Navigating Corporate Governance Reforms in the Wake of the 2024 Union Budget

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This article has been written by Hari sri vidya Lalithambica, a law student from Padala Rama Reddi Law College.

Table of Contents

Abstract

The 2024 Union Budget marks a significant milestone in India’s corporate governance landscape, introducing reforms aimed at enhancing transparency, accountability, and sustainability in the business environment. This article analyses the key measures announced, including the abolition of the angel tax, the removal of the equalization levy on e-commerce, and the adjustments to capital gains and securities transaction taxes. The reforms prioritize the needs of startups and MSMEs, facilitating compliance and access to finance while promoting responsible business practices through mandatory ESG disclosures. Additionally, the government’s focus on skill development and digitalization underscores a commitment to preparing the workforce for emerging industries. By creating a more inclusive and stable ecosystem, these reforms lay the groundwork for sustainable growth and position India as an attractive destination for investment and innovation, ultimately benefiting all stakeholders in the economy.

Introduction

The 2024 Union Budget introduces corporate governance reforms aimed at enhancing India’s global competitiveness while fostering transparency, compliance, and sustainability. The reforms focus on simplifying operations for startups and MSMEs, addressing pain points like abolishing angel tax for foreign investors and ensuring timely payments through the TReDS platform. Adjustments to capital gains taxes and an increase in STT on speculative trades aim to stabilize markets and boost investor confidence. The budget also emphasizes ESG disclosures and sustainability, alongside expanding SIDBI’s reach and implementing a risk-based compliance model for smaller enterprises. With a focus on skill development and job creation, these reforms aim to create a stable, inclusive, and sustainable business environment where entrepreneurs, MSMEs, and investors thrive.

Key Corporate Governance Reforms in the 2024 Budget

The 2024 Budget builds upon the government’s commitment to streamlining corporate governance, focusing on transparency, accountability, and fostering an environment conducive to business growth. The measures reflect significant shifts in regulatory, taxation, and compliance norms, all of which aim to strengthen governance structures across sectors.

Taxation Reforms Impacting Corporate Governance

Taxation reforms have a direct influence on corporate governance as they affect both internal financial controls and external investor relations. Key taxation changes in the 2024 budget focus on providing clarity and predictability for businesses, particularly startups and foreign investors.

Angel Tax Adjustments for Startups

One of the standout reforms in the 2024 budget is the amendment of the controversial angel tax for startups. The angel tax, levied on investments that startups receive at a valuation higher than their fair market value, had historically caused friction between tax authorities and investors. This created a significant hurdle, especially for startups receiving foreign funding.

Under the new regulations, the angel tax provisions have been relaxed, with non-resident foreign investors now exempt from the tax. This provides relief to startups and encourages foreign venture capitalists to invest in Indian enterprises without fear of undue taxation.

Withdrawal of 2% Equalization Levy on E-commerce

The government has withdrawn the 2% equalization levy, which had been imposed on foreign e-commerce companies operating in India. The levy, introduced in earlier budgets, was designed to create a level playing field between local and international companies. However, it faced widespread criticism from global e-commerce firms for being discriminatory and leading to double taxation.

Its removal signals India’s alignment with global tax frameworks, particularly those proposed by the OECD, and it simplifies tax compliance for foreign e-commerce platforms. This reform is expected to make India a more attractive destination for international e-commerce businesses.

Increased Capital Gains Tax and Securities Transaction Tax (STT)

The budget has raised the capital gains tax on certain asset classes, particularly long-term capital gains (LTCG) from securities and real estate. This reform was driven by the government’s aim to address revenue leakages while also simplifying the tax structure for investors.

In addition, the Securities Transaction Tax (STT) on Futures and Options (F&O) trading has been increased. This move is designed to discourage speculative trading and ensure market stability, which aligns with broader governance goals of promoting long-term investment over short-term speculation. By moderating excessive volatility in the financial markets, these changes help foster a more stable environment for investors and improve corporate accountability.

Reforms in E-commerce and Startup Sectors

The e-commerce and startup sectors have received special attention in the 2024 budget, particularly through regulatory reforms aimed at improving compliance and creating a level playing field for businesses.

Compliance Simplification for E-commerce Platforms

E-commerce platforms in India have been brought under stricter compliance frameworks, with the government introducing new rules that require online marketplaces to disclose more detailed information about sellers and product offerings. This move aims to protect consumers from fraudulent practices and ensure greater accountability.

