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Personal Income Tax: Under the existing tax regime, individuals with annual earnings up to INR 5 lakhs are exempt from paying taxes, while the new tax regime raises this threshold to INR 7 lakhs, aiming to provide more relief to taxpayers. The Government is expected to further enhance the new tax regime by increasing the basic exemption limit, adjusting tax slabs, and raising the standard deduction. Additionally, there is speculation that the Government may introduce a sunset clause for the old tax regime, gradually phasing it out in favor of the new system. These measures would make the new tax regime more taxpayer-friendly, encourage savings and investments, and support economic growth.

Concessional Tax Rate for Manufacturing Companies: In 2019, a concessional tax rate of 15% was announced for new manufacturing companies that began production on or before 31 March 2024. However, this relief was not extended by Finance Act (No. 2), 2024. Currently, a tax rate of 25.17% (including surcharge and cess) is applicable for companies that could not benefit from the earlier concessional tax regime for manufacturing companies. The DTC may reintroduce this concessional tax rate to further support the government’s Make-in-India initiative, maintaining India’s appeal as a destination for new manufacturing investments. While the Production Linked Incentive offers some relief, an additional tax incentive would further bolster the sector’s growth.

Capital Gains Income: The DTC has simplified the categorisation of assets for capital gains purposes, consolidating multiple holding periods into a single 24-month period, except for listed shares.. However, the holding period for new assets under section 54 of the Act remains at three years, which could be rationalised and brought down to 24 months. Moreover, there is a strong industry expectation that the exemption limit for Long-Term Capital Gains (LTCG) on equities, currently set at INR 1.25 lakh, may be increased to INR 2 lakh or higher, which would allow investors to retain a greater portion of their returns.

BEPS: Pillar Two: India is among the 140 countries that have signed on to the OECD’s Global Anti-Base Erosion Rules on Pillar Two. These rules are designed to prevent multinational groups from exploiting tax arbitrage by ensuring that they pay a minimum effective tax rate of 15% in every jurisdiction where they operate. Currently, around 30 countries which have implemented Pillar Two Rules in 2024, with another 30-35 countries expected to follow suit in 2025. While India has committed to the Pillar Two framework, it has taken a cautious approach by not incorporating it in previous budgets. Therefore, it will be crucial for the Government to clarify the application of Pillar Two in DTC and outline the reporting requirements in the upcoming Union Budget.

Simplification of Tax Filing and Reduction in Litigation Timeline: Filing tax returns for non-salaried taxpayers has become increasingly cumbersome due to extensive information required in the forms. There is a strong need within the DTC to streamline these forms by simplifying the language and rationalising the information requests. Additionally, under the Faceless Assessment Scheme, taxpayers face operational challenges such as the lack of grievance filing options, no provision for rectifications, and limited opportunities for early hearings with faceless Commissioners of Income Tax. These inefficiencies lead to protracted litigation and significant amounts of tax revenue being locked in disputes. The DTC should address these issues by introducing an operational framework to improve the functioning of the Faceless Assessment Scheme, thereby reducing the backlog of pending appeals.

Other Key Amendments: The DTC is also expected to bring about several other important changes. These include shifting to a calendar year for tax purposes instead of the financial year, simplifying the residential status for individuals by removing complex categories like ‘Resident but not Ordinary Resident’, introducing unified tax rates for domestic and foreign companies, and expanding the tax base for withholding taxes. Additionally, further rationalising of withholding tax rates and provisions is anticipated.  

 

 

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