Exclusive | Union Budget 2025 likely to simplify direct tax laws in phased manner

The government is gearing up for a significant overhaul of direct tax laws, according to sources. The upcoming Union Budget 2025 could mark the start of a phased approach to simplifying these laws, aiming to create a more streamlined and taxpayer-friendly system.

According to sources, the proposed reforms will focus on simplifying the language of tax laws, improving compliance processes, and removing outdated provisions. The phased rollout is designed to give industries and taxpayers sufficient time to adapt, ensuring a smoother transition.

One key area under review is the rationalisation of Tax Deducted at Source (TDS) provisions. If approved, this could reduce the current array of TDS slabs to 3-5 broad categories with simplified rates.

According to Sreenivasulu Reddy , Tax Partner, EY India, the purpose of comprehensive review of the Income tax Act (Act) is to make the Act concise, lucid, easy to read and understandable. Accordingly, the simplification could involve rationalisation of TDS rates, simplification of language, reduction in compliance burden and litigation.

“Currently, there are various categories and the TDS rates under the current income tax laws and rationalizing TDS rates and categories would streamline withholding processes, making compliance easier for businesses and individuals alike. Also, these steps would help reduce undue hardships caused by litigation, promote efficient dispute resolution, and ultimately provide greater tax certainty to taxpayers,” he said.

The simplification initiative is also expected to address the persistent issue of tax litigation. The government is exploring measures to reduce the burden of disputes and tackle the backlog of cases. As of FY24, tax disputes amounting to approximately ₹21 lakh crore are pending at various levels.

The move to simplify tax laws was first announced in the full Budget of 2024. Following this, an internal panel was set up in July 2024 to conduct a comprehensive review of the Income Tax Act. To date, the panel has received over 6,500 suggestions, which are being closely examined.

With the Union Budget 2025 on the horizon, all eyes are on how these proposed reforms will reshape the tax landscape, impacting industries, taxpayers, and the economy at large.