Furthermore, the abolition of the equalization levy not only eases the tax burden on foreign e-commerce platforms but also encourages them to expand their operations in India, which is expected to result in increased competition and innovation.

Facilitating Foreign Listings for Startups

One of the most significant corporate governance reforms is the introduction of the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024. These rules allow unlisted Indian companies to issue equity shares and list them on foreign stock exchanges in permitted jurisdictions.

This reform is expected to provide startups with greater access to international capital markets, reducing their dependence on domestic funding sources. It also enhances corporate governance by requiring listed companies to adhere to Indian Accounting Standards and other global financial reporting norms.

India’s Tax Reforms and Alignment with Global Trends

India’s 2024 tax reforms demonstrate strong alignment with international standards, particularly the OECD’s BEPS (Base Erosion and Profit Shifting) framework. These reforms enhance India’s position in the global tax environment while promoting fair taxation, transparency, and responsible business practices.

Combatting Profit Shifting

India’s strengthened transfer pricing regulations aim to prevent profit shifting to low-tax jurisdictions, in line with OECD’s BEPS Action 8-10. These measures ensure that cross-border transactions reflect the true economic value and tax liabilities, promoting fair taxation where economic activities occur.

Digital Taxation and Equalization Levy

The removal of India’s equalization levy aligns with OECD’s digital tax reforms, which seek to avoid unilateral tax measures for e-commerce platforms. This change reflects India’s commitment to the OECD’s global digital tax framework, promoting consistency and reducing trade disputes.

Enhanced Transparency

India’s implementation of Country-by-Country (CbC) reporting and e-filing systems aligns with OECD BEPS Action 13, ensuring greater tax transparency. This helps tax authorities track where profits are generated and taxes are paid, fostering global compliance and addressing tax avoidance.

Global Minimum Tax

India’s participation in the OECD’s Pillar 2 global minimum tax ensures a competitive tax regime that discourages profit shifting to jurisdictions with low or no tax rates. This initiative supports global fairness in taxation and ensures India’s tax policies remain aligned with international standards.

ESG and Sustainability

India’s focus on ESG disclosures and sustainability incentives reflects OECD’s recommendations for responsible business practices. These reforms encourage businesses to adopt green technologies, aligning India with global efforts to promote ethical, sustainable business growth.

Tax Treaties and OECD’s Multilateral Instruments

India continues to modernize its tax treaties through the OECD’s Multilateral Instruments (MLIs), ensuring its agreements are consistent with global anti-avoidance standards and contribute to reducing tax abuse.

By aligning its tax policies with the OECD’s BEPS framework, India not only strengthens domestic governance but also enhances its global competitiveness. These reforms create a transparent, fair, and sustainable tax environment, positioning India as a responsible player in the global tax ecosystem.

MSME Support: Credit Facilitation and Compliance Reforms

MSMEs play a critical role in India’s economy, and the 2024 budget introduces several reforms to support the sector’s growth and financial stability. The key focus here is improving credit access and simplifying compliance frameworks for MSMEs.

Mandatory Onboarding on TReDS Platform

To alleviate the liquidity challenges faced by MSMEs, the government has made it mandatory for larger companies with significant outstanding payments to onboard onto the Trade Receivables Discounting System (TReDS) platform. This measure aims to expedite payments from large buyers to MSMEs, improving their working capital flow.

The TReDS platform allows MSMEs to sell their receivables to financiers at competitive rates, reducing their dependency on informal credit channels. The mandatory onboarding by larger companies ensures that MSMEs face fewer payment delays, which is a significant corporate governance reform aimed at enhancing transparency and accountability in the MSME sector.

Expansion of SIDBI Branches

Another significant reform announced in the 2024 budget is the expansion of Small Industries Development Bank of India (SIDBI) branches across the country. The increased presence of SIDBI will ensure that MSMEs, especially those in Tier II and Tier III cities, have better access to credit and financial services.

Moreover, SIDBI has introduced new credit schemes for MSMEs, focusing on providing collateral-free loans and working capital finance. These credit schemes are expected to facilitate the digital transformation of MSMEs, allowing them to invest in technology and innovation while ensuring compliance with corporate governance norms.

Risk-based Compliance Framework

The introduction of a risk-based compliance model for MSMEs marks a significant shift in how regulatory inspections are conducted. Instead of blanket inspections, the new model uses risk profiling to prioritize inspections based on the risk associated with the company’s operations. This reduces the compliance burden on low-risk MSMEs, allowing them to focus on business growth while ensuring that regulatory oversight is proportionate and efficient.

