget also introduced the Direct Tax Vivad Se Vishwas Scheme 2024, aimed at resolving long-standing tax disputes. This scheme will be applicable from October 1, 2024, and offers taxpayers an opportunity to settle their outstanding tax litigation by paying the disputed tax amounts, with waivers on penalties and interest in certain cases.

Key Features:

• Dispute Resolution: Taxpayers with ongoing disputes or tax litigation will have the option to settle their cases by paying the principal tax amount, while penalties and interest may be waived.
• Simplified Process: The scheme aims to provide a faster, more transparent dispute resolution process, reducing the burden of litigation for both taxpayers and the government.

Impact on Taxpayers:
The Vivad Se Vishwas Scheme presents a valuable opportunity for individuals and businesses involved in tax disputes to settle their cases and move forward without the weight of ongoing litigation. Taxpayers should carefully evaluate whether the scheme benefits their situation and make informed decisions on whether to participate.

Conclusion

The tax changes effective from October 1, 2024, reflect the government's continued effort to simplify tax laws, improve compliance, and address tax loopholes. For investors, the increased STT and shareholder-level taxation on buybacks will influence financial planning and returns on investment. Taxpayers should also ensure compliance with the updated Aadhaar provisions to avoid any disruptions in tax filing.

As these changes come into force, taxpayers are encouraged to seek professional advice to adapt to the new tax landscape. The Tax Partner can assist individuals and businesses with expert guidance to navigate these new rules and ensure seamless tax compliance.