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The Union Budget 2025 is expected to be presented in Parliament by our hon’ble FM Smt. Nirmala Sitharaman on February 1, 2025. This will be her eighth Budget presentation. In her previous Budget presentation in July 2024, she had announced a comprehensive review of the Income-tax Act, 1961, to make it concise, lucid, easy to read and understand.
As per some media reports, the new Income Tax Bill is going to be introduced in the upcoming Budget Session, more likely in the second session and a mention of the same is likely to be made in the Budget Speech. The new Bill is going to be free of provisos and redundant sections, it is being said. Some reports also suggest that all separate TDS sections in Chapter XVII-B are going to be turned into one or two sections with a separate schedule of different TDS rates.
The Direct Tax collections have witnessed a significant growth of 19.94% with the gross direct tax collections of Rs. 20.64 lakh crores for FY 2024-25 as on 12.1.2025. This evident tax buoyancy should give our hon’ble FM an ample cushion and room to provide the much-needed tax incentives and tax breaks to the manufacturing sector as well as the service sector and especially the middle class to boost demand and consumption to revive the slowing GDP growth rate. Measures to reduce disputes and demands embroiled in litigation and thereby providing tax certainty to the tax payers are also desirable.
Some of the basic yet effective suggestions in the direct tax domain for the upcoming Union Budget 2025 and the revamped Income Tax Bill, are being discussed below.
1. Enactment of New Income Tax Bill only after Stakeholders Consultation
The draft of the proposed revamped Income Tax Bill should be made public and suggestions and feedback should be invited from all stakeholders concerned, before its enactment.
2. No Tinkering with Established Jurisprudence on Jurisdictional Matters
In the name of simplification, the established legal jurisprudence on various jurisdictional issues, currently in favour of assesses, should not be diluted and set at naught.
3. Rationalisation of TDS related provisions:
a) Section 139AA of the Income Tax Act provides for the compulsory linking of PAN with Aadhar and section 206AA mandates deduction of TDS at a higher rate of 20% in case of deductees whose PAN had not been linked with Aadhar. As per CBDT Circular No. 6/2024 dated 23.4.2024, relaxation from such penal consequences was provided up till 31.5.2024. In recent times, many of the corporate employers and other big organisations have received huge TDS related demand notices for not deducting TDS at the higher rate of 20%, in case of employees whose PAN had not been linked with their Aadhar.
The problem arose because in majority of such TDS demand related notices, the demand had been generated in respect of those employees also, whose salary income was below the taxable thresholds or the rebate u/s 87A thresholds and as such no TDS had been deducted by the employers. It is pertinent to mention here that as a prudent and transparent practice most corporate employer organisations issue Form 16 to all their employees, even to those whose salaries are below the taxable brackets or are non-TDS deductible after claiming rebate u/s 87A.
Thus, the system generated TDS demand notices in such cases, are creating unnecessary and undue hardships both for the employer organisations as well as such low salary employees. Therefore, it is desirable that such low salary employees are also included in the exempt category of applicability of section 139AA and 206AA of the Act.
b) Reducing the maximum time barring limitation period for initiation and completion of TDS verification proceedings under section 201(1)/201(1A) from the existing six long years to maximum two years from the end of the relevant financial year, so as to align it with the time barring limitation period of completion of regular assessment proceedings. This will go a long way in ensuring that the sword of such cumbersome TDS verification proceedings doesn’t keep on hanging on the businesses for six long years.
c) Fixing the time limit for initiation and completion of prosecution proceedings under section 276B of the Income Tax Act, to two years, from the end of the relevant quarter, as at present there is no prescribed time limit for initiation of prosecution proceedings from the end of the relevant financial year. Also, prosecution proceedings should not be launched where the TDS has already been deposited along with the penal interest u/s 201(1A) before the due date of return filing, as in such cases, deductees will get the TDS credit and the Exchequer will get the penal interest. In order to penalize such cases, the rate of penal interest may be increased to 2% per month in place of the existing 1.5% per month. This measure will go a long way in curbing the arbitrary misuse of this prosecution provision and decriminalizing this draconian provision and facilitating ease of doing business in real and effective terms.