MCA and SEBI Notifications: Strengthening Corporate Governance

Both the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) have introduced several regulatory updates that complement the corporate governance reforms announced in the 2024 budget.

MCA’s Notification on CSR Reporting

Corporate Social Responsibility (CSR) has become a critical component of corporate governance in India. The MCA has introduced amendments that require companies to file annual CSR-2 forms, detailing their CSR expenditures and the impact of their initiatives. This reform enhances transparency and accountability in CSR spending, ensuring that companies fulfill their social responsibilities effectively.

SEBI’s Enhanced ESG Disclosures

SEBI’s updates to the Listing Obligations and Disclosure Requirements (LODR) mandate that listed companies provide detailed disclosures related to Environmental, Social, and Governance (ESG) factors. These disclosures are designed to align Indian businesses with global sustainability standards, promoting long-term value creation and attracting ESG-focused investors.

By requiring greater transparency in ESG activities, SEBI aims to improve corporate governance and make companies more accountable for their environmental and social impact. This move also supports India’s broader climate goals by encouraging businesses to adopt sustainable practices.

Simplified Listing Procedures for Foreign Markets

The MCA’s notification regarding the listing of Indian companies on foreign stock exchanges also strengthens corporate governance by ensuring compliance with both Indian and international accounting standards. Companies listing abroad must adhere to Indian Accounting Standards (Ind-AS), which ensures transparency in financial reporting and strengthens investor confidence.

Investment Facilitation and Ease of Doing Business

The reforms announced in the 2024 budget are designed to improve India’s attractiveness as a destination for both domestic and foreign investment.

Streamlining Compliance Through Digitalization

A major focus of the budget is the digitalization of compliance procedures. The MCA has introduced several e-filing requirements, including the use of e-Form LEAP-1 for companies listing abroad. Digitalization simplifies compliance for businesses, reducing paperwork and lowering administrative costs.

Foreign Investment Incentives

The government has relaxed several foreign investment regulations, particularly in sectors like e-commerce and technology. By providing tax exemptions for specific foreign investments and allowing equity listings in global jurisdictions, the budget seeks to attract international capital.

These reforms, combined with the abolition of the equalization levy, are expected to encourage greater foreign participation in India’s growing digital economy. This aligns with the broader corporate governance goal of enhancing transparency and compliance, thereby making India an attractive investment destination.

Encouraging Sustainable Business Models and Skill Development

Sustainability and workforce upskilling have become integral to the 2024 Budget’s vision of corporate governance reform. Recognizing that businesses can no longer operate without addressing environmental, social, and governance (ESG) factors, the government has laid out incentives for companies adopting sustainable models.

ESG Disclosures and Sustainable Investments

SEBI has mandated expanded ESG disclosures for listed companies, encouraging businesses to measure and disclose the environmental and social impact of their operations. The government has also introduced green tax incentives for companies investing in renewable energy and other sustainable initiatives. This aligns with international practices where ESG compliance attracts long-term investors and fosters accountability.

Skill Development Programs for Employment Generation

The 2024 Budget includes provisions for skill development programs aligned with the needs of emerging industries, such as artificial intelligence (AI), fintech, and sustainable energy. Companies involved in public-private skill development partnerships will receive tax deductions and financial incentives, encouraging businesses to actively contribute to workforce development.

These measures not only address the rising demand for skilled professionals but also ensure that businesses remain competitive and socially responsible.

Conclusion

In conclusion, the reforms aimed at enhancing the ease of doing business in India are not just regulatory adjustments; they represent a commitment to fostering an environment where innovation and entrepreneurship can thrive. By streamlining processes, improving access to finance, and investing in infrastructure, the government is taking crucial steps to support businesses of all sizes, particularly startups and MSMEs.

These initiatives not only alleviate the operational burdens faced by entrepreneurs but also empower them to focus on their core missions—driving growth and creating jobs. Furthermore, by prioritizing skill development and promoting digitalization, these reforms ensure that the workforce is equipped for the future, fostering a culture of adaptability and resilience.

Ultimately, the success of these reforms hinges on their ability to create a vibrant and inclusive business ecosystem where every individual has the opportunity to contribute to and benefit from economic growth. By putting people at the centre of these initiatives, the government is laying the groundwork for a sustainable, transparent, and prosperous future for all. This human-centered approach to governance not only builds trust in the system but also inspires hope and ambition across the nation, making India a promising landscape for business and innovation.

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