- Focus on capex and fiscal consolidation with debt anchoring – For sustained growth in FY2025-26, reduce fiscal deficit to 4.5%, lower the current debt-GDP ratio and increase investment rate to 34%.
- Over ₹31 lakh crore stuck in income tax disputes (FY24): Urgent need to clear CIT(Appeals) backlog and bolster alternate dispute resolution mechanisms like Advance Pricing Agreements and safe harbours.
- Reduce the holding period for unlisted shares transferred under Offer for Sale in IPO to one year from the current two years, in view of commercial compulsions.
- Pressing need to extend the benefit of carry-forward and set-off of accumulated loss and unabsorbed depreciation to service and trading organisations.
- Rationalise and simplify the withholding tax framework that reduces the multiplicity of TDS rates and thresholds, by having only two or three categories of payments and a small “negative list” of payments which will not be liable to TDS.
New Delhi, 8 January 2025 – As India prepares for the Union Budget 2025-26, expectations are focused on a set of strategic reforms that can propel the economy forward. With an emphasis on fiscal consolidation, tax system simplification, and investment-driven growth, the budget is expected to lay a solid foundation for sustained economic development. Key areas of focus are likely to include enhancing public spending, reducing the fiscal deficit, incentivizing private sector investment, and introducing targeted tax reforms that foster business innovation.
Sameer Gupta, National Tax Leader, EY India, said, “The Government has made significant progress in reforms over the last two terms. The focus now should be on accelerating and executing the key policies announced in recent years. To boost private capex, a proactive push from the Government is essential.” He added, “While a full comprehensive review of the direct tax code may take time, we might see some initial steps toward its implementation in this Budget. I also hope for a reduction in personal income tax, particularly for the lower-income groups, to provide relief and stimulate demand. For businesses, particularly SMEs, reducing the complexity of tax compliance is critical. Streamlining TDS rates into fewer categories and eliminating redundant provisions will ease the administrative burden, allowing businesses to focus on growth and innovation.”
Commenting on India’s financial ambitions, Sameer said, “The International Financial Services Centre (IFSC) at GIFT City is at the heart of India’s ambition to become a global financial hub. But to truly reach its potential, we need to tackle some pressing challenges like provide tax framework for issuance of Offshore Derivative Instruments by non-banking units on same lines as provided to banks in the past, clarify characterization of securities listed on the IFSC stock exchanges as ‘capital asset’, non-applicability of deemed dividend provisions to amounts received by IFSC based treasury companies and prescribe separate tax chapter for IFSC in the new tax code (aiming at simplifying the existing provisions).
Economic push:
To achieve sustainable growth in FY26, the Government must prioritize reducing the fiscal deficit to 4.5% of GDP in FY26 while reducing the debt-to-GDP ratio, which stands at 54.4%, well above the FRBM target of 40%. A medium-term real GDP growth target of 6.5% or higher will require boosting the aggregate investment rate (GFCF) measured at constat prices to 34%. This can be achieved by increasing Government’s capital expenditure, improving capital efficiency and encouraging states to enhance their investment spending. To stimulate private sector investment, a progressive reduction in interest rates should be considered. Additionally, targeted employment schemes should be fast-tracked to uplift urban demand and support economic momentum in FY26.
Tax system transformation:
EY anticipates significant reforms to simplify the tax system and improve taxpayer services, reduce litigation, and enhance tax compliance. Key suggestions include:
Comprehensive tax simplification and certainty
Government is already working on simplifying the Income Tax Laws. It should follow a consultative approach and invite public comments on the draft proposals.
As on FY2023-24, more than INR 31 trillion was locked in Income Tax litigation, amounting to 9.6% of India’s GDP for the year. Reducing the pendency of disputes and avoiding disputes must be taken up on a priority basis. In this regard, other dispute prevention options like safe harbours should be made attractive. The current safe harbour margins are too high and should be rationalised. For instance, the margins are as high as 17-18% for IT/ITeS. These can be reduced to 14-15%. Further, at present only companies with a revenue of up to Rs 200 crores are eligible for safe harbours. These revenue thresholds should be removed so that even the larger companies can avail the benefit. These changes would be most useful for IT and ITeS sector and the Global Capability Centers (GCCs) who are playing a significant role in the Indian economy today.
