FM’s Budget speech earmarked ‘taxation’ as a dominant pillar to guide India through a reformatory phase
Outlays, outcomes, and outposts-the triumvirate of ‘O’s, which determine major microfinance decisions, are interlinked with an economy’s power to leverage self-sufficiency and ascendancy. In a tumultuous global disposition ridden with economic downturns and the US action on tariff structures, evident fall in most economic parameters on demand, investment and a slight dip in corporate tax collection, Finance Minister Nirmala Sitharaman had multiple challenges. On February 1, the matrix for her eighth consecutive Budget was unblemished: the document should transcend from policy prescriptions to bold affirmative action, signalling relief to the middle class and a message for continuity of reforms with the overarching theme of ‘Viksit Bharat’. The Budget announcements predicate four luminescent considerations for India: consolidating avenues for FDI inflows, measures to augment employability, fool-proofing against externalities and geopolitical shocks, and reimagining the blueprint for ease of business.
The Budget speech earmarked ‘taxation’ as a dominant pillar to guide India through this reformatory phase. Reforms are seldom attained without recalibration, and the adage ‘trust first, scrutinise later’ is a carillon to the tax administration. These tax proposals contain an adage of trust as a two-way street: tax administrations shall deliver on certainty and efficacious dispute resolution, while taxpayers shore up on voluntary compliances with ease and best practices on tax adaptability. The new income tax Bill shall carry forward the proposals and hopefully double its reformist (Nyaya) endeavours. It should have a lucid, dynamic interpretation of tax provisos and extant jurisprudence and be concise to inspire domestic and foreign investors, given that the extant law of 1961 has been replete with over a few thousand amendments and rendered unwieldy and complex. Resultantly, taxpayers have been condemned with protracted litigation, eluding them from the translucent application of the law, and not to forget the tormenting and time-consuming litigation process. The new Bill should serve as a panacea to build a broader and more committed tax base, protecting taxpayer rights.
Recommendations for addressing a core issue in the new code include the stratification of law into mini codes tailored for different taxpayer categories. The exchange of taxpayer information with other enforcement authorities like GST and the ED will be subject to structured checks and balances to avoid duplicity of proceedings. A mandatory show-cause before information sharing would prevent hardships, besides adhering to principles of natural justice. Also, the current dual tax regime (for individuals and businesses), which requires an annual assessment of the beneficial option, exacerbates compliances. A well-defined sunset clause for the old regime would promote transparency.
A codified obligation to adhere to Court rulings could streamline the resolution process and reduce taxpayer grievances. Curtailing the quasi-judicial power to stay tax demand against high-pitched assessments is viewed as breaching taxpayer rights besides the exchequer indebting itself with principal and interest payouts when taxpayers succeed in defending such arbitrary assessments. A settlement or compromise mechanism shall go a long way. Taking a cue from the OECD and UN, introducing mediation, arbitration, or negotiated settlements could ease the burden on domestic courts, who are otherwise less equipped with the nuances of cross-border transactions and treaty interpretation. The backlog of cases with the first appellate forum, Commissioner (Appeals), has been a bottleneck, which is likely to choke the higher appellate forums. Should the new tax Bill embolden such recommendations, it could mark a pivotal shift towards a fair, transparent ecosystem.
A CODIFIED OBLIGATION TO ADHERE TO COURT RULINGS COULD STREAMLINE THE RESOLUTION PROCESS AND REDUCE GRIEVANCES
Streamlining the transfer pricing regime in India is an apotheosis for facilitating investments in gargantuan supply chains. The Budget expounded on carrying out Transfer Pricing assessments for a block period of three years, a progenitor for foreign investors that India stands firmly aligned with global standards of transparency and fairness. Additionally, extending the time limit for filing updated tax returns from two to four years encourages voluntary compliance and will reduce litigation, allowing businesses more flexibility to rectify errors. The advent of the new code should fortify an arsenal of announcements. For non-residents who have a permanent establishment or business connection, the notification of profit apportionment rules, which was due in 2019, must be expedited. The Budget has proposed measures to crystallise safe harbours for electronics manufacturing; its coverage to other businesses shall lend certainty.
Budget proposals suggest tariff changes, such as critical minerals used for the manufacture of EVs and electronics, and labour-intensive industries such as leather, the telecom sector, shipbuilding, and shipbreaking, which support targeted manufacturing sectors. It bodes well with the China Plus One strategy.
To conclude, the rejig of personal income tax rates, which entail a whopping Rs 1 lakh crore of revenues foregone, is viewed as the most audacious move made by any finance minister. And considering that its coming in a year wherein growth and corporate tax collections are likely to slow, over-delivering on the fiscal deficit target by 10 basis point as well as staying committed to the path including reduction of debt stands out. Finance Bill 2025 promises to proclaim a harbinger of phase-driven, accountable and marquee reform agenda.