Author: Sanchita Maity, a student at Sister Nivedita University (Kolkata)
To the Point
The Union Budget 2025 outlines a major overhaul of India’s tax system, covering both direct and indirect taxes. The government’s main goals with these reforms are to expand the tax base by bringing more people into the tax net and curbing evasion, which will lead to a fairer distribution of the tax burden and increase government revenue. The budget also aims to rationalize tax rates, making them more fair and competitive. This means reviewing and adjusting current rates to remove inconsistencies and create a simpler tax structure that’s easier for everyone to understand and follow. It’s especially significant for establishing an environment that supports businesses. The government recognizes that complex tax rules can discourage compliance, especially for small and medium-sized businesses (MSMEs). To address this, the budget will introduce measures to streamline tax procedures, making it easier for taxpayers to file returns and meet their obligations. This simplification should lighten the administrative load for businesses and promote more willing adherence to tax regulations. The budget also puts a strong emphasis on providing relief to middle-class taxpayers by increasing tax exemption limits and offering deductions for specific expenses. This measure is designed to increase the funds people have available to spend, which in turn is expected to boost overall consumer purchases and drive economic expansion.
Support for MSMEs is another critical element. Recognizing their vital role in the economy, the government plans to introduce targeted measures like tax incentives and easier access to credit to strengthen these enterprises. The provision of this support is critical for cultivating innovative endeavors, expanding the employment base, and achieving holistic economic development. Finally, all these reforms are designed to align with the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, ensuring fiscal prudence. While the government aims to offer tax relief and stimulate growth, it remains committed to maintaining fiscal discipline and managing the fiscal deficit responsibly. This balanced approach ensures the reforms contribute to sustainable economic growth without jeopardizing fiscal stability.
Abstract
The Union Budget 2025 represents a major step forward in India’s tax administration, showcasing the government’s dedication to a fair and efficient system. A core element of this budget is the rationalization of income tax slabs, aiming to simplify the tax structure and make it more progressive. By adjusting these slabs, the government wants to ensure people are taxed fairly according to their income, promoting fairness within the tax system. The budget also proposes enhanced deductions, which are meant to give taxpayers more financial relief. This move is designed to encourage compliance and build trust between the government and taxpayers, as individuals and businesses will feel more supported in meeting their financial duties.
Furthermore, the budget tackles GST compliance challenges for small businesses. By easing these requirements, the government aims to help these vital enterprises operate more smoothly, which is key for economic growth and job creation. This is consistent with the government’s wider aim to make doing business in India easier. In essence, the Union Budget 2025 is a comprehensive plan that looks to boost taxpayer trust, encourage compliance, and support economic growth through progressive tax reforms. By balancing revenue collection with economic development, the budget demonstrates the government’s commitment to responsible fiscal management and upholding constitutional principles.
Use of Legal Jargon
The Finance Minister’s recent tax reforms in India are firmly rooted in Article 265 of the Constitution, which dictates that no tax can be imposed or collected without legal backing. This fundamental principle ensures all tax measures are legally authorized, strengthening the rule of law in tax administration and safeguarding taxpayer rights. A significant change in the budget is the revision of income tax slabs under Section 115BAC of the Income Tax Act, 1961. This section introduces a new tax regime offering lower tax rates to individuals who opt out of certain deductions and exemptions. By rationalizing these tax slabs, the government aims to simplify the tax structure, making it more equitable and accessible. This simplification not only makes taxation fairer but also encourages compliance, as a clearer tax system is easier for taxpayers to understand and navigate. Additionally, the budget proposes enhancements to deductions under Section 80C, allowing taxpayers to claim deductions for specific investments and expenditures, such as life insurance premiums and provident fund contributions. By increasing these deductions, the government intends to provide extra financial relief to taxpayers, thereby promoting savings and investment. This initiative is designed to build trust between the government and taxpayers, as individuals will feel more supported in managing their financial responsibilities.
In essence, the Finance Minister’s use of legal terminology highlights the government’s commitment to constitutional principles while enacting tax reforms. By referencing specific articles and sections of the law, the Finance Minister underscores the legal foundation of the proposed changes, ensuring their legitimacy and alignment with the broader goals of fiscal responsibility and taxpayer equity. This comprehensive approach aims not only to boost taxpayer trust but also to establish a more efficient and fair tax system in India, ultimately contributing to economic growth and stability.
The Proof
The Finance Bill, 2025, currently being debated in Parliament, introduces several significant tax reforms designed to streamline the system and offer relief across various economic sectors. A primary change is the introduction of new optional tax regime slabs under Section 115BAC(1A). This includes an increased basic exemption limit, aiming to simplify the tax structure and provide greater financial relief, thereby making the system more equitable and accessible for taxpayers. The bill further provides for a higher standard deduction of ₹75,000, as specified in Section 16(ia). This increase allows individuals to reduce their taxable income, providing additional financial relief and encouraging compliance by effectively lowering their overall tax burden. For Micro, Small, and Medium Enterprises (MSMEs), the Finance Bill proposes an additional depreciation benefit under Section 32(1)(iia). This measure supports their growth and sustainability by enabling them to claim higher depreciation on assets, which in turn reduces their taxable income and promotes investment for business expansion. The bill also aims to ease compliance for small businesses by raising the GST threshold limit from ₹40 lakh to ₹50 lakh in turnover. This change lets these businesses concentrate more on growth, freeing them from the immediate burdens of GST registration and compliance.
