February 2025 is set to herald a new chapter of tax simplicity in India, as the upcoming Union Budget 2025-26 proposes essential reforms to the Income Tax Act, aimed at easing the tax filing process for citizens.

Informed sources from the Finance Ministry have revealed to India Today TV that a series of significant reforms are underway for the country’s income tax system. These initiatives focus on improving compliance, streamlining tax structures, and enhancing the overall ease of doing business.

Amid shifting global and domestic circumstances, India is keen to stimulate economic growth. Over the last decade, the government has made noteworthy progress in alleviating the tax burden on both businesses and individuals. The anticipated reforms aim to provide taxpayer relief while simultaneously broadening the tax base.

The complexity of the Indian tax system presents notable challenges for businesses and individuals alike. A key illustration of this complexity is the time-intensive nature of filing income tax returns:

  • For individuals, filing tax returns can take anywhere from 2-3 hours to 1-2 days.
  • Small companies (with a turnover of less than 1 crore) typically require about a week to file.
  • Mid-sized businesses (with a turnover between 1-5 crore) generally take around 10 days to file returns.
  • Large companies (with a turnover exceeding 5 crore) may need a month or even longer for filing, depending on their complexity and scale.
  • Furthermore, audits necessitate a minimum of 15 days.

India Today TV consulted with Chartered Accountants and tax experts who collectively acknowledged that the excessive complexity of forms and inquiries has significantly increased the burden of tax compliance. The heightened responsibility forces Chartered Accountants (CAs) to exercise considerable caution.

The difficulties extend beyond income tax returns, as filing Goods and Services Tax (GST) returns is similarly arduous, often taking 15 days to a month. Additionally, audits can extend over several months, with GST filing itself lasting up to a month.

SIMPLIFICATION FOR THE COMMON MAN

A major concern shared by both individuals and businesses is the fear of non-compliance with income tax returns, as a notice from the tax department can be intimidating. However, the ongoing simplification initiatives frequently discussed by Finance Minister Nirmala Sitharaman and Prime Minister Narendra Modi aim to convert tax filing from a dreaded obligation into a routine task.

Historically, the Income Tax Department has been perceived as an entity predominantly focused on complicating life for citizens. Acknowledging this sentiment, the government introduced the faceless assessment scheme on April 1, 2021, designed to minimize direct human interaction in tax disputes and assessments. Under this system, the Income Tax Department manages returns, refunds, assessments, scrutiny, and appeals, assigning cases randomly to assessing officers, independent of geographical constraints.

A central goal of the proposed income tax reforms is to reduce the complexities that currently impede both taxpayers and the government. To accomplish this, 22 specialized sub-committees have been established to examine various facets of the Income Tax Act. The Finance Ministry is actively orchestrating meetings and discussions to pinpoint necessary modifications that will benefit citizens.

India’s tax system has faced longstanding criticism for its complex filing procedures, multiple tax brackets, and frequent regulatory updates. These elements have often resulted in confusion and compliance hurdles for both individuals and businesses.

To tackle these challenges, the Finance Ministry is focused on streamlining the income tax filing procedure. This includes simplifying tax forms, enhancing digital infrastructure, and reducing paperwork requirements. The introduction of e-filing systems in recent years has marked a substantial advancement, but further improvements are anticipated to encourage increased participation in the formal tax system.

The Finance Ministry is exploring a significant overhaul of the Income Tax Act, which includes:

A pivotal element of the income tax reform process is the simplification of tax brackets and the potential reduction of tax rates. The existing income tax structure, characterized by numerous exemptions, deductions, and rebates, can be complicated and inefficient. To mitigate this, the government is assessing proposals to consolidate income tax brackets, making the system less convoluted.

There is also a prospect of decreasing corporate tax rates to bolster India’s position as a global business hub. Lower corporate taxes may incentivize businesses to reinvest in the economy, fostering job creation and industrial expansion. Additionally, the government is contemplating extending tax relief to middle-income groups and small businesses, crucial sectors for post-pandemic economic recovery.

  • Expanding the tax base

Prime Minister Modi has consistently advocated for increased tax compliance among citizens. Over the last decade, the government has initiated several measures to promote tax adherence and extend the tax net.

India has traditionally grappled with a limited tax base, with a considerable segment of the population operating outside the formal tax system. To address this issue, the Finance Ministry is formulating strategies to enhance tax collection and encourage voluntary compliance, potentially utilizing advanced data analytics to monitor financial transactions and identify tax evaders.

Moreover, the government is prioritizing the promotion of digital payments and the formalization of the informal economy. As more economic activities transition to digital platforms, it becomes easier for authorities to oversee and tax these transactions.

This approach aligns with the broader government objective of financial inclusion, aiming to integrate more individuals into the formal economy and expand the tax base.

  • Balancing revenue generation and taxpayer relief

While the anticipated reforms are expected to benefit taxpayers, particularly those in the middle-income bracket, the Finance Ministry must also ensure that tax revenue remains sustainable.

Achieving equilibrium between taxpayer relief and adequate revenue generation is crucial to maintaining government investment in essential sectors such as infrastructure, healthcare, and social welfare programs.