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PROPOSED BUDGET 2025-26



RECOMMENDATIONS & PROPOSALS 2025-26

The Union Budget 2025, scheduled for presentation on February 1, 2025, by Finance
Minister Nirmala Sitharaman, is anticipated to introduce significant tax reforms. The
proposed changes aim to simplify the tax structure, increase disposable income, and boost
urban consumption amidst slowing GDP growth. This analysis examines the key tax
proposals and their potential implications.

Direct Tax Reforms
Personal Taxation
Proposed Reforms Under Section 80D:
·       Increased Tax Deduction Limits: The proposal suggests raising the tax deduction limits under Section 80D to Rs 50,000 (Rs 1,00,000 for senior citizens) to encourage greater investment in health insurance.
·       Inclusion in New Tax Regime: Additionally, the inclusion of Section 80D within the new tax regime aims to further promote insurance coverage
Higher Deduction Limit on Home Loan Interest.
Proposed Change: Another expected reform is the increase in the deduction limit under Section 24(b) for interest on home loans, from the current Rs 2 lakhs to Rs 3 lakhs.
Objectives of This Change:
·       Encourage homeownership among citizens
·       Provide a boost to the real estate sector
·       Strengthen economic growth by driving investment in residential properties.
 
Taxation of Employer Contributions to Provident Fund, Superannuation, and NPS
Budget 2020 introduced a provision stating that employer contributions to the Recognized Provident Fund (RPF), superannuation, and the National Pension System (NPS) exceeding INR 7,50,000 in a financial year will be taxable in the year the contribution is made.
Taxability under Section 17(3) of the Income Tax Act, 1961
Section 17(3) of the Income Tax Act outlines the taxability of amounts received from a provident fund under specific conditions. For example, if an employee does not meet the conditions laid out in the Fourth Schedule (such as not rendering continuous service for five years), the funds received from the provident fund may be subject to tax.
Excess Employer Contributions and Accretions
When employer contributions exceed the specified limit, both the excess contribution and the accretions (such as interest or earnings) on that excess are taxable in the hands of the employee in the year the contribution is made.
Double Taxation on Provident Fund Withdrawals

At the time of withdrawal, the same provident fund balance could be subject to tax withholding if the employee does not meet the necessary conditions for exemption, such as five years of continuous service. This could lead to a situation of double taxation—where the contribution and its accretions are taxed when made, and again at the time of withdrawal, even though the income was already taxed previously.
                                                                                                                                                                                                                 Exemption for Provident Fund Contributions Already Taxed.
  Budget 2020 Provision: The Budget 2020 introduced a provision whereby employer contributions to the Recognized Provident Fund (RPF), superannuation, and the National Pension System (NPS) exceeding INR 7,50,000 in a financial year will be taxable in the year of contribution.
Taxability Under Section 17(3): According to Section 17(3) of the Income Tax Act, 1961, funds received from a provident fund are subject to tax if certain conditions are not met, such as the requirement for continuous service of five years, as outlined in the Fourth Schedule.
  Tax on Excess Contributions and Accretions: If employer contributions exceed the specified limit, the excess contribution and any accretions (such as interest or earnings) are taxed in the hands of the employee in the year the contribution is made.
 Double Taxation on Withdrawal: When the same provident fund balance is withdrawn, it may be subject to tax withholding if the employee does not meet the exemption conditions (e.g., five years of continuous service). This could result in double taxation, as the contribution and its accretions have already been taxed when made. However, there is no specific exemption to exclude the income that was already taxed under Section 17(2)(vii) at the time of withdrawal.
  Recommendation: It is recommended that the Income Tax Act include a specific provision to exempt contributions and accretions that have already been taxed under Section 17(2)(vii) at the time of provident fund withdrawal. This will eliminate the risk of double taxation, ensuring a fairer tax treatment for employees.
 
 
 
 
 
Recommendations:
  • Increase basic exemption limit to Rs. 5 lakhs under the new tax regime
  • Enhance Section 80C deduction limit from Rs. 1.5 lakhs to Rs. 2 lakhs
  • Increase deduction for home loan interest under Section 24(b) to Rs. 3 lakhs
  • Revise Child Education Allowance and Hostel Expenditure Allowance limits
  • Allow HRA and home loan interest deductions under the new tax regime
  • Reform tax rebate under Section 87A for special income categories
Impact: These changes would provide substantial relief to individual taxpayers, augment disposable incomes, and stimulate consumption-driven economic growth.
2. Corporate Taxation
Proposals:
  • Extend 15% concessional tax rate for manufacturing sector beyond March 31, 2024
  • Introduce concessional tax rate of 15% for Global Capability Centers (GCCs)
  • Rationalize provisions for carry forward of losses in mergers and acquisitions
  • Introduction of sector-agnostic provisions for loss carry forward
  • Restore domestic withholding tax rate on Royalty & FTS to 10% from 20%
3. Research & Development Incentives
Recommendations:
  • Reintroduce weighted deduction for R&D expenditure
  • Implement PLI schemes specifically for R&D activities
  • Enhance deductions for investments in cutting-edge technologies
  • Focus on promoting innovation in key sectors like EVs, IoT, and AI
 
