As the Big Budget Day approaches on February 1, it’s once again time to assess our expectations from the central government.
The upcoming Budget for 2025-26 is likely to be used to indicate shifts in policies and preferences as well as clearly laying down the foundation for robust medium-term growth and fiscal consolidation.
In light of the above, here are some of the expectations from this Budget from a tax perspective.
• Increase in the basic exemption limit and reduction in tax rates under new tax regime:
The government is expected to increase the basic exemption limit under the new tax regime from ₹3,00,000 to ₹5,00,000 to provide further relief to individual taxpayers.
• Revision in deduction limit in HRA calculation from 40 per cent to 50 per cent for Tier-II cities:
The cost of renting a house in tier two cities such as Bangalore, Ahmedabad and Pune is much higher than certain metropolitan cities such as Calcutta and Chennai. Therefore, it is expected to increase the exemption bracket for these cities from 40 per cent to 50 per cent of basic salary and bring them in alignment with the metropolitan cities.
• TDS on interest for PF contributions over ₹2.5 lakh
The withholding tax implications on interest earned on employees’ PF contributions of more than ₹2.5 lakh per annum may be deferred to withdrawal/cessation of employment against TDS on an accrual basis.
• New Labour codes
The long awaited implementation of the new labour codes may be talked about in this Budget. It is expected that the government might lay out a roadmap of the rollout of labour codes in a phased manner from the next financial year.
• Revival of concessional tax rate for manufacturing sector
The 15 per cent concessional tax rate under Section 115BAB of the Act was available for new domestic manufacturing companies that commenced operations by March 31, 2024. The government may revive this benefit to companies commencing operations on or after April 1, 2024, to strengthen India’s manufacturing ecosystem, attract foreign direct investments, and align with the “Make in India” initiative.
• Clarification on interest deduction on loan taken to purchase electric vehicles:
The government may increase the scope of deduction in respect of purchase of electric vehicles (viz. quantum of interest deduction and removal of sunset period for sanction of loan).
• The government may examine the interface with Central Processing Centre (‘CPC’):
The government may look into the technical challenges faced by the Central Processing Centre (CPC) to address ongoing issues like delays in refunds and TDS credits, ensuring relief for taxpayers.
• Considering the large pendency, reducing income tax disputes would be a priority:
In the interest of fairness to taxpayers and considering large pendency of income tax appeals, the government should propose an amendment in the budget, stipulating a time limit within which National Faceless Appeal Centre must hear and dispose of appeals - say, 15 months from the end of the month in which the appeal is filed.
• The entire gamut of withholding taxes likely to be streamlined:
There are multiple sections under the Act, which deal with different types of payments to residents. Further, the applicable TDS rates vary from 0.1-30 per cent. As a part of the simplification exercise, the government may rationalise the TDS structure and rates by having only 3-4 broad categories and lower withholding tax rates. Hence, a roadmap to reduce the disparity in TDS rates may be introduced by the government to avoid confusion to taxpayers on account of varying rates of TDS depending upon the status of payees or nature of payments.
• No penalty on debatable issues: In the interest of fairness to taxpayers,the government should propose an amendment in the budget for non-levy of penalty for underreporting or misreporting of income on issues which are debatable in nature and the taxpayer has given bonafide explanation and disclosed all material facts.
• Retrospective amendment to deny ITC on immovable property construction:
The GST Council has recommended retrospective amendment w.e.f 01-07-2017 in Section 17(5)(d) of CGST Act to bring “plant or machinery” on a par with “plant and machinery” used in other places in the provision post favorable judgment of the Supreme Court in the Safari Retreat case with an objective to deny input tax credit on inward supplies used for construction of immovable property even when they are used for outward taxable supplies.
• Legal backup would be provided in law for Invoice Management system (IMS):
A new functionality called IMS was introduced at the GSTN portal where actions are required to be taken on invoices uploaded by supplier in GSTR 1 in order to correctly avail ITC from October 1, 2024 onwards. The GST Council has recommended suitable amendments in GST law to provide legal backup to generation of GSTR-2B based on action taken by taxpayers in IMS at GSTN portal.
• Introduction of new provision for track and trace mechanism:
It has been recommended by the GST Council that a new provision be inserted empowering the government of India to enforce the ‘Track and Trace Mechanism’ for specified evasion prone commodities. The system shall be based on a Unique Identification Marking which shall be affixed on the said goods or the packages thereof.
• Dispute resolution — extension of benefit under Amnesty Scheme under GST
Introduction of Amnesty scheme under GST in the Finance (No. 2) Act, 2024 was a welcome move by the government of India to manage litigations. The government may further extend the timeline of the scheme beyond FY2019-20 to attract the taxpayer’s participation. Issue based settlement instead of notice or order-based settlement may be allowed.
• Dispute Resolution —Amnesty Scheme (Customs):
Customs litigations are pending at various forums for a very long time and the same requires time and effort to be spent by both the taxpayer and Government in resolving them. The Government may introduce one time dispute/litigation resolution/settlement scheme to settle and resolve the pending disputes.
Dinesh Agarwal and Avisekh Jaiswal are tax partners, EY India. Ankur Goel and Harshita Modi, tax professionals also contributed to the article