4. Rationalizing of Reassessment related provisions
Restricting the wide scope of the coverage of ‘information in possession’ and ‘audit objection’ in subsection (3) of section 148, so as not to include those issues which had already been made the subject matter of extensive and comprehensive scrutiny, examination and verification during the course of original regular assessment proceedings will go a long way in providing certainty, stability and conclusivity to the already concluded income-tax assessments and will also prevent gross misuse of the reassessment provisions in harassing the taxpayers.
5. Fixing Time Limit for Passing of Appeal Orders by CIT/JCIT(Appeals) & Ensuring Meritorious Adjudication & Disposal of Appeals
The hon’ble Gujarat High Court, in a recent judgement, in the case of ‘Om Vision Infraspace Pvt Ltd vs. ITO’, has highlighted the grave and serious problem of pendency of 5.80 lakhs appeal cases before the CIT(Appeals).
Our hon'ble Prime Minister had launched the scheme of Faceless Appeals, in the year 2020. However, even after the lapse of five long years, a majority of such appeals are still lying pending undisposed off by the National Faceless Appeal Centre. An additional cadre of JCIT (Appeals) has also been created to ensure faster disposal of small value appeals. But still the pendency of appeals looms at large.
In many cases, the appellants have even filed their appeal submissions multiple times in the appeal filing window, but with no response from the concerned appellate authorities. Even the mandatory opportunity of being heard through video conferencing (VC) is not being granted to the appellants. In other cases, where the VC has been granted, but even after the lapse of substantial time period after the VC hearing, no orders have been passed by the first appellate authority. This is resulting in undue financial hardships to the appellants, because there are many cases of high-pitched assessments, wherein atleast twenty percent of the demand has been coercively recovered, but the appellate relief is still not coming.
In view of a CBDT Instruction, the taxpayers can get a stay of demand on paying 20% of such demand, till the pendency of their appeals before Commissioner (Appeals). But, since such appeals have been pending since last four or five years, the department is adjusting the entire demand stuck up in such appeals, by way of adjusting the subsequent year’s refunds against such demands. The department has to grant an opportunity to the concerned taxpayers, to agree or to disagree to the proposed adjustment of their refunds against their old outstanding demands. But at the ground level, in view of the discretion available with the jurisdictional assessing officer, refunds are frequently getting adjusted, despite the taxpayers filing their disagreements with such adjustment. Thus, one of the prominent reasons for the substantial growth in the direct tax collections, in recent years, is such adjustment of refunds of subsequent years with old outstanding demands embroiled in appeals, only.
Another injustice which the taxpayers face is that interest of eighteen percent per annum keeps on adding up on their unadjusted tax demands, till the pendency of their appeals. In case, if taxpayers win their appeals, then they are entitled for interest on their refunds at just half the rate of nine percent per annum only.
Though amnesty schemes like ‘e-Dispute Resolution’ and ‘Vivad se Vishwas’ have been brought up by the legislature aimed at reducing the pendency of appeals, there is an urgent need to hammer the very root cause of such piling up of appeals before the Commissioner (Appeals).
A simple solution could be to convert the existing discretionary adjudication of appeals within a period of one year, by the Commissioner (Appeals), into the mandatory requirement of Law.
The existing subsection (6A) of section 250, provides the discretion to the CIT(Appeals) that he/she may hear and decide the appeal, within a period of one year from the end of the financial year in which such appeal has been filed by the appellant. Thus, there is an urgent need to make suitable amendment in subsection (6A) of section 250 of the Income tax Act, and to replace the word 'may' with 'shall' so as to convert this discretionary requirement of adjudicating the appeal within a period of one year, to the mandatory requirement of Law.
The currently flawed ‘incentive points’ system of awarding higher grading points to Commissioner (Appeals) for disposing higher value tax demand appeals and lower points for adjudicating lower value appeals also need to be streamlined in the Central Action Plan.
The necessary supporting infrastructure along with the filling of vacancies and new appointments of the requisite number of competent Commissioner (Appeals) should be ensured to achieve a permanent solution to this problem.
6. Resolve of the DIN Controversy by Re-insertion of Section 282B in the Income Tax Act
In order to sanctify the legislative intent of the Ministry of Finance in bringing the Document Identification Number (DIN) mandate and the binding nature of the said CBDT Circular No 19/2019, in real and effective terms and not just as a mere lip service, it is desirable that the erstwhile section 282B, is being re-inserted in the Income Tax Act, with retrospective effect from 1.10.2019, and the CBDT own Circulars are not being undermined, contested and challenged by the learned standing counsels of the CBDT in the Courts.