Tax Administration & Litigation
1. Dispute Resolution
Recommendations:
  • Implement mandatory timeline for disposal of appeals by CIT(Appeals)
  • Expand scope of Dispute Resolution Committee
  • Introduce mediation/settlement scheme between taxpayers and tax department
  • Streamline assessment and appeal procedures
2. TDS/TCS Framework
Proposals:
  • Rationalize TDS rates into 3-4 categories
  • Eliminate redundant TDS provisions
  • Remove TDS on e-commerce transactions and goods purchase
  • Allow TDS credit based on Form 26AS
  • Address practical difficulties in implementing Section 194T
 
Specific Sector Reforms
1. Real Estate Sector Recommendations:
  • Increase ‘safe harbour limit’ from 10% to 20% in sections 50C, 43CA & 56(2)(x)
  • Rationalize provisions for joint development agreements
  • Enhance deductions for housing loan interest
2. MSME Sector Proposals:
  • Reform Section 43B provisions for MSME payments
  • Extend timelines for payments to micro and small enterprises
  • Provide clarity on applicability to trading enterprises
Capital Markets and Investments – Capital Gains Reforms Recommendations:
  • Restore indexation benefits for gold investments
  • Harmonize holding periods across asset classes
  • Simplify taxation of mutual funds and market-linked debentures
  • Address challenges in cryptocurrency taxation
Budget Impact Analysis – Expected Outcomes:
  • Enhanced tax compliance and revenue collection
  • Reduced litigation and dispute resolution timeframes
  • Improved ease of doing business
  • Stimulated economic growth through targeted incentives
  • Greater alignment with global tax practices
 

GST Expectations for Budget 2025-2026

 
1. Input Tax Credit Framework
1.1 Blocked Credits Reform
  • Current provisions under Section 17(5) of CGST Act list items ineligible for input tax credit
  • Recommendation to revisit disallowance of ITC for business expenses
  • Suggested alignment with Income Tax Act to allow ITC for legitimate business expenditures
  • Proposal to remove artificial restrictions to simplify compliances
1.2 Credit Reconciliation and Verification
  • Proposal for yearly comparison of credit shown in Form GSTR-2B with Form GSTR-3B
  • Current monthly reconciliation creates unnecessary burden
  • Issues:
-       Section 16(4) allows credit availment until November following the financial year
-       Annual return (GSTR-9/9C) due by December
-       Monthly monitoring creates substantial problems despite legal allowance for later availment
  • Recommendations:
-       Implement annual credit reconciliation instead of monthly verification
-       Modify GSTR-9 and GSTR-9C formats to include comprehensive credit information
-       Reduce audit verification requirements through enhanced annual reporting
1.3 ITC for Intermediate Products
  • Current Challenge: ITC restrictions on exempt intermediate products transferred between distinct entities
  • Issue with Section 17(2) mandating ITC apportionment for partly exempt supplies
  • Recommendation: Introduce specific provisions to ensure ITC eligibility when final product is taxable
 
2. E-Commerce and Digital Economy
2.1 Online Gaming Sector
  • Recent implementation of 28% GST on full face value of bets
  • Challenges:
-       Heavy tax burden on Indian gaming industry
-       Rise in offshore illegal betting and gambling
-       Potential loss of $2.5 billion in GST revenues
  • Recommendations:
-       Reassess implementation of current provisions
-       Consider alignment with global taxation models (Gross Gaming Revenue model)
-       Need for immediate review to prevent industry disruption
2.2 E-Commerce Operators (ECOs) Framework
  • Recent clarifications through Circular No. 240/34/2024-GST
  • Misalignment issues:
-       Section 49(4) permits use of credit ledger for "output tax"
-       Section 9(5) liability not explicitly categorized as reverse charge
-       Restriction on ITC utilization needs legislative backing
  • Recommendations:
-       Align legislative framework with operational requirements
-       Clarify ITC utilization rights for ECOs
2.3 Cryptocurrency and NFT Taxation
  • Current ambiguity in GST treatment of Virtual Digital Assets
  • Need for:
-       Precise classification guidelines
-       Clear taxation framework
-       Coordination with global best practices
 
