Budget 2025 may usher in major overhaul with Direct Tax Code reforms

The upcoming Union Budget 2025 is expected to bring significant developments in the long-awaited implementation of the Direct Tax Code (DTC), signalling a major step toward overhauling India’s income tax framework.

The Central Board of Direct Taxes (CBDT) had recently had constituted 22 specialised sub-committees comprising income tax officials to review and simplify various aspects of the existing tax laws.

In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman had emphasised the government’s commitment to simplifying direct taxation in India. “This will reduce disputes and litigation, thereby providing tax certainty to the taxpayers,” the FM had said. 

These committees are tasked with ensuring that the proposed changes align with global best practices, enhance ease of compliance for taxpayers and bolster revenue efficiency for the government. While the finer details of the reforms are under wraps, insiders suggest that the focus is on creating a more streamlined and equitable tax system, addressing issues like litigation reduction and widening the tax base.

"We are working on simplification of the language. The act itself is about 300-500 pages, with certain sections not important at all. These sections will be completely removed," an official told Business Today TV. 

The Income Tax department has received 6,500 suggestions from stakeholders over the past month on review of the Income Tax Act, 1961. As per sources, suggestions majorly have been received on streamlining of income tax rates, especially the corporate tax rate. 

A key industry input has been to have one single flat rate for corporate tax and not divide it between surcharge and cess but it is unlikely that government will announce a tax change in this budget, an official said.  

The Direct Tax Code has been a longstanding demand of economists and industry experts, as India’s income tax laws have not seen a substantial revision since the Income-tax Act of 1961. Over the years, piecemeal amendments have led to increased complexity and ambiguity. The DTC aims to replace the outdated framework with a modern, coherent structure, streamlining exemptions, rationalising tax slabs, and introducing measures to promote voluntary compliance.

The committees are expected to submit their findings and recommendations within the next few weeks, ahead of the Union Budget’s presentation in February 2025. Experts are closely watching for potential changes, such as adjustments to tax slabs, simplified filing procedures and measures to address high litigation rates in tax matters.

The government’s proactive approach, coupled with Sitharaman’s assurance of stakeholder consultations, has raised expectations for a tax regime that fosters both economic growth and ease of doing business.

With just weeks left until the Budget announcement, all eyes are on how the Finance Ministry navigates this crucial reform, poised to transform India’s tax landscape for decades to come.