7. Doing Away with the Automated Refund Withholding Intimations generated by AI used by CPC under the pretext of refund withholding by the AO in section 241A can go a long way in ensuring speedy refunds and can produce better results to inject liquidity in the economy than the fiscal packages.
It has been practically witnessed, that in many cases of the corporates returns being processed by CPC for the AY 2023-24 & AY 2024-25, refunds have been processed u/s 143(1) but at the same time have been withheld, by a mere online communication issued by the CPC, that the refund is withheld by AO not on account of any discrepancy, but due to the pendency of assessment proceedings of earlier assessment year u/s 241A of the Act. The ironical fact is that when such taxpayers approach their jurisdictional AOs, they simply claim their ignorance of any such withholding of refunds by them. Thus, ironically the jurisdictional AOs themselves are ignorant that they have withheld the refunds of their assessees and as such, the assessees have nowhere to go to seek their refunds as the CPC is faceless and the AOs claim ignorance. Indeed, the AI and ML tools of the CPC have become smart enough to withheld refunds on the pretext of section 241A of the Act.
8. Clarity needed in respect of Coverage of Trading Enterprises in section 43B(h) of the Income Tax Act and Inclusion of delayed payment to medium and small enterprises before the due date of return filing, in the proviso to section 43B of the Act
In order to promote timely payments to micro and small enterprises, the Finance Act 2023 has inserted a new clause (h) in section 43B of the Act to provide that any sum payable by the Businesses to a micro or small enterprise registered as such in the Micro, Small and Medium Enterprises Development (MSMED) Act, beyond the time limit specified in section 15 of the MSMED Act 2006, shall be allowed as deduction, only on actual payment.
Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days.
A suitable clarification by CBDT, with regard to the coverage or otherwise of the trading entities, under this provision, is very much desirable and essential, as currently only manufacturing and service entities are covered under the MSMED Act and the trading entities are not included in the definition of covered 'enterprise' under the MSMED Act.
Also, the inclusion of delayed payment to medium and small enterprises before the due date of return filing, in the proviso to section 43B of the Income tax Act is desirable and needed so as to bring parity in the allowability of such expenditure vis-à-vis other expenditures.
9. Allowing Deductions in respect of House Rent Allowance (HRA) & Interest on Home Loan in New Personal Taxation Regime in Section 115BAC
Currently, the individuals and HUFs opting for the new personal taxation regime u/s 115BAC of reduced personal tax slabs, are required to forgo a plethora of otherwise available specified deductions, including deduction in respect of House Rent Allowance (HRA) u/s 10(13A) available to salaried individuals and the deduction in respect of Interest paid on home loan taken for self-occupied house property u/s 24(b).
The specified deductions under various sections like 80C/80CCC/80CCD/80D, involves a conscious decision of actual earmarking and blocking of funds in making the specified investments, by the individual taxpayers, and so, such individuals are still inclined to forego these deductions, and opt for the new regime of reduced taxes with a view to avoid blockage of their funds.
However, the deductions like HRA u/s 10(13A) and the Interest paid on self-occupied house property u/s 24(b), per se, don't involve any conscious decision of making tax saving investments but infact are the result of the basic necessity of ensuring roof for one's living and survival.
Thus, the restriction pertaining to the mandatory requirement of forgoing of HRA deduction u/s 10(13A) by the salaried individuals and the deduction u/s 24(b) in respect of interest paid on home loan taken for self-occupied property, for availing the benefit of reduced personal tax rates in section 115BAC, is acting as the main deterrent for such individual taxpayers, to switch to the new personal taxation regime.
The Government also wants more and more assessees to switch to the new regime, to reduce the complexities in return filing and assessments arising out of the plethora of deduction claims of the assessees applicable in the old regime.
Therefore, an appropriate amendment in section 115BAC is desirable to be considered by the Law Makers in the upcoming Union Budget 2024, so as to provide for the allowability of HRA Deduction u/s 10(13A) and Interest paid u/s 24(b) for home loan taken in respect of self-occupied property, in the new personal taxation regime.
