Union Budget 2025: Expectations on a new tax landscape for growth and innovation

In Budget 2024, the government initiated a major review of the Income Tax Act, 1961, aimed at simplifying and modernising the tax system. The reforms focus on eliminating ambiguities, streamlining compliance, and establishing a more predictable framework, promising a fairer and more efficient tax regime. This initiative generated significant interest, as a stable and equitable tax system is crucial for investor confidence and economic competitiveness.

For Union Budget 2025, expectations include an emphasis on self-reliance while attracting foreign direct investment (FDI) amid global shifts toward localisation. Here are some of the key expectations.

1. Pillar 2 implementation: The OECD/G20 Inclusive Framework, comprising over 140 countries, introduced the Two-Pillar Solution in 2021 to address tax challenges in the digital economy. Pillar 2 establishes a 15 per cent global minimum tax rate for multinational enterprises (MNEs) with revenues exceeding EUR 750 million. India is expected to outline a roadmap for implementing this initiative, aligning with global practices.

2. Incentivising global capability centres (GCCs): India’s skilled talent pool and cost-effective resources make it an ideal destination for MNEs to establish GCCs. While state-specific policies exist, further measures under the income tax law — such as lower tax rates, clearer permanent establishment (PE) guidelines, and enhanced tax incentives for job creation, including skilled and high-paying roles — could drive economic growth and attract global investments.

3. Incentivising reverse flipping: Many Indian startups and MNEs have incorporated in global hubs like Singapore and the US for better access to capital and tax benefits. However, with India’s market becoming increasingly attractive, a trend of “reverse flipping” is emerging, driven by supportive government policies under FEMA and Company law. Domestic investor participation reached an all-time high of Rs 16,000 crore by mid-2024, positioning India as a financial powerhouse. To further accelerate this trend, tailored tax incentives — such as capital gains exemptions, reduced corporate tax rates, and simplified compliance — are expected.

4. Incentivising research and development (R&D): As technology evolves swiftly, fuelled by AI, investment in R&D is crucial. India currently spends only 0.6 per cent of its GDP on R&D, lagging far behind the US (3.4 per cent) and China (2.4 per cent). Therefore, the Budget is expected to prioritise measures like reintroducing weighted deductions, offering R&D tax credits, and providing capital gains exemptions for R&D investments to boost India’s innovation ecosystem, attract global talent, and position the country as a leader in advanced technologies.

5. Promoting mergers and acquisitions (M & A): A simplified tax regime is key to stimulating M&A thereby fostering economic growth. Currently, utilisation of carried-forward losses during amalgamation requires retaining three-fourths of fixed assets for five years, posing challenges in today’s fast-evolving technological landscape. Additionally, loss carry-forwards are restricted to specific industries. There is growing expectation that these conditions will be relaxed and rationalised across all sectors, potentially boosting M&A activity.

6. Rationalising carry-forward and set-off provisions: Currently, brought-forward business losses cannot be offset against other income heads, while unabsorbed depreciation faces no such restriction. Policymakers are expected to address this inconsistency by aligning the treatment of both. Additionally, losses from the sale of depreciable business assets are treated as short-term capital losses, limiting their offset against business income. Policymakers are expected to realign its treatment as a business loss, enabling offset potential against business income.

7. Promoting limited liability partnerships (LLPs): LLPs are gaining popularity among small businesses due to their simplified structure. However, current tax benefits, such as the reduced corporate tax rate and the ability to carry forward losses during amalgamation, are only available to companies. With the rising significance of LLPs in the economy, Budget 2025 is expected to extend these benefits to LLPs, boosting their growth and competitiveness.

8. Streamlining compliance for non-residents: Non-residents earning specific incomes under Section 115A are exempt from filing tax returns if taxes are withheld at domestic law rates. However, this exemption does not apply when taxes are withheld at treaty rates, leading to unnecessary compliance burdens. Additionally, there are no specific or simplified tax return forms for non-residents. Budget 2025 is expected to rationalise these provisions, addressing inefficiencies to ease compliance and foster a seamless business environment.

9. Unified taxpayer grievance redressal: Despite the introduction of the Taxpayers’ Charter in Budget 2020, an efficient grievance redressal system remains absent. Policymakers are expected to implement an integrated mechanism encompassing various authorities, including assessing officers, CPC, and NFAC, for effective resolution of taxpayer issues.

The upcoming Budget 2025 represents a pivotal opportunity to chart a new landscape, aligning India’s tax system with global standards and lay the foundation for transformative reforms.

Rajesh Srinivasan is partner and Ananthakrishnan N associate director, Deloitte India