Budget 2025: Will the Government Replace the Income Tax Act with the Direct Tax Code in the New Budget?

Posted on Friday, January 31st, 2025 | By IndusInd Bank

With the Budget 2025 just around the corner, an important thought is lingering in the minds of taxpayers, businesses, and financial experts. That is: Will the government finally implement the Direct Tax Code (DTC)? The aim is to replace the existing Income Tax Act of 1961. This Direct Tax Code or DTC has been in discussion for several years. If implemented, the Direct Tax Code will simplify India’s complex tax system, reduce the burden of compliance, and also improve overall transparency.

The Union Budget 2025 is expected to play a significant role in the matter of the DTC. With its introduction, speculation about the possible outcomes is widespread. This article elaborates on what is the Direct Tax Code, what importance it could hold for you, and other income tax news.

What Is the Direct Tax Code?

Direct Tax Code is a reform that many expect to replace India’s 60-year-old Income-tax Act. The existing law came into being in 1961. It has grown more complicated over years. There are numerous amendments, sections, and provisions. At present, it contains 298 sections and 23 chapters.

DTC would aim to make India’s tax system simpler and modern. These are its main goals:

• Cutting down on the number of chapters and sections.
• Removing redundant provisions.
• Streamlining processes that will make compliance easier for individuals and businesses.

Central Board of Direct Taxes (CBDT) has been working on the new code. They have integrated over 6,500 suggestions from those with stake. This collaborative effort demonstrates government’s dedication. It is to construct a tax framework. This framework is said to be both efficient and friendly for the taxpayer.

Why Is the Direct Tax Code Important?

India’s present tax system is often criticised for being complex and challenging to navigate. For individuals, tax filing, along with understanding exemptions and deductions, can be overwhelming. Businesses, particularly small and medium enterprises, incur substantial compliance costs. This is a result of intricate regulations and taxations with multiple layers.

The DTC aims to address these difficulties by simplifying the tax laws and consolidating provisions. Areas of focus include:

1. Efforts to Simplify Tax Deducted at Source (TDS)

The current TDS structure is complex. This means it could potentially be consolidated. Broad categories numbering 3-5 with rates that are simplified could be the outcome.

2. The Aim of Reducing Litigation

A significant amount of revenue gets trapped in tax disputes. Simpler laws could promote more clarity. The DTC is expected to reduce the scope for such disputes.

3. The Push for Transparency

Streamlining the tax code could do away with ambiguities, thereby improving compliance. The existence of loopholes that lead to tax evasion could also reduce.

Challenges in Roll Out of the Direct Tax Code

The initiation of DTC will be an arduous process accompanied by substantial challenges. These include:

• A legislative overhaul is needed in the Income Tax Act. Tremendous changes to laws in existence need to be made. Time might be needed for drafting, debating, and passing the new laws in Parliament. Hence, it presents a prominent challenge in the roll-out of DTC.

• Planning for the transition period between the Income Tax Act and the Direct Tax Code will require adjustments. Taxpayers, businesses, and the tax department will need to get used to a new system. Proper arrangements are vital. Launching the Direct Tax Code in phases will help prevent disturbances to routine business operations.

• The government needs to balance addressing urgent economic issues for both short-term and long-term needs. These include the revival of growth and a focus on increasing consumption. Simultaneously, it must work towards long-term reforms. The Direct Tax Code is one such reform.

What Else Taxpayers Can Expect in Budget 2025?

Whether the Direct Tax Code (DTC) is introduced or not will be revealed soon. Meanwhile, taxpayers continue to hope for several crucial changes in the tax system being introduced in the new budget. Here is what can be expected.

1. Revised Standard Deduction and Tax Slabs

The government may revise the standard deduction limit under the new regime to ₹1,00,000 from the current level of ₹75,000. In addition, the government may introduce an additional tax slab for individuals with income between ₹15L and ₹20L under the new regime. These efforts are directed towards fighting inflation and boosting the purchasing power. Additionally, salaried taxpayers will enjoy relief.

2. Increase in Basic Exemption Limit

A major change expected in the Budget 2025 is the increase in the basic exemption limit to ₹5L. Currently, the new tax regime has a limit of ₹3L. However, this only applies to taxpayers that have opted for the new tax regime. Through this measure, the government aims to boost the disposable income for low-income households. This also means there might be changes in other tax slabs.  

3. Streamlining Compliance and Reducing litigation

The Budget 2025 may see the government taking measures to simplify tax filing processes. Currently, the tax filing process involves a complicated and tedious that many find confusing. This will reduce paperwork for individuals and businesses.

The government may introduce initiatives to resolve pending tax disputes efficiently. This ensures faster revenue collection and certainty for taxpayers. These changes show the government’s intent to modernise tax administration and address immediate economic concerns.

Also Read: Budget 2024 Highlights

Conclusion

Budget 2025 may not be the year for a full shift to DTC. But the government is likely to introduce reforms that align with the goals of the DTC. The updates aim to streamline compliance, reduce litigation and provide relief to taxpayers. All this indicates the government’s commitment to a modern tax system in India.

Direct Tax Code’s implementation is key. It is a reform that could reform India’s tax administration. Now what Indian taxpayers can anticipate are pragmatic measures in Budget 2025. These measures balance short-term economic needs with long-term structural goals. Be it through new tax slabs, streamlined compliance or gradual simplification of tax laws, the government does seem ready to get close to its vision. The vision is that of a transparent and efficient tax framework.

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.