Strategic tax reforms in Budget 2025 for sustainable economic growth

Tax relief measures are increasingly viewed as a means to boost disposable income and stimulate consumption.

By Amit Bablani 

The Union Budget 2025, set to be unveiled on 1 February 2025, is the second full budget of the government in its third term. As India looks to strengthen its global presence and sustain economic growth, this budget is expected to continue the government’s focus on economic reforms, fiscal discipline, and inclusive growth. In recent years, India has successfully aligned its tax framework with global standards, with competitive tax rates, the introduction of GST, a rationalised capital gains regime, and the resolution of legacy tax disputes. These efforts have contributed to a 24-year high direct tax to GDP ratio of 6.64% in FY24, while tax collections grew by 17.82%, far outpacing GDP growth at 9.60%.

The 2025 Budget aims to balance fiscal discipline with the need to stimulate demand and sustain growth. It is expected to build on previous tax reforms, promote ease of doing business, and enhance tax administration efficiency, while aligning with the evolving global tax landscape.

Tax Reforms: A Blueprint for Economic Growth

Review of Tax Laws: In July 2024, the Finance Minister announced a review of the Income-tax Act to make it more concise and user-friendly. While the revised Act may not be introduced in the 2025 Budget, the government could incorporate key suggestions to simplify compliance and reduce litigation, which hinders business operations. Despite measures like the Vivad Se Vishwas Scheme (VsV) and increased monetary thresholds for appeals, high litigation rates continue. Therefore, the government is expected to focus on improving dispute resolution mechanisms:

* Mandatory timelines for disposing of appeals before CIT/JCIT (Appeals) to reduce delays.

* Restricting appeals before tax tribunals to only taxpayers, enhancing efficiency.

* Streamlining automated refund instructions for faster processing.

* Leveraging AI and legal bots to improve decision quality and case resolution.

Personal Tax Relief: A Push for Disposable Income

Tax relief measures are increasingly viewed as a means to boost disposable income and stimulate consumption. Expectations include an increase in the basic exemption limit under the new tax regime from Rs 3 lakhs, providing relief to middle-income taxpayers amid rising inflation. Reducing tax rates could encourage savings and investment. Additionally, increasing housing loan interest exemptions could make homeownership more affordable.

Currently, tax deferral on Employee Stock Option Plans (ESOPs) is available only to startups. Expanding this benefit to all organisations would encourage employee ownership across sectors, providing greater financial flexibility.

Tax Incentives to Drive Growth and Innovation

India’s Global Capability Centres (GCCs) are a significant contributor to the economy, generating $64.6 billion in export revenue and employing over 1.9 million people. With the sector expected to grow to a market value of $100 billion by 2030, the government may consider introducing concessional tax rates for Indian companies operating as GCCs.

There is also growing emphasis on environmental sustainability. The government may allocate more funds to support green energy initiatives and provide tax incentives, such as concessional rates on income from green bonds and renewable energy certificates (RECs), to help achieve the 2070 zero-emission goal. Further, the “Aatmanirbhar Bharat” initiative may include production-linked incentives to boost R&D and innovation, fostering domestic manufacturing.

GST Law Amendments and Customs Reforms

Simplifying GST regulations remains a priority. The government may propose reforms in the legal framework for invoice management systems, following recommendations from the GST Council. A one-time customs amnesty scheme could also be introduced to clear pending disputes and backlogs.

Additionally, to incentivise "Make in India," the Budget could propose increases in basic customs duties on imported goods while reducing duties on components used in domestic manufacturing.

Using Technology to Enhance Ease of Doing Business

Technology continues to play a central role in improving tax administration. A Deloitte survey in 2024 found that 92% of organisations are transitioning to technology-driven tax functions. The government’s focus on digitalising income tax services is expected to continue in Budget 2025. Key initiatives include:

* Adopting the Standard Audit File for Tax (SAF-T) for real-time compliance monitoring.

* Introducing a tax e-wallet to speed up taxpayer refunds and facilitate adjustments against future liabilities.

* Issuing APIs to extract data seamlessly from tax portals.

* Using blockchain technology to secure tax transactions, ensuring transparency and trust.

These advancements aim to simplify compliance, minimise errors, and improve the efficiency of tax collection systems.

The Path Ahead: Budget for Growth and Sustainability

The Union Budget 2025 presents a critical opportunity for India to address challenges such as slowing GDP growth while pursuing a resilient, growth-oriented economy. The government must strike a balance between providing immediate relief and implementing long-term structural reforms. Key areas of focus include:

# Simplifying tax laws and reducing compliance burdens.

# Introducing targeted incentives to foster innovation and self-reliance.

# Strengthening the ease of doing business to attract investment.

By prioritising tax simplification, incentivising key sectors like GCCs, manufacturing, and green energy, and addressing social welfare concerns, India is well-positioned to foster a sustainable and inclusive economic future.

-- With inputs from, Manasvi Nigam, Chartered Accountant and Sarsij Agrawal, Chartered Accountant.

(Amit Bablani is Partner – Deloitte India.)

Views are personal and do not represent the stand of this publication.