Budgets come and go leaving behind a sea of unfulfilled expectations of taxpayers. However, Budget 2025 will long be remembered as one of the few Budgets that warmed the cockles of middle-class hearts. In fact, before the Budget was presented, an impression was created that it would benefit the middle class immensely and at the beginning of the Budget Session, PM Modi sought special blessings of Goddess Lakshmi for the poor and middle class. FM Sitharaman obliged, making incomes up to Rs.12 lakhs tax free ~ a benefit of Rs.80,000; for salaried individuals, who are entitled to standard deduction, income up to Rs 12.75 lakhs would be exempted from tax. This largesse is not for everyone; persons filing returns under the old tax regime will continue to be taxed as before.

Also, lower tax rates will kick in from assessment year 2026-27, that is for income earned during financial year 2025-26. Another positive is that taxpayers owning two houses that are not rented out may claim both to be self-occupied, which would save them from having to pay tax on notional rent receivable from the second house. TDS provisions have been am – ended so that there would be no TDS for interest payouts up to Rs.1 lakhs and rent payments up to Rs.50,000 per month. The increase in the threshold for collecting TCS on foreign remittances from Rs 7 lakh to Rs 10 lakh, will benefit many households that have children studying abroad.

Advertisement

The majority of other amendments in income-tax provisions are aimed at rationalisation and are not of much interest to laymen. Coming to indirect taxation, seven tariff rates have been removed for customs duty, leaving only eight tariff rates including the ‘zero’ rate. However, in most cases where Basic Customs Duty has been removed or reduced, a cess has been imposed leaving the amount of duty payable unchanged. A question that may agitate the minds of taxpayers could be as to why the old tax regime was not phased out for individuals, because the old scheme could be beneficial for a taxpayer only if he was entitled to deductions exceeding Rs 3,50,000.

Also, continuation of two taxation regimes unnecessarily complicates the filing process. The tax threshold of income-tax has been increased after a number of years in which we saw considerable inflation. A better idea could be to link the tax threshold and tax deductions to the consumer price index, as done by many countries, so that no unnecessary burden is cast on taxpayers. Then, despite rationalisation of direct tax provisions, a number of anomalies remain. For example, manufacturing companies pay tax @ 15 per cent, most other companies @25 per cent, but firms that run small businesses are taxed at a flat 30 per cent.

The Government has further complicated the taxation structure by a system of surcharges ~ individuals having an income exceeding Rs.5 crore pay surcharge @37 per cent, translating into a tax rate of 42.74 per cent, while companies with the same income pay a surcharge of 7 per cent, leading to an effective tax rate of 27.82 per cent. This anomaly is reflected in tax collections ~ in recent times, personal income-tax collection has consistently exceeded corporate tax collection. It can be expected that such questions would be addre – s sed in the new Income-tax Act that the Finance Minister has promised to bring in shortly. The changes in tax rates reflect the government’s endeavour to make the private sector the growth engine of the economy.

Since, private consumption was not showing expected growth because inflation and high rates of direct and indirect taxes had left the middle class with little disposable income, a tax break of Rs 1 lakh crore was provided, so that disposable incomes of the middle class may rise and consumption could receive a boost, which would, hopefully, reverse the trend of a falling GDP growth rate. Reviewing the performance of the Government for Financial Year 2024-25, as against the budgeted expenditure of Rs.48.20 lakh crore, Revised Es – ti mates (RE) put the total expenditure at Rs.47.16 lakh crore.

The total capital expenditure is estimated at Rs.10.18 lakh crore in RE 2024-25, against the budgeted figure of Rs.11.11 lakh crore. Revenue and capital receipts were also slightly less than the original budgeted figures, showing a slight slowdown in the economy. However, as a result of falling receipts and expenditure, the fiscal deficit was 4.8 per cent of the GDP, against a target of 4.9 per cent ~ which is not a bad thing. Worryingly, for Financial Year 2024-25, interest payments at Rs 11.38 lakh crore, would amount to 20 per cent of the total expenditure, making them the biggest item of expenditure.

Debt receipts of Rs.15.18 lakh crore would overshoot the budget target of Rs.14.73 lakh crore, and so would external borrowings. Closely following interest payments, Central Sector Schemes and Centrally Sponsored Schemes would consume funds of Rs 15.13 lakh crore and Rs 4.15 lakh crore, respectively.

The present Budget continues this trend. Out of total expenditure of Rs.50.65 lakh crore, interest payments would account for Rs 12.67 lakh crore and the Government would borrow Rs 15.66 lakh crores, increasing the interest burden for future budgets. Also, Central Schemes would consume Rs.21.64 lakh crore. The Fifteenth Finance Commission had recommended a review of Central Schemes, with axing of unviable ones. However, no review is in sight, and a host of new schemes have been announced in the current Budget. The Outcome Budget for 2025-26 is a lengthy document of around 280 pages which gives the financial outlay, outputs and outcomes statement, output and outcome indicators, and specific output and outcome targets but most importantly, omits to mention the achievement of targets set in Budget 2024-25.

In the final analysis, an efficient tax system along with a brake on profligacy can help the Government balance its books. A partial reform of the tax structure, by adjusting the minimum income liable to tax and lowering tax rates for small taxpayers has been attempted. Concomitantly, rationalisation of GST, with a view to lower its incidence on the poor, sho – uld follow. To reiterate, a complete review of the taxation structure should be done on priority because even in the third decade of the twenty-first century, Direct and Indirect taxes operate in different silos in India. It is significant to note that most advanced countries have integrated direct and indirect taxes long ago. The first report of the Tax Administration Reforms Commission, headed by Dr Partha sarthy Shome, submitted on 30 May 2014, suggested integration of the two Revenue Boards, but even this suggestion got lost in the turf wars of the finance ministry.

Government economists sitting in the rarefied environs of North Block, who double budget size every three years, could well heed the words of US economist Martin Feldstein: “Increased government spending can provide a temporary stimulus to demand and output but in the longer run higher levels of government spending crowd out private investment or require higher taxes that weaken growth by reducing incentives to save, invest, innovate, and work.”

(The writer is a retired Principal Chief Commissioner of Income-Tax)