10. Increase in the Child Education Allowance & Hostel Expenditure Allowances Exemption Limits & Allowability of the same in New Tax Regime:
The current exemption limits in respect of Child Education Allowance is Rs 100 per child per month and in respect of Children Hostel Expenditure Allowance is Rs 300 per child per month , for a maximum of two children in a nuclear family. These exemption limits in respect of the basic necessity of primary education of the child, have not been revised since a very long-long time(the limits were same even during my CA exam days and it has been 17 years since I qualified as a CA). Whereas, I don't think that even in Govt. Schools the fees is Rs 100 per month, leave aside the private schools where the fees is not less than Rs 5-6k per month. Thus, there is a dire need to revise these exemption limits in respect of Children Education Allowance and Hostel Expenditure Allowance, in line with the realistic and currently prevailing cost inflation index pertaining to education in primary schools and hostels.
Further, like the house rent, the child education expenditure is a basic necessity, and as such must also be allowed in the new personal tax regime of reduced tax rates.
11. Restoring of the Domestic Withholding Tax Rate on Royalty & Fees for Technical Services (FTS) of 10% from the increased rate of 20%.
The rate of domestic withholding tax rate on Royalty and FTS payments has increased from 10% to 20% plus applicable surcharge and cess w.e.f. 1.4.2023. Practically at the ground level, the domestic Indian entities are bearing this increased burden, due to the grossing up of withholding tax liability clause in their agreements with the foreign parties. It is noteworthy to understand here that the Finance Act 2015 had reduced the domestic withholding tax rate on royalty and FTS from 25% to 10% in order to reduce the hardship faced by small entities. The then Finance Minister late Sh. Arun Jaitley in his budget speech had justified the said reduction to facilitate technology inflow to small businesses at low costs. The said justification for the reduced withholding tax rate of 10% still holds good. Also, the increased withholding tax rate of 20% is infact acting as a deterrent in revenue collection, as foreign entities are now more inclined to avail DTAA benefits, which in turn is increasing litigations and tussles. Hence, it is practical and desirable that the domestic withholding tax rate to be restored to 10%.
12. Reconsideration of the Inclusion of Inventory Valuation at the behest of the AO during assessments u/s 142(2A) of the Income Tax Act, as this provision is amenable to be misused and will increase tussles and litigations and thereby will hamper ease of doing business.
13. Reconsideration of the taxability of income from Debt Mutual Funds as Short-term Capital gains irrespective of the period of holding, as even the common man, small retail investors and many MSME's entities invest significant portion of their temporarily available surplus funds in debt-based securities to avoid exposure to equity market risks and reduce volatility of returns.
14. Rationalisation of the Reporting Clause 44 in Tax Audit Report (TAR)
The reporting clause 44 in the Tax Audit Report mandates breaking up of total expenditure incurred by the auditee company into GST and Non-GST expenditure and further GST expenditure into GST Registered/Unregistered & Composite Dealers.
Such voluminous and cumbersome mandated reporting in Clause 44 of TAR, has no effect on the allowability or disallowability of such expenditure in the computation of income, and is only acting as a serious compliance burden without any consequential benefit.
Therefore, this unwanted and undesirable reporting burden in clause 44 of TAR needs to be withdrawn, to ensure ease of compliance and ease of doing business.
15. Measures to Boost Real Estate Sector:
Increasing 'safe harbour limit' from the present 10% to 20% permanently in sections 50C, 43CA & 56(2)(x) can help a lot in boosting the real-estate sector.
16. Measures for increasing Disposable Income such as relaxing further the tax slab rates for reducing tax burden on middle class having annual incomes upto Rs. 15 lakhs, reinstating the incentivized corporate tax rate of 15% for domestic manufacturing entities, to boost domestic production, rationalizing the advance tax instalments mandating the payments of 25%-50%-75% instead of the existing 60%-75%-90%, extension of similar benefits of reduced tax rates u/s 115BAA & 115BAB to firms and LLPs, extending the benefit of presumptive taxation u/s 44ADA to partners of firms and LLPs, can result in increased disposable income for consumption, both in the hands of individuals and corporates and thereby augmenting the demand for the revival of the economy.
[This Article has also been published in Taxmann with the citation [2025] 170 taxmann.com 530 (Article)]
