Finance Minister Nirmala Sitharaman presented the Union Budget 2023-24 in Parliament on 1 February 2023, introducing several significant legal and fiscal changes. The Budget — the last full Budget before the 2024 general elections — made the new income tax regime under Section 115BAC the default regime, increased the income tax rebate limit to Rs. 7 lakh, and announced the Vivad Se Vishwas II scheme for resolution of contractual disputes involving the government.
Background
The Union Budget 2023-24 was presented against the backdrop of India's post-pandemic economic recovery, global inflationary pressures, and the Reserve Bank of India's tightening monetary policy cycle. The Budget targeted a fiscal deficit of 5.9 per cent of GDP for FY2024, down from the revised estimate of 6.4 per cent for FY2023. Structurally, the Budget emphasised capital expenditure (increased by 33 per cent to Rs. 10 lakh crore), green growth initiatives, and digital infrastructure. From a legal and regulatory standpoint, the Finance Bill, 2023 proposed amendments to the Income Tax Act, customs law, and introduced new dispute resolution frameworks.
Key Provisions
The Budget introduced the following legally significant measures:
New tax regime as default: The new income tax regime under Section 115BAC became the default regime for individual taxpayers and Hindu Undivided Families. Taxpayers wishing to continue with the old regime with deductions must affirmatively opt for it. The new regime offers revised tax slabs with no tax up to Rs. 3 lakh, and an enhanced rebate under Section 87A making income up to Rs. 7 lakh effectively tax-free.
Vivad Se Vishwas II — contractual disputes: A new scheme titled "Vivad Se Vishwas II" was announced for settlement of contractual disputes where the government or government undertakings are parties. The scheme offers standardised terms of settlement to reduce pending government contract litigation.
Presumptive taxation threshold increased: The turnover limit for presumptive taxation under Section 44AD was raised from Rs. 2 crore to Rs. 3 crore for businesses, and the gross receipts limit under Section 44ADA was raised from Rs. 50 lakh to Rs. 75 lakh for professionals, subject to the condition that cash receipts do not exceed 5 per cent of total receipts.
MSME credit guarantee scheme: A revamped credit guarantee scheme for MSMEs with an infusion of Rs. 9,000 crore into the corpus was announced, enabling additional collateral-free guaranteed credit of Rs. 2 lakh crore.
Capital gains tax — Section 54 and 54F capped: The deduction available under Sections 54 and 54F for reinvestment of capital gains in residential property was capped at Rs. 10 crore, closing a loophole used by high-net-worth individuals.
Customs duty rationalisation: The number of basic customs duty rates was reduced from 21 to 13, with rationalisation aimed at simplifying the tariff structure and reducing compliance burden.
New KYC system: A unified KYC framework using a "one-stop" digital system was announced to simplify identity verification across financial services.
Implications for Practitioners
Tax practitioners must immediately advise clients on the implications of the new default tax regime. Since the new regime eliminates most deductions (HRA, Section 80C, 80D, etc.), clients with significant deduction-eligible investments may need to affirmatively opt for the old regime. The compliance burden shifts: employers will need to collect regime election declarations from employees for TDS purposes.
The Vivad Se Vishwas II scheme for contractual disputes is potentially transformative for government contractors and infrastructure companies facing pending litigation. Practitioners handling government contract disputes should evaluate their pending matters against the scheme's settlement terms once detailed guidelines are issued.
The capping of capital gains reinvestment deductions under Sections 54 and 54F at Rs. 10 crore will affect high-value property transactions. Real estate practitioners should reassess tax planning strategies for clients with large capital gains.
The enhanced presumptive taxation thresholds offer significant compliance relief for small businesses and professionals, though the 5 per cent cash receipt condition incentivises digital payments.