Transformative direct tax reforms in Budget 2025 for middle class empowerment

The reforms are part of the Government's broader strategy to stimulate consumption, enhance ease of doing business and boosting economic growth

Budget 2025-26, presented by the Union Finance Minister Nirmala Sitharaman has introduced a series of direct tax reforms aimed at providing relief to the middle class, simplifying tax compliance and in encouraging voluntary compliance. These reforms are part of the Government's broader strategy to stimulate consumption, enhance ease of doing business and boosting economic growth. 

 

One of the most anticipated aspects of the Budget was the populist focus on personal income-tax. The FM has proposed significant beneficial changes to the income tax slabs, with the intention to reduce tax burden on the middle class and improve disposable income, thereby boosting household consumption and savings.

 

 

The Budget also proposes rationalising the Tax Deduction at Source (TDS) and Tax Collected at Source (TCS) mechanisms. The number of TDS rates and thresholds has been reduced to simplify compliance and reduce the burden on taxpayers. For instance, the threshold for tax deduction on interest for senior citizens has been doubled from Rs 50,000 to Rs 1 lakh. These changes aim to simplify the tax process and reduce the number of transactions subject to TDS, benefiting small taxpayers.

 

To further ease the compliance burden, the budget proposes the omission of higher TDS/TCS rates for non-filers of income tax returns. These measures are expected to streamline the tax process and reduce the administrative burden on both taxpayers and the tax department.

 

In a bid to encourage voluntary compliance, the government has extended the time limit for filing updated tax returns from two years to four years. This extension allows taxpayers more time to correct any omissions in their income declarations, fostering a culture of compliance and trust between taxpayers and the government. The Government has also proposed to simplify the compliance burden for small charitable trusts by increasing their registration period from five to ten years and ensuring that minor defaults do not lead to disproportionate consequences.

 

For promoting investment and employment, the Budget extends the benefits available to start-ups under Section 80-IAC, for another five years, allowing eligible start-ups incorporated before April 1, 2030, to avail of tax benefits. Additionally, the Budget proposes a presumptive taxation regime for non-residents providing services for electronics manufacturing facilities, aiming to ease the burden and attract more foreign investment in this sector.

 

The Budget also proposes several measures to boost investment and employment, particularly in International Financial Services Centres (IFSCs). The sunset dates for tax concessions related to IFSCs have been extended to March 31, 2030. This includes exemptions on capital gains and dividends for ship leasing units in IFSCs, aligning with similar benefits for aircraft leasing. Additionally, a simplified regime for fund managers based in IFSCs is proposed, aiming to enhance their competitiveness globally.

 

Simplified Income-Tax Bill

 

The biggest development, which is yet awaited, is the introduction of the simplified Income Tax Bill, something that was promised by the Finance Minister in her budget speech of 2024. The new income tax law is aimed to simplify and modernise the tax system, making it more accessible and understandable for taxpayers and tax administrators alike. It is expected that the proposed law will significantly reduce the complexity of the current tax code by halving the number of chapters and words, thereby enhancing clarity and reducing litigation. 

 

This reform is part of a broader effort to provide good governance and ensure tax certainty, aligning with the government's commitment to trust-based economic governance. This is reflective of the spirit of "Nyaya" or justice, and is expected to facilitate easier compliance and foster a more taxpayer-friendly environment.

 

Overall, the direct tax proposals in the Budget 2025-2026 reflect the government's commitment to simplifying the tax system, reducing the tax burden on the middle class, and fostering a more conducive environment for economic growth and investment. These measures are expected to enhance compliance, stimulate consumption, and support the Government's vision of a "Viksit Bharat" or developed India.

 

Rohinton Sidhwa, Partner, Deloitte India. Views are his own.