As a part of tax law simplification exercise, in the previous budget TDS rate rationalization was undertaken to a certain extent. To further simplify the entire gamut of withholding tax provisions, TDS rate structure could be divided into 3-4 broad categories with lower rates and a negative list. Among other reforms, defer TDS on interest earned on employee’s PF contributions above 2.5 lakhs to the withdrawal stage for reduced compliance.
The subject of profit attribution to Permanent Establishments set up in India has been complex and litigation prone. To address this issue, the government had circulated a consultation paper in 2019 with the objective of providing guidance on this subject. However, the specific rules for profit attribution have still not been issued. It is expected that to provide greater certainty on this matter, government may notify the requisite apportionment rules.
Capital gains rationalization
In the last Budget, government had rationalised the capital gains structure in terms of holding period of assets and tax rates. The government may further address some of the unintended anomalies to make the rationalisation of capital gains more complete. For instance, the holding period for capital assets, such as business undertakings in slump sales may be reduced from 36 months to 24 months and unlisted shares in IPO Offer for Sale (OFS) (from 2 years to 1 year), aligning them with listed securities. Exemptions for sovereign wealth and pension funds investing in infrastructure should be clarified to preserve their eligibility for long-term capital gains benefits.
Fostering business and innovation
EY expects the Budget to enhance fiscal management, public spending, and create an environment conducive to business and innovation. India Inc expects reforms to facilitate business restructuring by extending benefit of carry forward and set-off of accumulated loss and unabsorbed depreciation given under section 72A of ITA to service and trading organizations, particularly DPIIT-registered start-ups.
Furthermore, this Budget presents a critical opportunity to enhance GIFT IFSC’s position as a global financial hub through targeted tax and regulatory measures. Key expectations include announcements for enabling tax-neutral relocation of holding company structures to GIFT IFSC, as recommended by the Committee on Onshoring the Indian Innovation and facilitating the creation of a commodity trading hub for global supply chains similar to that in Dubai and Singapore. Additionally, extending a tax framework for ODIs by non-banks especially broker-dealers similar to that provided to International Banking Units (IBUs) will boost the fund management ecosystem at GIFT IFSC.
Other tax measures:
Other taxpayer-friendly measures, such as no penalties on debatable issues under Section 270A if in case taxpayer has given bonafide explanation and disclosed all material facts. Further, the new regime treatment of buybacks as dividend-cum-capital loss should not be applied to buyback out of share premium or buyback out of proceeds of another issue of shares/security as it will lead to artificial taxation of capital receipt as dividend income.
Proposed reforms for Personal Tax relief
The upcoming budget should focus on personal tax relief by raising the basic exemption limit in the new tax regime from INR 3 lakhs to INR 5 lakhs and reducing tax rates. Clarifications on the perquisite valuation for EVs and clear guidelines for the taxation of cryptocurrency and non-fungible tokens (NFT), including the treatment of virtual digital asset (VDA) losses, are needed. The cap on the set-off of house property losses against other heads should also be removed. Including tier-2 cities like Hyderabad, Pune, Bengaluru, and Ahmedabad in the HRA exemption at 50% will provide tax parity. Further simplification is needed for employer contributions exceeding INR 7.5 lakhs to specified funds. Deferring TDS on PF interest (above INR 2.5 lakhs) until the withdrawal stage will reduce compliance burdens. The ESOP tax deferment benefit should be extended to all employers, allowing tax payment at the sale stage.
Enhancing customs compliance through digital transformation and simplification
The upcoming budget should focus on digital transformation in customs compliance through API integration, improving data filing, and facilitating access to the ICEGATE portal. The introduction of an Amnesty Scheme under Customs Law, similar to past successful models, will help resolve pending litigation. Tariff rationalization is needed to address inverted duty structures and incentivize domestic manufacturing. Implementing an online module for BoE amendments and duty payments will improve ease of doing business. Updates to the MOOWR 2019 framework, including periodic customs duty payments and streamlined clearance processes, will enhance its viability and support the Make in India initiative