As India gears up for Union Budget 2025, Indian and foreign MNCs keenly anticipate policy reforms and incentives that the government may introduce to stimulate economic growth, enhance the ease of doing business and align India with the evolving global tax landscape.
With revamp of the Income Tax Act, 1961 (‘Act') already in motion, aiming to simplify its complex provisions, the Union Budget 2025 presents a unique opportunity for the government to address corporate tax issues which hinder business operations and investment inflows into the country.
A significant concern for corporates is the protracted tax litigation landscape in India. As of now, there are more than 6 lakh appeals which are pending adjudication by the appellate authorities/courts, with a staggering amount of over Rs 12 trillion locked up in litigation. What is further alarming is that tax disputes in India can potentially take as long as 20 to 25 years to reach finality. This has far-reaching implications resulting in significant amounts of tax revenue being locked up in tax disputes, adversely affecting both, the taxpayer’s financial planning and government’s revenue collection.
To address this concern, the Finance Minister (FM) may consider a two-pronged approach; one being to clear the backlog of pending appeals and second being to avoid fresh disputes from arising. To address the first issue, in the last Budget, the FM did well to also designate Joint Commissioners (JCIT) as the first appellate authority to adjudicate smaller cases. Despite that, there is a huge backlog of more than 5.49 Lakh cases with CIT(Appeals) as of 31 March 2024. As in the case of Dispute Resolution Panel, the FM may consider introducing a mandatory timeline for disposal of appeals by CIT(Appeals)/ JCIT(Appeals), which will help clear the backlog of appeals pending with them.
Expanding the scope of the Dispute Resolution Committee (DRC) could further contribute to a more conducive tax environment. The DRC offers an alternative to regular appellate proceedings. It can make variation to the proposed additions, reduce or waive penalties and grant immunity from prosecution in smaller cases where the returned income is less than Rs 50 lakhs and additions are under Rs 10 lakhs. These limits need to be significantly enhanced to enable corporates to take advantage of this remedy.
With a view to minimize fresh disputes from arising, taking a leaf out of the APA regime which has provided to be quite successful, the FM may consider introducing a mediation/ settlement scheme between taxpayers and the tax department, allowing for amicable dispute settlement right at inception and thereby avoid lengthy litigation.
The Tax Deducted at Source (TDS) regime in India has become quite onerous for taxpayers, with there being 35 TDS provisions applicable to various transaction categories. This complexity has led to numerous interpretation issues and unnecessary disputes. There is a pressing need to rationalize the TDS rates by ensuring that there are no more than 3 or 4 rates of TDS. While tax can continue to be deducted at normal slab rate for salary payments, for casual income in the nature of winning from lotteries, etc, a higher rate can be prescribed; for payment towards works contract, rent, service fee, commission etc., one single rate (preferably 2%) can be prescribed. Also, the TDS on e-commerce transactions and on purchase of goods which is applicable @ 0.1% should be done away with, given that it leads to significant administrative inconvenience without materially augmenting revenue collection.
Taxpayers also demand that TDS credit be allowed based on the amounts reflected in Form 26AS, eliminating the cumbersome reconciliation process with their books of account, which proves to be a daunting task for corporates.
India’s push for bolstering manufacturing through initiatives like “Make in India” and “Atmanirbhar Bharat” has spurred investments across various sectors. Nevertheless, corporates are looking for targeted incentives to enhance their competitiveness. Reintroducing weighted deduction for Research and Development expenditure, particularly for advancements in cutting-edge technologies such as Electric Vehicles, the Internet of Things and Artificial Intelligence would serve to foster innovation and growth in these critical areas.
Given the significant increase in business restructuring, the FM should consider extending the benefit of carry forward of tax losses and unabsorbed depreciation afforded to companies engaged in specific sectors, such as those owning industrial undertakings, ships, hotels, banking institutions, public sector etc., to all the sectors. By broadening these provisions to encompass all sectors, India can attract a wider array of investors and give a boost to the M&A landscape.
With India’s GDP growth hitting four-year low of 6.4% in FY25, the upcoming Union Budget 2025 is anticipated to introduce measures aimed at revitalizing industrial output and stimulating investment. Further, by simplifying the tax compliance and litigation burden, the government can create a more business-friendly tax environment. Corporates remain optimistic that the Budget will introduce reforms that not only spur investments but also position India as a global economic powerhouse in the years to come.
A version of this article was published in The Financial Express Online. The same can be read here
