Budget Expectations 2025: Personal tax

Divya Baweja, Partner, Deloitte India

Current environment

• The current budget comes just 6 months after the last one, announced in July 2024 post-elections. In July 2024, the Finance Minister announced a comprehensive review of the Income-tax Act to make the Act concise, lucid and easy to read and understand. The objective was also to reduce disputes and litigations, provide tax certainty to the taxpayers and bring down the demand embroiled in litigation. The Finance Minister aimed to complete this review within 6 months.

• The Central Board of Direct Taxes (CBDT) formed a committee in this regard and invited suggestions from taxpayers, and an overwhelming 6500 suggestions have been received. Hence, one needs to monitor the changes incorporated in the interim before the announcement of the Union Budget 2025.

• In the last budget, the government also announced the Employment Linked Incentives and the Internship Scheme to encourage employment and the skilling of youth in the country. Efforts are also being made to develop a comprehensive and well-thought-out welfare and social security scheme for the gig workforce.
   

Expectations:

Top Ask: Ease of tax compliance for purchase of property from Non-Residents (NRs)

Simplify the TDS compliance for home buyers where the seller is an NRI

The current provisions require home buyers to withhold 1 percent of the purchase value as Tax Deducted at Source (TDS), where the property value is INR50 lakh or more. The TDS deposit process is simple and convenient if the seller is a resident (i.e., with the challan-cum-statement in Form no.26QB).

If the seller is an NRI, tax is withheld at a higher rate, and the buyer is also required to obtain a TAN, deposit the tax deducted and file e-TDS returns. While the purchase and sale of the property is not a recurring transaction, obtaining TAN solely for the mentioned purpose may result in more inactive TANs.

To address this issue, the TDS process applicable for cases where the seller is an NRI may be eased by introducing these challan-cum-statements similar to those applicable for a resident seller.

• Enabling tax payments from overseas bank accounts (removing the requirement of having a bank account in India)

At present, tax payments in India are accepted through various modes, such as net banking, debit cards, NEFT/RTGS and over-the-bank counter. The bandwidth has been broadened to include many Indian banks and NEFT/RTGS payments and UPI payments. However, these are possible with an Indian bank only, which makes it difficult for an NRI to make tax payments.

NR taxpayers residing overseas would benefit if they were allowed to make tax payments from their overseas bank accounts.

• E-verification using OTPs to foreign mobile numbers

The introduction of e-filing of tax returns has improved the process, saving both time and effort. The last mile step of e-filing is the e-verification process, which is restricted to having accounts with net banking/demat facilities with specified banks, Aadhaar OTP to India mobile numbers, digital signature certificates, etc.

NR individuals who need to complete the tax return filing process could benefit if the e-verification process can be extended via OTP to foreign mobile numbers or have two-factor authentication (different OTPs for foreign mobile numbers and email addresses). This would reduce paperwork and administrative tasks, such as tracking the ITR-V receipt by the tax office and applying for condonation of delays. Further, the time limit of 30 days should be extended to facilitate verification through physical mode.

• Credit of tax refund to overseas bank accounts

NR individuals, especially foreign nationals, who leave India after closing their bank accounts in India could get a refund for various reasons. The tax refund is payable only to pre-validated Indian bank accounts. Any delay in refund processing could cause bank accounts (even if open under the NRO status) to go into dormant mode. This would prevent the refund from being credited to the account. To alleviate the difficulty, foreign bank accounts should be considered for tax refunds for PAN-holders registered as NR/foreign nationals.

Rationale and outcome: Ease of administrative hassle for the taxpayers

Policy recommendations

Recommendation #1: Treaty relief for Foreign Tax Credit (FTC) at the time of tax withholding

Taxpayers are allowed tax credits/other benefits in terms of taxes paid outside India, subject to the fulfilment of certain conditions. Currently, taxpayers can claim FTCs in their income tax returns. Hence, these taxpayers end up with a huge refund as there is no specific provision for the employer to consider FTC at the time of tax withholding. To provide legitimate relief to the taxpayers and avoid huge refunds and related cash flow issues, guidelines can be issued for considering benefits under Section 90 at the time of tax withholding and disclosing them appropriately in eTDS returns, especially where such FTC is on employment income.

Outcome: Ease the administrative challenge for taxpayers in claiming refunds in return

Recommendation #2: Revised/belated return (Deadlines)

o The due date for filing the revised or belated returns is 31 December of the following financial year.
o In a situation where the assessee is a Resident and Ordinarily Resident (ROR) in India claiming an FTC, it is difficult to finalise the FTC to be claimed in his India tax return when the return for the calendar year is not yet finalised in the overseas jurisdiction. For example, in the US, returns for 2024 would be finalised only in April 2025. However, in India, the revised/belated returns can be filed for FY2023–24 only until 31 December 2024 to claim the credit for taxes paid from Jan to March 2024.
o If the due date for the belated/revised return filing is not extended, the FTC claimed on the return may not be final as it would be claimed on an estimated basis on the taxes withheld at source in the overseas jurisdiction.
o The due date for filing the revised belated/revised return must be extended at least until 31 March instead of 31 December.

Recommendation #3: Clarity in taxation of stock options

o Section 17(2) provides for taxing stock award benefits as a perquisite. However, the section lacks clarity regarding the taxation of stock awards in the case of NR employees who have rendered a part of services overseas during the grant period to vest. The principle that the benefit accrues over the vesting period is indicated based on court rulings and OECD guidelines.
o However, in the absence of clear guidance, the claim of the taxpayers is denied at the assessment stage by the tax officer. While at the appellate level, claims are accepted, the taxpayers have to go through unnecessary hardship of litigation.
o Clear guidelines stating rules for apportionment of this benefit based on the grant to vesting period should be provided on the lines of the FBT Circular No. Circular No 9/2007 dated 20 December 2007. Further, only the place of rendering services should be considered for apportionment.

