Anticipated Reforms in India’s Upcoming Union Budget
As India approaches its Union Budget for 2025-2026, taxpayers and businesses are keenly awaiting reforms that could significantly impact the nation’s economic landscape. With Prime Minister Narendra Modi entering his third term, the government’s economic guidance is under scrutiny. Ernst & Young (EY) India has put forth several recommendations aimed at enhancing the fiscal framework and simplifying the tax system. These reforms are expected to address ongoing challenges, including a substantial backlog of unresolved tax disputes.
Focus on Tax System Simplification
One of the primary recommendations from EY India is to simplify the tax system. Currently, over ₹31 trillion is tied up in unresolved income tax cases, representing 9.6% of India’s GDP for the fiscal year 2023-24. This backlog hampers the efficiency of the taxation system and creates uncertainty for taxpayers. EY suggests that the government should prioritize measures to reduce litigation and improve compliance.
To achieve this, the firm recommends raising the basic exemption limit in the new tax regime from ₹3 lakh to ₹5 lakh. This change would provide relief to common taxpayers by lowering their tax burden. Additionally, EY proposes deferring the tax deduction at source (TDS) on provident fund interest until the withdrawal stage. This would ease compliance burdens for individuals and streamline the TDS rate structure into a few broad categories.
Moreover, EY emphasizes the need for dispute prevention options, such as making safe harbors more attractive. These measures aim to foster a more cooperative relationship between taxpayers and the government, ultimately leading to a more efficient tax system.
Enhancing Capital Expenditure and Investment
Another critical area of focus is increasing capital expenditure (capex) to stimulate economic growth. EY India believes that achieving a GDP growth target of 6.5% or higher is contingent upon the government’s ability to enhance its total capital expenditure. This includes improving capital efficiency and encouraging state governments to boost their investment spending.
The firm also highlights the importance of reducing the fiscal deficit to 4.5% of GDP by 2025-26. Currently, India’s debt-to-GDP ratio stands at 54.4%, significantly above the target of 40%. Lowering interest rates is another suggested strategy to attract private sector investments. By creating a favorable investment climate, the government can stimulate economic activity and promote sustainable growth.
In addition to these measures, EY advocates for the implementation of tailored employment schemes. Such initiatives would not only uplift urban demand but also support overall economic momentum in the coming years.
Addressing Taxation of Digital Assets
As the digital economy continues to expand, EY India emphasizes the need for clear guidelines on the taxation of digital assets, including cryptocurrencies and non-fungible tokens (NFTs). The absence of specific regulations has created uncertainty for investors and businesses involved in digital transactions. EY recommends that the government establish a framework that addresses the taxation of these assets and allows for the treatment of losses incurred in digital investments.
Furthermore, the firm suggests streamlining the capital gains framework to eliminate discrepancies and enhance clarity. For instance, reducing the holding period for capital assets in slump sales from 36 months to 24 months could provide greater flexibility for investors. Similarly, shortening the holding period for unlisted shares in IPO Offer for Sale (OFS) from two years to one year would align them with the treatment of listed securities.
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