The Hon’ble Finance Minister, Nirmala Sitharaman, announced in the last budget to undertake a comprehensive review of the Income Tax Act, 1961 (“IT Act”). The objective of this review is to make the Act more concise, lucid, and easy to comprehend, while reducing litigation, providing tax certainty, and lowering the volume of tax demands entangled in disputes.
With reforms already initiated to simplify the tax regime for charities, TDS rate structure, provisions for reassessment and search provisions and capital gains taxation, all eyes and hopes are now on this Budget to see what reforms await us in the direct tax front. With economic expansion at an exponential pace for India, one can always expect either enactment of a new ‘Direct Tax Code’ or significant reforms under the existing tax regime including tackling backlog of cases enabling ease of doing business.
Individual tax rates / Personal tax
The government is actively promoting the new tax regime. The previous budget focused on job creation, especially in the manufacturing sector. In light of these developments, it is crucial to increase the disposal income in the hands of individuals. A much-needed reform is to increase the exemption limit as a relief for individuals, especially middle-income earners and reduce the existing tax rate across income slabs under the new tax regime.
Startups / MSME Sector
Startups and other small and medium enterprises are gradually increasing and forming the backbone for a developing India. Amidst this, the government is proactively engaged in granting tax and other incentives to this sector. Presently, the IT Act provides a tax holiday to eligible startups under section 80-IAC. However, this section has a sunset clause, it is applicable for startups incorporated up toMarch 31, 2025. It is expected that this budget will grant an extension under section 80-IAC. Additionally, there is a need for rationalisation of presumptive taxation scheme under section 44AD of the IT Act. This scheme is applicable when the taxpayer has total turnover or gross receipts in the financial yearupto INR two crores(INR 3 crores when cash receipts do not exceed 5% of total receipts). It is expected that the threshold limit under this scheme may be increased to align it with the turnover threshold under theMicro, Small and Medium Enterprises Development Act, 2006.
Corporate tax
Ease of doing business has been one of the prime agendas of the present government. Tax incentives especially corporate tax directly affect this initiative. Some of the key tax expectations include extension in ca oncessional tax regime that was available to new manufacturing companies commencing their business prior to March 31, 2024, for at least another five years, with effect from April 01, 2024. It is also expected that there may be a reduction in tax rate for non-corporate entities, like limited liability partnership, association of persons, etc., to 25% (including surcharge and cess). This will be in line with the concessional tax rate offered to a private limited company.
Dispute Resolution
The previous budget focused on simplification of the dispute resolution process and brought in significant changes with the introduction of the Vivad se Vishwas scheme. In line with this continued objective and taking into account the issue of backlog of cases, some new measures are expected this year. According to January 2024 data, 5,44,205 petitions await resolution within the norms of the income tax department, with an additional 63,246 declining at different levels of appellate authorities including Income Tax Appellate Tribunals (ITATs), High Courts, and the Supreme Court.
To deal with this problem, the government increased the monetary limits for filing appeals related to direct taxes, excise and service tax in the Tax Tribunals, High Courts, and Supreme Court to INR 60 lakh, INR 2 crores, and INR 5 crores respectively. Budget 2025 is also expected to specifically target initiatives to deal with pendency of tax cases.
This budget, we may witness foundations being laid for a simplified tax regime that bolsters the tax collection.
Lokesh Shah is a Partner at IndusLaw. Gaurav Goya is Principal Associate and Aarya Jha is an Associate at IndusLaw. Views expressed are personal.