With Budget 2025 around the corner and Finance Minister Nirmala Sitharaman set to present her 8th Budget overall and the 2nd under the Modi 3.0 regime, tax experts and taxpayers alike have high expectations regarding direct taxes.
There is growing anticipation that the Modi government will ease the tax burden on the middle class, provide relief from high inflation, and simplify compliance processes, as taxpayers are currently facing challenges with the dual tax regime.
Taxpayers have a plethora of demands, including the introduction of a New Direct Tax Code (DTC), revisions to personal income tax slabs, concessional tax rates under the new tax regime, simplification of tax filing, reduction in litigation timelines, and the introduction of a sunset clause for the old tax regime.
Tax experts are also rallying for a shift from the financial year to a calendar year for tax purposes. This change, they argue, will align India’s tax framework with global standards, improve administrative efficiency, and offer greater clarity for businesses and individuals.
Aakash Uppal, Partner & Leader (North & East), Corporate Tax, Tax and Regulatory Services, BDO India, said, “The DTC is also expected to bring about several other important changes. These include shifting to a calendar year for tax purposes instead of the financial year, simplifying the residential status for individuals by removing complex categories like ‘Resident but not Ordinary Resident’, introducing unified tax rates for domestic and foreign companies, and expanding the tax base for withholding taxes. Additionally, further rationalising of withholding tax rates and provisions is anticipated.”
How will the shifting to a calendar year tax system impact taxpayers?
Switching to a calendar year tax system, as proposed by tax experts ahead of Budget 2025, might see both benefits and challenges for taxpayers. On the one hand, aligning the tax year with the calendar year (January to December) would help align the system with global standards, which will simplify tax compliance for multinational companies and NRIs. This might also streamline financial planning by syncing tax deadlines with calendar-based income and expense cycles.
However, the transition might cause some initial difficulties and challenges also as taxpayers and businesses adjust to the new timeline. Taxpayers may face challenges like recalibrating their tax-saving investments, managing overlapping tax periods, and filing their income tax returns (ITRs) during the transition phase.
Personal Income Tax: Expecting relief and simplification
Uppal highlighted the need for enhancements to the new tax regime, saying under the existing tax regime, individuals with annual earnings up to Rs 5 lakh are exempt from paying taxes, while the new tax regime raises this threshold to Rs 7 lakh, aiming to provide more relief to taxpayers.
“The government is expected to further enhance the new tax regime by increasing the basic exemption limit, adjusting tax slabs, and raising the standard deduction. Additionally, there is speculation that the government may introduce a sunset clause for the old tax regime, gradually phasing it out in favor of the new system. These measures would make the new tax regime more taxpayer-friendly, encourage savings and investments, and support economic growth,” he noted.
He also emphasised India’s commitments under the OECD’s Global Anti-Base Erosion Rules on Pillar Two, which aim to prevent multinational groups from exploiting tax arbitrage. Uppal remarked:
“India has taken a cautious approach by not incorporating Pillar Two in previous budgets. It will be crucial for the Government to clarify the application of Pillar Two in DTC and outline the reporting requirements in the upcoming Union Budget.”
Simplification of tax filing and reduction in litigation timelines
Tax filing for non-salaried individuals remains a complex and cumbersome process. Uppal noted: “Filing tax returns for non-salaried taxpayers has become increasingly cumbersome due to extensive information required in the forms. There is a strong need within the DTC to streamline these forms by simplifying the language and rationalising the information requests.”
He also addressed operational challenges under the Faceless Assessment Scheme: “Taxpayers face operational challenges such as the lack of grievance filing options, no provision for rectifications, and limited opportunities for early hearings with faceless Commissioners of Income Tax. These inefficiencies lead to protracted litigation and significant amounts of tax revenue being locked in disputes. The DTC should address these issues by introducing an operational framework to improve the functioning of the Faceless Assessment Scheme, thereby reducing the backlog of pending appeals.”
Expanding the tax base and enhancing compliance
Kunal Gala, Partner, Deal Value Creation, BDO India, highlighted systemic issues in compliance and income disclosure:
“With as few as 7% of the population i.e. about 75 million people, filing returns last year and 63% of return-filing individuals paying no tax, there is a systemic problem with respect to compliance and income disclosure. Since a small group of high earners are responsible for most of the taxes, there is the need for reforms that not only simplify the tax code but also expand its base.”
Gala further emphasised the importance of addressing middle-class concerns: “Middle class concerns such as compliance measures, tax complexity and public services are critical to addressing the measures that need to be taken to keep a large population benefitted. A balanced approach is necessary to ensure sustainable growth in revenue and reduce reliance on indirect taxes, which disproportionately impact lower-income groups.”
As the Finance Minister prepares to unveil the Union Budget 2025, taxpayers and experts alike await reforms that promise to streamline the tax structure, address compliance hurdles, and bring long-term benefits to the Indian economy.