Hence, the focus will be on employment generation, skill development and providing relief to a large mass of people suffering from inflation, with the overall objective of boosting GDP growth. Let’s look into crystal balls and share ideas about the direction the 2025 budget proposals could take from an individual tax perspective.
As always, taxpayers expect the Chancellor of the Exchequer to deliver lower tax rates and tax relief to increase personal disposable income. More money in the hands of the people is a good idea from a macroeconomic perspective and would also mean increased savings, investment and spending, which will help drive economic growth.
Providing tax breaks to increase personal disposable income is a seemingly simple solution to meet popular demand and increase economic growth. The Finance Minister and her team working on the budget may consider the following proposals:
1. Move towards a unified tax system
For the past five years, we have had two tax systems running in parallel. The old tax system with the usual income slabs and eligible deductions/exemptions and the new tax system with relatively wider income slabs and lower tax rates, without most of the deductions/exemptions found in the old tax system. The taxpayer can choose either tax regime.
The goal of introducing a new tax regime in Budget 2020 was to simplify the tax system and over the years the government has made changes to the new tax system to make it more attractive.
It was widely reported in the media earlier this year that nearly 72% of taxpayers opted for the new tax system when filing their FY24 income tax returns. Given this and the fact that a new income tax law is on the way, the timing is perfect for the government to introduce a single, unified tax regime.
A unified tax regime with widened income slabs and lower tax rates will help achieve the intended rationalization and simplification of the tax system and also satisfy the minority’s old tax system.
2. Rationalization of capital gains
This has been under the government’s consideration for many years and in the last budget changes were introduced to aspects such as capital gains tax rate, holding periods and indexation to make capital gains taxation simpler and easier to administer.
It is a well-known fact that there is an increase in private investor activity in the stock markets with more people turning to it to supplement their income. The government should raise the tax-exempt threshold for long-term capital gains on equity units and equity-oriented funds from ₹1.25 lakh more ₹5 lakhs. This would be a major incentive for taxpayers to invest more, save more and spend more, thus increasing overall economic activity.
Another aspect of capital gains taxation that could benefit from the Finance Minister’s intervention in this Budget is the exemption threshold under section 54, section 54F and section 54EC of the Income Tax Act, which relates to the reinvestment of capital gains from the sale of immovable property assets. property or specified securities.
Currently there is a limit of ₹10 crore to claim exemption under section 54 and under section 54F. Likewise, there is a limit to ₹50 lakh to claim exemption under section 54EC.
Since the indexation benefit is no longer available, it makes sense to raise the exemption thresholds from ₹10 million more ₹12 crore under section 54/54F and from ₹50 lakh more ₹1 crore under section 54EC.
3. Tax incentives to encourage sustainable development
The government has actively integrated sustainability goals into its economic and tax policies to control climate change and promote sustainable development. Tax breaks can be introduced for individuals who adopt renewable energy, reduce carbon dioxide emissions and dependence on fossil fuels or invest in sustainable development projects.
A separate slab or tax rebate, taking into account the overall principles of the new tax system, can be introduced for individual taxpayers who promote sustainable development by investing in renewable energy sources, such as solar panels or electric vehicles, to reduce the carbon footprint. This will also help the government balance economic growth with environmental protection and social justice.
This idea is very much in line with developed countries such as the US, UK, Germany and Canada, where such tax breaks, vouchers and credits are effectively used to promote the adoption of renewable energy and promote sustainable development.
As always, individual taxpayers may have expectations of lower taxes and there is no shortage of ideas from armchair intellectuals. While some ideas may have to wait their turn, it is clear that the role of the Finance Minister is never easy. Still, there is confidence that fiscal prudence will ultimately prevail.
Sonu Iyer is Tax Partner and National Leader, Human Resources Advisory Services, EY India. Siddharth Deb, Tax Director, EY India, also contributed to the article.
