India’s Budget 2025: A transformative leap towards Viksit Bharat

The budget focused on transforming India to achieve Viksit Bharat by 2047. Tax reform was one of the six key focus areas. The government’s commitment was highlighted by measures designed to grant significant relief to middle-class taxpayers - a long-awaited promise fulfilled.

A transformative shift in taxation

One of the significant elements is introduction of new income tax bill aiming to simplify income tax - bring tax certainty and reduced litigation.

Focus on Viksit Bharat was eminent in extension of tax concessions done for 5 years (eg; start-up / IFSC commencement) at a stretch compared to historically for one / two years which reflects government’s commitment to stable and predictable tax environment for investors.

Slab rates

A very bold move by the government by providing revised tax slabs delivering relief to crores of middle class taxpayers earning upto ₹12 lakhs (excluding special rate income) who will not required to pay income tax. The statistics suggest that in FY 2023-24, out of 7.5 crore tax returns, 6.5 crore (~87%) returns were filed by individuals earning less than ₹12 lakh. While, this is expected to cause ₹1 lakh crore dent to government revenue, there is a hope that this will help expand taxpayer base.

The higher disposable income will stimulate consumption leading to higher GST collections and will also significantly boost investments in SIPs / bank deposits contributing to broader financial sector growth.

Inflationary trends to be watched out

On supply side / to augment manufacturing, corresponding reintroduction of concessional tax regime of 15% could have spearheaded the growth engine, however as a balancing act,  government in its wisdom has not extended such concession.

TDS/TCS rationalisation

TDS/TCS provisions are rationalised only to increase threshold limits whereas major concern was on number of provisions and varied rates (causing interpretation issues). One would expect such simplification in new income tax bill.

Trust-based system

As government’s focus is on trust-first, scrutinize-later approach and encourage voluntary compliances, time limit for filing updated tax return for voluntarily disclosure of additional income has been increased to 48 months. While, this comes with additional tax / interest cost over and above the applicable tax, but also provides taxpayers with breather to disclose inadvertently unreported income upto 48 months and saves from the ambit of penalty/prosecution if gets detected by tax authorities. 

IFSC

The government also extended time limits for availing tax concessions under IFSC provisions by 5 years from 2025 to 2030 entailing government’s focus of establishing IFSC as major global financial hub attracting both international investment and businesses.

Transfer Pricing (‘TP’)

Another important rationalisation is introduction of validity of TP assessment for 3 years block. An option to taxpayer to apply same arm’s length price determined for year 1 by transfer pricing officer (‘TPO’) for year 2 and 3 (to be confirmed by TPO) giving certainty and reduce litigation.  

Merger rationalisation

Merger process rationalisation is clearly a need of an hour. Currently, the merger approvals takes anywhere between 6-8 months or even longer for listed entities severely hampering ease of doing business especially while restructuring businesses.

Another amendment is removal of evergreening of losses of amalgamating companies for fresh 8 years for merger effecting from April 1, 2025. While this is aligned with demerger, however, unlike demerger (where tax losses for all sectors are allowed to be carried forward), tax losses under merger are allowed essentially for manufacturing entities that too on fulfillment of critical conditions (eg; lock in for assets sale etc). This could hamper ability of businesses to undertake restructuring and reviving of businesses which hitherto were beneficial given evergreening of tax losses on merger.

Conclusion

As India sets its sights on becoming Viksit Bharat by 2047, budget paves way for more resilient, dynamic and inclusive economy.

On tax front, all eyes are now on what lies in the new income tax bill which will be introduced this week.

Dinesh Kanabar is CEO, Dhruva Advisors LLP; Mundada is Partner, Dhruva Advisors LLP. Views are personal.