3. Structural Reforms
3.1 Rate Rationalization
  • Current structure includes multiple slabs (0%, 5%, 12%, 18%, 28%)
  • Proposal to merge 12% and 18% slabs into single rate
  • Benefits:
-       Simplified compliance
-       Reduced disputes
-       Enhanced business efficiency
3.2 Centralized GST Account
  • Proposal for single national-level CGST balance
  • Benefits:
-       Reduced operational costs
-       Improved revenue management
-       Simplified tax administration
  • Implementation Considerations:
-       Need for robust IT infrastructure
-       Interstate coordination requirements
-       Transition planning
3.3 Composition Scheme Extension
  • Proposal to include small-scale ice cream manufacturers
  • Current exclusion challenged in courts:
-       Chhattisgarh High Court direction for reconsideration
-       Delhi High Court similar order
  • Recommendation for amendment to allow composition scheme benefit
4. Sector-Specific Reforms
4.1 Healthcare Sector
  • Issues with room rent GST above Rs. 5,000
  • Challenges with composite supply concept
  • Need for legislative backing for splitting composite supplies
4.2 Petroleum Products
  • Proposal to include under GST:
-       Aviation Turbine Fuel (ATF)
-       Natural Gas
-       Other petroleum products
  • Benefits:
-       Simplified tax structure
-       Input tax credit availability
-       Reduced cascading effect
4.3 Data Centre Industry
  • Growing sector with significant investment potential
  • Challenges:
-       Lack of specific GST framework
-       Unclear input credit provisions
-       Valuation issues
  • Recommendations:
-       Develop specific GST guidelines
-       Clarity on input tax credit
-       Simplified compliance framework
5. Compliance and Administrative Reforms
5.1 Registration Cancellation Process
  • Need for thorough verification before cancellation
  • Recommended steps:
-       Review of Search Taxpayer Report
-       Verification of E-way bill details
-       Assessment of GSTR-1 and GSTR-3B filing history
5.2 Post-Sales Discounts
  • Current ambiguity in treatment
  • Need for:
-       Clear guidelines on treatment
-       Alignment with business practices
-       Simplified documentation requirements
5.3 Documentation and Returns
  • Proposal for simplified return formats
  • Enhanced digital integration
  • Reduced compliance burden
 
 
 
 
 
 

COMPARATIVE ANALYSIS

 
Sl. no   Interim Budget
2024-2025
Budget
2024-2025
Proposed Budget
2025
1. Direct Tax Framework - Maintained status quo on tax rates.
 
- Extended benefits for startups, sovereign wealth funds until March 2025.
 
- Focus on tax administration improvements.
 
- Withdrawal of outstanding tax demands benefiting one crore taxpayers.
- Enhanced standard deduction to Rs 75,000 from Rs 50,000.
 
- Increased family pension deduction to Rs 25,000.
 
- Corporate tax reductions (22% for existing companies, 15% for new manufacturing).
 
- Capital gains rationalization with 12.5% unified rate.
- Potential tax-free income up to Rs 10 lakh (from current Rs 7.75 lakh).
 
- New 25% tax slab for Rs 15-20 lakh bracket.
 
- Enhanced standard deduction to Rs 1,00,000.
 
- Comprehensive overhaul of Income Tax Act 1961.
2. Indirect Tax Structure - Maintained existing indirect tax rates.
 
- GST collections doubled to Rs 1.66 lakh crore monthly.
 
- Improved SGST revenue buoyancy to 1.22.
- Total indirect tax projection: Rs 16,17,840 crore.
- Focus on GST simplification.
 
- Enhanced digital infrastructure.
 
- Improved compliance mechanisms.
 
- Streamlined customs procedures
- Emphasis on GST reforms.
 
- Enhanced digital infrastructure.
 
- Focus on dispute resolution.
 
- Measures for improving tax buoyancy.
3. Administrative Reforms - Digital transformation initiatives.
 
- Improved taxpayer services.
 
- Focus on dispute resolution.
- Complete digitalization of services.
 
- Enhanced appeal mechanisms.
 
- TDS rationalization.
- Streamlined procedures.
- New Income Tax Act implementation.
 
- Comprehensive dispute resolution framework.
 
- Enhanced digital compliance.
 
- Simplified documentation requirements.
 
 
 
 
 
 
 
 
 
 
 
 

CONCLUSION

 
The evolution of tax reforms across these three budgets demonstrates a clear progression from interim stability to comprehensive transformation. The Interim Budget 2024-25 established a foundation of stability while focusing on administrative improvements. Budget 2024-25 built upon this with specific reforms in direct and indirect taxes, while the proposed Budget 2025 aims to introduce transformative changes through a new tax framework and significant relief measures.
The trajectory reflects three key priorities:
  1. Simplification of tax structure and compliance
  2. Enhanced digitalization and administrative efficiency
  3. Balanced approach to revenue optimization and economic stimulus
The success of these reforms will depend on effective implementation and the government’s ability to manage revenue implications while achieving desired economic outcomes. The proposed changes in Budget 2025, particularly the potential tax slab revisions and new Income Tax Act, represent the most ambitious phase of this reform journey, aimed at fundamentally restructuring India's tax framework for improved efficiency and compliance.