Recommendation #4: Valuation rules for perquisite in the form of electric vehicles (Rule 3)

o Rule 3 of the Income tax rules provides the valuation of motor car benefits, where the employer reimburses running and maintenance expenses. The valuation principles consider the cubic capacity of the engine to determine the perquisite value and typically cover only conventional fuel cars; no separate criteria have been laid out with respect to electric vehicles.
o The stimulus provided by the government to electric vehicles includes tax deduction for interest on loans taken to buy electric vehicles, lower GST and exemption/subsidised road tax/registration costs. With the availability of infrastructure facilities such as fast charging stations in public places such as metro stations, electric vehicle usage is increasing.
o Given the encouragement to use electric vehicles, Rule 3 could be suitably amended to bring in the valuation mechanism for hybrid and electric vehicle maintenance (recharging batteries in lieu of fuel) and criteria based on battery capacity (besides the engine capacity).
o This valuation mechanism would help bring much-required clarity, which could, in turn, promote the use of electric vehicles and even pave the way for a greener future.

Recommendation #5: Robust appellate disposal process

o On account of COVID-19, there is a significant pendency in appeal disposal, especially at the level of Commissioner of Income Tax (Appeals). The pendency extends more than 6 years in some cases. To reduce the pressure, the Finance Minister introduced the Vivad Se Vishwas Scheme, cleared dues for petty amounts from the tax portal and introduced the FACELESS Appeal disposal. While this has eased taxpayers' hardship to some extent, the larger issue of pending appeals and refunds remains.
o Hence, the government should adopt a robust machinery with timelines for expediting the process and ensuring a fair redressal.
o Appeals should be resolved promptly in favour of the taxpayers when there are covered matters, especially if the tax officer takes positions that go against judicial decisions.
o A process for automated instructions to issue refunds for cases disposed in favour of the taxpayer.

Social security and Labour code Saraswathi Kasturirangan, Partner, Deloitte India

Expectations

Ask #1: The Labour Codes need to be made effective, considering aspects such as the changing workforce, the need for consistency in interpretation and enhancements in ease of business and technology use.

• Specific measure: Tax and social security-related regulations are in place for the general employee class, which helps them avail certain benefits subject to few anomalies. The regulatory environment must be upgraded to support workforce flexibility and technological innovation. It should also bring consistency in provisions, enabling ease of doing business for the establishment while ensuring compliance with regulatory requirements. The Labour Codes also bring in additional and newer types of workforce within the social security umbrella thereby increasing coverage of the country’s working population. All of the above call for an urgent need to enforce the Labour Codes at the earliest.

• Outcome: Consistency must be maintained in interpreting tax and regulatory provisions, considering the evolving trends in work and innovation, as these factors impact many individuals and promote economic growth. This measure will help reduce compliance costs, enhance ease of doing business and ensure regulatory clarity. It will also promote uniform interpretation of laws, encourage investment and foster workforce adaptability to emerging trends. Consistency in provisions and clarity in requirements lead to mutual benefit for businesses and regulators, minimising litigation and paving the way for growth through collaborative working.

• Rationale: India’s rapidly changing workforce, increasing focus on start-ups and globalisation demand regulatory agility and uniformity. Although there are regulations in place, both for the employer and employees at large, there is a lack of consistency across the legislation, leading to diverse interpretations and multiple compliance requirements. Besides, changes in workforce trends and in the environment call for a need to revisit social security-related provisions and streamline the process with the help of AI automation and digital platforms. The tax provisions also need to address the concern of the employer/workforce to promote ease of business. A transparent regulatory framework addresses generic issues and minimises controversies and tax-saving schemes.

Ask #2: Widen the social security benefits for the newer workforce, such as gig and platform workers, via Labour Codes

• Specific measure: Workers in the organised sector are entitled to social security benefits such as Provident Fund, Employees’ State Insurance/group medical insurance and maternity benefits. While the contribution is based on the employment relationship and the schemes are funded partly/mainly by the employer, the primary objective of these benefit schemes is to entitle these workers to financial benefit/support at times of distress (such as death, sickness, maternity and temporary disability).

• Measurable outcome: Organisations that employ a newer workforce can contribute to designated schemes or funds by paying a fixed amount or rate for each individual within that workforce. These schemes or funds could be in the form of life insurance policies/retirement/pension plans/medical insurance policies/emergency funds (specific to cater to gig and platform workers) from which these individuals can draw financial support/benefits in times of need.

• Rationale: With the rise of newer types of workforce, the concept of employer-employee relationship is on the wane. These are not restricted to the lower strata involving minimum skill sets but include niche services requiring specialised knowledge and experience. With more individuals opting for freelance work, these jobs provide a livelihood to a sizeable population. Therefore, this workforce section must also be brought within the ambit of social security. Additionally, other sections of unorganised workers, such as those engaged with self-help groups and domestic helpers, need to be provided with social security to safeguard against challenges/loss from unforeseen risks. One should also bear in mind that some of these jobs (such as drivers/food delivery agents) could involve significantly higher risks, such as accidents/death/disability, thus making social security benefits indispensable to such a workforce. These individuals cannot be devoid of benefits merely because they do not have an employer/employment relationship. As the Labour Codes recognise these new types of workforce, it is only apt that the workforce is provided with due benefits through appropriate mechanisms and infrastructure.

Contributed by Radhika Viswanathan, Deloitte Haskins & Sells Chartered Accountants LLP