Balancing fiscal prudence with the need to provide a growth impetus has been a hallmark of our government over past Union budgets. Tax buoyancy has improved, while taxation has been simplified and ease of paying taxes enhanced.
With a keen eye on resilience, the 2024-25 budget laid the groundwork for a more robust economy, one that is prepared to withstand varied headwinds on its way towards the national vision of a ‘Viksit Bharat’ or developed India.
Within the overarching ambit of ‘fiscal realism’ lies a fine balancing act of the government’s expenditure with revenue. While garnering more resources for growth, I am sure the government would further strengthen the taxation regime to enhance simplicity and certainty, offering the country a more competitive regime that further improves the ease of paying taxes.
The budget for 2024-25 did a fine job on these. With an overall objective to plan for India@100, it announced various targeted measures on the taxation side (both direct and indirect) to increasingly align revenues with its long-term goal of a developed nation.
Particularly praiseworthy is the government’s proposal to undertake a comprehensive review of the Income Tax Act of 1961 within the context of reviewing the entire direct and indirect taxation regime. In addition, the Confederation of Indian Industry (CII) suggests that the government consider setting up an expert committee with industry participation.
Along with simplification, addressing the high level of litigation on taxation is critical to foster greater ease of paying taxes in the country. The forthcoming budget for 2025-26 may make further progress on this aspect. Currently, there is a huge number of appeals filed before the Commissioner of Income Tax (Appeals).
To address this, the government may announce steps to reduce the pendency of disputed cases by disposing high pitched assessments and high-tax-demand cases on a priority basis. To provide further relief to taxpayers from delays in refunds, TDS credit, etc, the government may consider an enhanced interface with the Central Processing Centre that would make it even more efficient and responsive.
The Finance Act, 2023, had provisions to promote timely payments to micro, small and medium enterprises (MSMEs), including amounts payable to such enterprises within the ambit of Section 43B of the Act. While this amendment was intended to promote timely payments to MSMEs, it probably needs a relook.
We find that a large number of companies in the private sector prefer to make purchases from non-MSME units to avoid disallowance under that section. The government may consider replacing it with a scheme incentivizing those who make timely payments to MSMEs.
On the indirect taxation side, the 2024-25 budget clearly captured the government’s sustained endeavour to simplify and rationalize the GST and customs duty structure, with targeted adjustments for sectors such as electronics, pharmaceuticals, critical minerals and certain precious metals. These efforts may be built upon further in next year’s budget.
On the customs front, the budget could focus on further improving trade facilitation, which would foster domestic manufacturing. A strategic roadmap for the rationalization of import tariffs to make India’s manufacturing sector globally competitive would help Indian manufacturing.
CII proposes a three-tiered tariff structure, with the lowest or nil duty rates for raw materials, followed by intermediate and finished goods. This phased approach will allow domestic manufacturers time to adapt, while enhancing competitiveness. Further, a one-time tax dispute settlement scheme under customs may also be considered for MSMEs.
The government may also consider further reforms in indirect taxation through GST 2.0, with a transition to a three-rate structure that features rate moderation as well. Centralized assessments and audits could be introduced for large taxpaying units with a pan-India presence.
The scope of input tax credit may be expanded to cover all business expenses. Also, petroleum products should be covered under GST to enable the seamless flow of input tax credits. This will reduce the impact of a tax cascade on the manufacturing sector.
By further simplifying GST and bringing everything under its input-tax-credit chain, GST 2.0 reforms are likely to boost compliance and increase government revenues.
Admittedly, tax simplification while fostering greater competitiveness is one side of the coin. The other is broadening the tax base for higher resource mobilization.
Let statistics put this imperative in the right context: it is estimated that of the 75.5 million individuals who filed income tax returns for assessment year 2023-24, 63% paid zero tax and just 5% of filers paid 73.5% of the overall tax payable, underscoring the need to broaden India’s income tax base.
Steps that could be considered include a greater transition from cash to digital transactions, which would create an information trail that can be used to correctly assess the income of individuals and businesses, thereby helping the tax department in detecting evasion.
Towards this end, the government could consider incentivizing cooperative banks to issue Virtual Payment Address (VPA) or UPI facilities to their customers, incentivizing business correspondents to onboard customers for UPI, announcing measures to strengthen trust in digital transactions, and mandating the adoption and prioritization of digital transactions by large merchants like governments, utilities and companies in the sectors of transport, telecom and e-commerce, among others.
In the last many budgets, the government has established beyond any doubt that it is aiming for the creation of a tax ecosystem that is simple, predictable and competitive. We are certain that the budget of 2025-26 would be another major step in that direction.
The author is director general, Confederation of Indian Industry (CII).
