As the Union Budget 2025 approaches, anticipation is mounting over possible cuts in personal income tax rates. In her seventh budget presented last July, Finance Minister Nirmala Sitharaman offered limited tax relief, which failed to significantly enhance individual purchasing power.
Economic Realities Highlight Need for Tax Cuts
Rising prices and declining wages have put pressure on household budgets, leading to a steady decline in private consumption. Data shows that private consumption growth, which was 7.45% in Q1 of FY 2024-25, dropped to 5.96% in Q2, signaling the need for measures to boost demand. Experts suggest that tax cuts could be an effective way to increase disposable income and stimulate consumption.
Potential Overhaul of Income Tax Laws
Sitharaman had announced plans to revamp income tax laws last year, with reports indicating that a bill to overhaul the Income Tax Act of 1961 might be introduced in the upcoming parliamentary session. While comprehensive tax reforms require time, the government could consider a partial rollout of these changes in the upcoming budget to provide immediate relief.
Challenges with the Income Tax Act 1961
The Income Tax Act, 1961, has undergone annual amendments, making it overly complex and difficult for the average taxpayer to understand. The overlapping, inconsistent, and outdated provisions have increased compliance costs, administrative burdens, and tax-related litigation. Experts argue that the current law’s shortcomings allow tax avoidance, reducing government revenue and undermining equitable taxation.
A Call for Meaningful Tax Reforms
Tax reform is a delicate process that must address distortions, simplify compliance, and uphold principles of equity and efficiency. While growth incentives are not the primary purpose of taxation, a well-designed tax system can provide a stable and reliable revenue source without discouraging economic activity. The focus should be on creating a tax system that is simple to comply with but challenging to evade.
As the government prepares to present the budget, all eyes will be on Finance Minister Sitharaman to see if she delivers the much-anticipated tax relief while addressing the long-standing need for comprehensive tax reform.
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