Reform Tax Laws in Budget 2025 to Reduce Compliance Costs
By: Admin
Date: January 27, 2025
Category: TAX News
Reading Time: 4 Minutes
With the Union Budget just around the corner, expectations are high for personal income tax rate cuts. In her seventh budget presentation last July, Finance Minister Nirmala Sitharaman provided only limited tax relief, which, unfortunately, did little to enhance individuals’ purchasing power.
Challenges Facing Taxpayers
Rising Financial Pressures
Currently, household budgets are under considerable strain due to falling wages and rising prices. This economic stress has directly affected private consumption, which declined sharply from 7.45% growth in Q1 of 2024-25 to merely 5.96% in Q2. To address this issue, it is essential for the upcoming budget to prioritize tax cuts that can help revive consumer spending and drive economic recovery.
Slow Progress on Tax Reforms
In July, Sitharaman also announced plans to overhaul the Income Tax Act, 1961. Although the introduction of a reform bill is anticipated during the next parliamentary session, such legislative changes often take time to fully materialize. Therefore, the government might consider partial rollouts of reforms in the budget to tackle pressing concerns.
The Need for Tax Law Reforms
Complex and Burdensome Framework
The Income Tax Act, 1961, amended annually, has evolved into a complex and confusing system. This complexity not only increases compliance costs for taxpayers but also:
- Creates administrative inefficiencies.
- Leads to litigation due to ambiguities.
Revenue Challenges
Additionally, outdated tax laws fail to address modern economic transactions, enabling tax avoidance. Consequently, this negatively impacts government revenues.
A Distorted System
The current tax framework deviates from core principles of taxation, resulting in inefficiencies and inequities that hinder overall economic growth.
Goals for Effective Tax Reform
For tax reforms to be successful, they must align with key principles, including:
- Equity: Distribute tax burdens fairly across all income groups.
- Simplicity: Ensure laws are straightforward and easy to understand.
- Economic Efficiency: Reduce compliance costs and eliminate systemic inefficiencies.
Proposed Measures for Budget 2025
- Simplify Tax Provisions
The government should introduce clear and consistent provisions to reduce taxpayer confusion and compliance burdens. - Promote Revenue Neutrality
A well-designed framework must ensure that reforms do not discourage economic growth while maintaining stable revenue collection. - Implement Phased Reforms
By rolling out reforms in stages, immediate issues can be addressed while planning for long-term structural changes. - Encourage Compliance
A system that is easy to follow yet difficult to evade can foster greater compliance and reduce tax avoidance.
Conclusion: A Step Towards Growth
While tax reform is undoubtedly a gradual process, immediate steps in the Union Budget 2025 can provide relief to taxpayers and lay the groundwork for economic progress. By simplifying the tax regime and addressing critical challenges, the government has an opportunity to foster equity, efficiency, and growth in the economy.
