India’s tax landscape is undergoing significant transformations in 2025, aiming to simplify compliance, enhance transparency, and stimulate economic growth. Here’s an overview of the key changes:
1. Introduction of the Direct Tax Code (DTC) 2025
The government is set to replace the six-decade-old Income Tax Act of 1961 with the new Direct Tax Code 2025, effective from April 2025. This overhaul seeks to streamline tax laws, reduce litigation, and make compliance more straightforward for taxpayers. The revised bill condenses the law to 622 pages from over 800 by eliminating outdated sections and presenting tax rates in tables.
Key Features:
- Simplified Residential Status: Taxpayers will now be classified as either residents or non-residents, eliminating the “Resident but Not Ordinarily Resident (RNOR)” category.
- Unified Corporate Tax Rates: A uniform tax rate will be applied to both domestic and foreign corporations, simplifying compliance for multinational businesses operating in India.
- Reduced Deductions and Exemptions: The DTC aims to simplify the tax filing process by reducing the number of available deductions and exemptions, ensuring a more straightforward tax system.
2. Revised Income Tax Slabs
In the Union Budget 2025, Finance Minister Nirmala Sitharaman announced significant changes to the income tax structure under the new tax regime:
- Increased Tax-Free Income Threshold: Income up to ₹12 lakh is now tax-free, up from the previous ₹7 lakh threshold. With the standard deduction of ₹75,000, salaried individuals can have a tax-free income up to ₹12.75 lakh.
- Revised Tax Slabs: The minimum income threshold for taxation has been raised from ₹3 lakh to ₹4 lakh. Additionally, the 30% tax rate now applies to incomes above ₹24 lakh, increased from the previous threshold of ₹15 lakh.
3. Digital Economy Tax (DET)
To address the rise in digital transactions and the gig economy, the government has implemented a Digital Economy Tax:
- Levy on Non-Resident Entities: A 2% tax is imposed on digital transactions conducted by non-resident entities earning revenues exceeding ₹2 crore in India.
- TDS on E-commerce Transactions: Indian e-commerce operators are required to deduct Tax Deducted at Source (TDS) at 1% on payments exceeding ₹1 lakh annually to individual sellers.
4. Goods and Services Tax (GST) Reforms
The GST Council has introduced several changes to broaden the tax base and promote sustainability:
- Reduced Rates for Sustainable Products: Essential items like renewable energy equipment and electric vehicles are now taxed at a reduced rate of 5%.
- Higher Rates for Luxury Goods: Luxury goods and services are subjected to a higher GST rate of 28% to enhance revenue collection.
- GST on Digital Assets: Online gaming platforms are now subject to 18% GST on platform fees, and cryptocurrency transactions attract a GST of 28%, aligning with the government’s cautious approach to regulating digital assets.
5. Tariff Revisions
In response to international trade dynamics and domestic industry protection, India is reviewing import tariffs on over 30 items, including luxury cars, solar cells, and chemicals. The recent budget has halved several import tariffs and introduced an Agriculture Infrastructure Development Cess (AIDC) on many items. Basic customs duties on luxury cars, solar cells, and machinery have been reduced, bringing the peak tariff down from 150% to 70%. However, a new AIDC ranging from 5% to 70% is now applied to 32 goods, replacing what was previously zero AIDC.
These comprehensive reforms reflect India’s commitment to creating a more efficient, transparent, and taxpayer-friendly system, fostering economic growth and aligning with global best practices.
The Tax System Under Nirmala Sitharaman’s Leadership in India
India’s tax system, a crucial pillar of its economy, has seen significant evolution under the leadership of Finance Minister Nirmala Sitharaman. Since taking office in May 2019, Sitharaman has introduced reforms aimed at simplifying taxation, promoting transparency, and boosting compliance while maintaining a focus on economic growth and fiscal responsibility. This article explores key aspects of her tenure and its impact on India’s tax structure.
Simplification and Rationalization of Direct Taxes
One of the most notable initiatives under Sitharaman’s leadership was the introduction of the new income tax regime in the Union Budget 2020-21. This regime offers taxpayers the option to choose between the existing tax system with exemptions and deductions and a new, simplified structure with lower tax rates but no exemptions.
For example, under the new regime:
- Income up to ₹2.5 lakh remains tax-free.
- Income between ₹2.5 lakh and ₹5 lakh is taxed at 5%.
- Income between ₹5 lakh and ₹7.5 lakh is taxed at 10%, and so on.
This dual-system approach empowers taxpayers to choose a structure that best suits their financial situation, promoting flexibility and ease of compliance.
Corporate Tax Reforms
To attract investment and foster economic growth, Sitharaman announced a historic cut in corporate tax rates in September 2019. The base corporate tax rate was reduced to 22% for domestic companies not availing of exemptions, while new manufacturing companies set up after October 1, 2019, were offered an even lower rate of 15%. This move positioned India as a competitive destination for global investments.
Goods and Services Tax (GST) Reforms
The GST regime, introduced in 2017, continued to evolve under Sitharaman’s stewardship. Her tenure saw efforts to streamline the tax filing process and address structural challenges. Measures like the introduction of the QRMP (Quarterly Return Monthly Payment) scheme and enhancements in the GSTN (Goods and Services Tax Network) infrastructure have improved compliance and reduced the burden on taxpayers.
Additionally, the rationalization of GST rates on various goods and services has been an ongoing process, balancing revenue generation with affordability for consumers.
Measures for Transparency and Digitalization
Sitharaman’s focus on digitalization has significantly improved the transparency and efficiency of India’s tax system. Key initiatives include:
- Faceless Assessments and Appeals: Introduced to eliminate physical interaction between taxpayers and tax authorities, reducing corruption and ensuring fairness.
- Pre-filled Tax Returns: Simplifying the filing process by providing taxpayers with pre-filled forms containing information on income, deductions, and tax payments.
- Taxpayer Charter: Announced in 2020, this charter outlines the rights and responsibilities of taxpayers, fostering trust between the government and citizens.
Challenges and Criticism
While the reforms have garnered praise, they have also faced criticism. For instance:
- The new income tax regime’s lack of exemptions has been seen as less beneficial for individuals who rely on deductions to lower their taxable income.
- The corporate tax cuts, though aimed at boosting investment, raised concerns about their impact on fiscal deficit.
Additionally, the GST system still faces issues like delayed refunds and complex compliance requirements, particularly for small businesses.
Conclusion
Nirmala Sitharaman’s tenure as Finance Minister has been marked by bold reforms aimed at transforming India’s tax system into a more transparent, efficient, and taxpayer-friendly framework. While challenges remain, the initiatives taken under her leadership represent significant steps toward creating a tax environment conducive to economic growth and development. As India continues to navigate its economic priorities, the tax reforms under Sitharaman will likely play a pivotal role in shaping the country’s fiscal landscape.