As India prepares for the Union Budget 2025 on 1st February 2025, taxpayers, businesses, and financial experts have high expectations regarding direct and indirect taxation policies. With a focus on economic growth, investment promotion, and ease of compliance, our finance minister Nirmala Sitharaman is expected to introduce measures that streamline tax structures while maintaining fiscal growth.
Let us understand a few expectations that various industries, businesses, and common people have with the Union Budget for Direct and Indirect taxes.
Direct Tax Expectations
Direct taxes, including income tax and corporate tax, have seen significant reforms in recent years, with efforts to reduce tax rates and improve compliance. However, there is room for further simplification and rationalization to strengthen investor confidence and ease the tax burden. Here are a few expectations with Union Budget 2025 regarding direct tax:
1. Corporate Tax Reforms
In recent years, India has progressively reduced corporate tax rates to attract investments and enhance competitiveness. Currently, new manufacturing companies benefit from a concessional 15% tax rate, which is comparatively much lower compared to existing corporate tax rates of 25% to 30%. There is a strong demand for extending this regime beyond the previous deadline of March 31, 2024, to encourage fresh investments in the post-pandemic recovery phase. The demand now persists to extend this sunset clause by another 3 years.
Additionally, Global Capability Centers (GCCs), which have significantly contributed to employment and estimated revenue of US $64.6 million, may be considered for similar tax benefits. Providing tax incentives for R&D activities across sectors would further encourage innovation and make India a global hub for technology development.
2. Capital Gains Taxation Clarity
Capital gains taxation remains a complex area, particularly for transactions involving share transfers and mergers. Currently, there is a lack of clarity around the taxation of contingent consideration in share transfer agreements, leading to disputes and uncertainties. The budget is expected to provide clarity by taxing such transactions only upon realization.
Further, there are expectations of tax neutral structure for intra-group share transfers, especially for foreign entities restructuring their businesses in India. Many countries like the UK and Australia offer such provisions to facilitate smoother corporate restructuring without tax implications, and India may adopt similar measures to enhance ease of doing business.
3. Rationalization of TDS Structure
The current tax deduction at source (TDS) regime is considered overly complex, with over 30 different rates applying to various types of transactions. This complexity often leads to increased litigation. Businesses expect a simplification of the TDS structure, consolidating tax rates into a few broad categories, such as goods, services, and financial transactions.
A key demand is for lower TDS rates on professional and technical services, which have become a significant cost burden for businesses operating in the digital economy.
4. Personal Taxation Simplifications
Individual taxpayers are looking for several compliance simplifications, especially concerning property transactions involving non-resident Indians (NRIs). Currently, buyers must withhold tax at higher rates and obtain a Tax Deduction and Collection Account Number (TAN), which adds to their compliance burden. A simplified process, like the one applicable to resident sellers, is highly anticipated.
Other expectations include:
- Allowing tax payments from overseas bank accounts for NRIs.
- Extending deadlines for filing revised returns to accommodate delays in foreign tax credit (FTC) claims.
- E-verification of tax returns using foreign mobile numbers for better accessibility.
5. Incentives for Startups and MSMEs
Startups and MSMEs are seeking tax exemptions, extended carry-forward periods for losses, and simpler compliance frameworks. The introduction of a concessional tax rate for startups and specific incentives for digital and green businesses could accelerate growth in these sectors.
6. Encouraging Research & Development (R&D)
With India pushing for self-reliance and technological advancement, there is a call for additional tax benefits on R&D spending, including deductions for patent-related income beyond the current provisions under the Patent Box Regime. Providing incentives for private sector R&D investments can encourage innovation and support the government’s ‘Atmanirbhar Bharat’ vision.
Indirect Tax Expectations
Indirect taxation, particularly under the Goods and Services Tax (GST) and customs duties, plays a significant role in driving consumption and regulating trade. The government has been focusing on simplifying compliance and promoting domestic manufacturing while ensuring that tax collections remain persistent. Here are a few changes expected for indirect taxes in Union Budget 2025:
1. Rationalization of GST Rates and Structure
The GST structure has seen several changes over the years, but issues such as the inverted duty structure continue to pose challenges for businesses in sectors like textiles, electronics, and automobile components. The budget is expected to address this by aligning tax rates, especially for sectors like aluminium, to ensure that input taxes do not exceed output taxes, hence reducing working capital blockages.
There are also expectations for:
- Simplifying GST returns and reducing compliance burdens for small businesses.
- Restructuring the 28% GST slab on luxury and sin goods.
2. Customs Duty Reforms to Promote ‘Make in India’
The government has been strategically using customs duties to promote domestic manufacturing under the “Make in India” initiative. However, industry stakeholders expect further custom duty rationalization, especially for raw materials and intermediate goods critical to manufacturing.
One of the major demands is the continuation of duty exemptions under the MOOWR (Manufacturing and Other Operations in Warehouse) scheme, which allows companies to defer tax payments until the final sale of products.
3. Amnesty Scheme for Customs Disputes
The pending litigation in customs and indirect taxes remains a significant concern for businesses. As per EY in EY Budget Expectations 2025-26, 5,62,794 cases remain stuck in dispute at various forums for an amount involved as much as 20.9 lakh crore. A special amnesty scheme for settling disputes, like the earlier “Sabka Vishwas” scheme, is anticipated. This will help businesses resolve cases and avoid prolonged litigation.
4. Simplified Compliance for Exporters
Exporters are seeking relief through easier compliance procedures, particularly under Free Trade Agreements (FTAs). The current documentation and verification processes under CAROTAR (Customs Administration of Rules of Origin) are complex, and a relaxation in procedural requirements is expected to help exporters benefit from lower tariffs without unnecessary delays. To facilitate this, amendment of Section 28DA of the Customs Act, 1962 is expected along with waiver of the AEO certificate holders.
5. Strengthening the Digital Taxation Framework
With the increasing prominence of digital transactions and cross-border e-commerce, there is an urgent need to strengthen India’s digital taxation framework. Expectations include providing clearer guidelines on the applicability of Significant Economic Presence (SEP) rules to ensure taxation of digital businesses operating without a physical presence in India. It could be removed from Income Tax after the new Pillar One framework.
Conclusion
The Union Budget 2025 is expected to focus on a balanced approach, providing relief to taxpayers while ensuring fiscal growth. Businesses and individuals are hopeful for measures that simplify compliance, provide clarity on impending tax issues, and encourage investments in key sectors.
With India’s ambitious goal of achieving a $5 trillion economy, tax policies must support growth and favorable investment climate. Whether it’s extending tax benefits for manufacturers or simplifying GST compliance, the budget has the potential to revolutionise India’s economic landscape.
To stay informed of all the changes announced in Union Budget 2025, join our webinar- Union Budget Dialogue- Finance and Tax Perspective on 4th February 2025. Register Now!