Crucially for the startup ecosystem, the bill introduces the abolition of the Angel Tax under Section 56(2)(viib) for eligible startups certified by the Department for Promotion of Industry and Internal Trade (DPIIT). This move is designed to foster innovation and entrepreneurship by removing the tax burden on startups receiving investments, thereby encouraging more funding and support for new ventures.
Finally, to significantly cut down on tax disputes, the government is introducing the Dispute Resolution Scheme 2025. This initiative, part of Direct Tax Vivad se Vishwas II, aims to clear up old tax cases. This scheme provides a streamlined process for taxpayers to settle their disputes with tax authorities, aiming to reduce ongoing litigation and foster a more cooperative relationship between the government and taxpayers. In essence, the Finance Bill, 2025, underscores the government’s commitment to enhancing taxpayer relief, supporting MSMEs, promoting entrepreneurship, and simplifying tax compliance. These comprehensive measures are designed to cultivate a more favorable economic environment, ultimately contributing to India’s sustained growth and stability.
Case Laws
1. CIT v. Vadilal Lallubhai, (1972) 3 SCC 709
– This case reinforced the constitutional mandate under Article 265, which states that “No tax shall be levied or collected except by authority of law”. The ruling emphasizes that every tax imposed must have explicit statutory backing, ensuring that taxpayers are not subjected to arbitrary taxation. This principle is fundamental in protecting taxpayer rights and ensuring that the government operates within the legal framework.
2. Kesoram Industries Ltd. v. State of West Bengal, (2004) 10 SCC 201
– This case established a clear distinction between a tax, a fee, and a cess, which is crucial for determining constitutional validity and fiscal classification. The court elucidated the varying characteristics of governmental imposts a tax denotes a compulsory remittance to the public exchequer sans direct quid pro quo in services; a fee represents an imposition for particular services rendered; and a cess is a distinct form of taxation allocated for a specified objective. This distinction is vital for ensuring that the government does not overreach its authority in imposing levies.
3. CIT v. B.C. Srinivasa Setty, (1981) 128 ITR 294
– The Supreme Court ruled that a tax can only be levied on transactions explicitly defined as taxable events by law. In a capital gains case, the Court held that if a transaction isn’t clearly within the Income Tax Act’s scope of taxable events, it cannot be taxed. This highlights the crucial need for precise legal definitions in tax laws to ensure taxpayers are only taxed on statutorily recognized transactions.
4. McDowell & Co. Ltd. v. CTO, (1985) 3 SCC 230
– This landmark ruling addressed the issue of tax evasion through the use of colourable devices, which are transactions that appear legitimate but are intended to evade tax liability. The court drew a line between legitimate tax planning and sham transactions, emphasizing that while taxpayers can plan their affairs to minimize tax, they cannot engage in artificial arrangements that lack substance. This ruling aimed to prevent abuse of the tax system and ensure that tax liabilities are based on genuine economic activity.
Conclusion
The effectiveness of the Union Budget 2025’s tax proposals hinges on successful implementation and continuous engagement with key groups like taxpayers, businesses, and tax professionals. This ongoing dialogue is crucial for addressing concerns, gathering feedback, and ensuring the reforms are both practical and economically beneficial. The main goal is to translate these reforms into concrete economic gains, fostering a simpler, fairer, and growth-oriented tax environment. To achieve this, the government is prioritizing transparency and cooperation to boost taxpayer compliance and stimulate economic growth. By building a strong fiscal framework, the government aims to align its tax policies with India’s broader development goals. This comprehensive strategy highlights the importance of collaboration between the government and its citizens, working together for a sustainable and prosperous economic future that ultimately benefits the entire nation. Through this partnership, the government seeks to create an environment that encourages growth and development, ensuring the tax system supports the country’s overall economic well-being.
FAQS
1. What’s the main tax relief for salaried individuals in Budget 2025?
Salaried individuals will find the most significant tax relief in Budget 2025 through two key changes a higher standard deduction of ₹75,000 and an expanded basic exemption limit within the new tax regime. These adjustments collectively enable taxpayers to significantly reduce their taxable income, leading to lower tax payments. This relief is particularly beneficial for middle-class individuals, directly addressing their financial pressures and fostering a more equitable tax system.
2. What is the new GST turnover threshold?
The new GST turnover threshold has been raised to ₹50 lakh for small businesses, meaning that they are required to register under GST only if their annual turnover exceeds this amount. This increased limit, up from the previous ₹40 lakh, significantly eases the compliance burden for numerous small traders and MSMEs. It allows them to operate without the complications of GST registration, provided their turnover stays below this higher threshold.
3. What happens to old tax regime slabs?
The old tax regime slabs remain unchanged, allowing taxpayers the option to continue using this system if they prefer. However, the government encourages more individuals to transition to the new simplified tax regime, which offers lower rates and fewer exemptions, aiming to streamline the tax process and make it more beneficial for taxpayers.
4. When will these new proposals apply?
The new rates, deductions, and schemes introduced in the budget will come into effect from 1st April 2025, following the enactment of the Finance Bill 2025. This timeline allows for the necessary legislative processes to be completed before the new tax provisions are implemented.
