Indian Budget 2025 | Pre-Budget Expectations

Pre-budget Expectations

BACKDROP

Despite international concerns, higher than anticipated inflation, low domestic employment growth, and lower-than-expected urban expenditure, FY 2024–25 has shown the Indian economy's resilience.

The citizens of India exhibit a long-term optimism contrasting with a short-term pessimism, reflecting a remarkably similar scenario to that observed at the same time last year.

This is chiefly evidenced by the unemployment rate and elevated inflation, alongside the reduction of employment opportunities.

The challenges associated with supply chain disruptions and the significant demands placed on MSMEs to secure timely working capital continued unchecked in 2024, mirroring the circumstances observed in 2023.

On the contrary, all governmental indicators imply a positive trend, including tax collections that exceed initial forecasts for the entirety of 2024, especially in GST, increased manufacturing activity driven by the PLI Scheme, and a hopeful perspective on India's economic trajectory.

OVERALL

According to EZTax, the budget for 2025 is expected to allocate substantial resources to advance the 'Make in India' initiative, aiming to establish a credible alternative to the waning Chinese manufacturing sector.

A sustained emphasis on supporting the middle class is expected; proposals to make agriculture a viable alternative to the reduced job market.

Projected within Budget 2025, similar to Budget 2024, are tax frameworks designed to encourage investments in startups focused on national construction, agricultural, and defence products and services.

In the absence of new taxes, it is expected that prudent fiscal measures will be enacted, including the establishment of a specialized entity aimed at enhancing tax enforcement and augmenting revenue collection. It is expected to use analytics from UPI payments to mine the non-compliant businesses and individuals.

 Expected to promote self-reliance in defence and technology to promote jobs & middle-class tax reduction to boost urban spending.  

GOVERNANCE

1. The NDA administration has consistently pursued the principle of "minimum government and maximum governance" for more than ten years, thereby facilitating the execution of bold reforms such as the privatization of non-functional public sector undertakings, the automation of processes, and the centralization of governmental functions to reduce expenditures and enhance governance.
2. This is expected to continue for another budget cycle due to the lack of market support and the prevailing challenges.

MSMEs

1. Given the reduced expectations on GDP growth, initiatives or schemes aimed at facilitating MSMEs in securing affordable working capital and appropriate financial resources will continue.
2. Professional Tax (PT) and ESI collection and compliance is expected to be simplified, as the current system causes bureaucratic headaches for many small businesses.
3. A one-time waiver of penalties is anticipated for all MSMEs that have failed to adhere to tax compliance regulations.
4. In accordance with the projections outlined in the 2022 budget, it is advisable to enhance the local sourcing mandates for significant public enterprises, governmental bodies, and multinational e-commerce platforms in order to invigorate the MSME sector. This is significant opportunity given how Trump administration is restricting it's sourcing to enhance US economy.
5. The advancement of infrastructure aimed at the establishment of workhouses and additional workspaces within industrial clusters.
6. Motivations for the advancement of innovation, the embrace of technology, and the digital transformation of operations using ONDC or similar by micro, small, and medium enterprises.
7. Formulating approaches to address the recent limitations set forth by the RBI regarding NBFC lending practices to MSMEs would provide significant alleviation, which is more than necessary this year as we see not so good signs of global economic output.
8. Enhance the incentives allocated to start-ups that engage in innovation and contribute to employment within the defence, agriculture, and national construction sectors.
9. Considering the dynamics of rural economies, it is prudent to contemplate a reduction or modification of GST rates on essential goods.

GST

1. GST Compliance: It is advisable to maintain stability in the processes and systems to prevent unnecessary alterations. The issue facing the economy is not the GST; rather, it lies in the demand. Implement comprehensive GST, incorporating the reverse-charge mechanism, to ensure accurate ITC.
2. Rationalization of GST rates: The need for a systematic approach to GST rates: At present, India operates under a multifaceted GST framework characterized by various tax brackets. The systematic adjustment of GST rates is undoubtedly a pivotal reform expected in Budget 2025, possessing considerable potential to improve the efficiency and efficacy of India's Goods and Services Tax framework.
3. Amnesty Scheme: The introduction of an amnesty scheme within the framework of GST is essential for the resolution of outstanding demands in accordance with recent GST notices, as well as for the submission of pending returns.

 Theme of the Budget 2025 is expected to be Make in India 

INCOME TAX

1. The expansion of the tax base and the simplification of tax compliance should be the primary objectives of the 2025 Budget and income tax reforms in India.

2. The Direct Tax Code is anticipated to be introduced in Union Budget 2025, and the effective date of application may be disclosed, atleast a draft proposal.

   It is anticipated that the Direct Tax Code will simplify the tax structure, enhance efficiency, and decrease litigation. Read more on DTC 2025 expectations at DTC - Direct Tax Code 2025 Portal

3. It is anticipated that Budget 2025 will declare the complete implementation of the new tax regime and the sunset of the previous tax regime, thereby facilitating tax compliance.

   We have been recommending this for last couple of years. As of last year, more than 72% choose New Tax Regime (NTR) while filing income tax returns (ITR).

4. The increasing practical inflation is causing extreme concern for the Middle-Class population in India. The middle class would receive much-needed respite if the rebate u/s 87a were to be increased to Rs 9 lakhs of income. This will translate a tax saving of Rs. 33,800 from prior FY.

   This measure would not only alleviate the tax burden but also increase consumer expenditure and stimulate the overall economy.

5. It is anticipated that Budget 2025 will offer additional clarification regarding the capital gains "relief" that was introduced in Budget 2024.

6. The introduction of a new tax rate 25% for taxpayers with an income between 15 and 25 lakhs under the new tax regime.

   Alternatively, the current 30% base rate could be increased to Rs 20 lakhs.

7. The reporting of foreign income and foreign taxes must be aligned with the calendar year, rather than the financial year.

   This would facilitate the reporting process for taxpayers with foreign income and reduce confusion. This would also facilitate the transmission of information between tax authorities in India and other countries by ensuring that Indian tax reporting is consistent with international standards.

8. Encourage reimbursement for a small family of four, consisting of a wife, spouse, and two children. Establish "Family" as an IT return category for incentivized family tax filing.

   The importance of family in our nation should be reflected in our IT compliance.

9. The TDS provisions regarding payments to non-resident Indians (NRIs) such as rental income and property purchases should be simplified.

EASE OF DOING

1. Ease of Starting Business: The Facilitation of Business Initiation: It is proposed that for limited liability partnerships (LLPs) and private companies generating an annual revenue below Rs. 10 crores, the majority of professional certifications should be abolished. Concurrently, stringent compliance standards ought to be implemented for annual revenue surpassing Rs. 10 crores.
2. Ease of Doing Business: Facilitation of Business Operations: Implement Aadhaar-based eSignatures and Know Your Customer (KYC) protocols for Income Tax Returns (ITR), and Registrar of Companies (ROC) Compliance. This will enhance usability and mitigate the risk of DSC fraud.

3. Simplification of Compliance: Private limited companies must complete numerous filings annually. Moreover, the repercussions for failing to meet the deadlines are exceedingly severe.

   The forthcoming Budget 2025 is anticipated to introduce a more streamlined compliance process for private limited companies, alongside a rationalization of penalties. An amnesty scheme should be instituted for private limited companies, allowing them a singular opportunity to address all outstanding compliance matters.

LOANS

1. Root Cause of Loan defaults: Strengthen lending asset valuation standards. Link and enforce GST turnover in income tax files immediately to avoid overstated turnovers and bad loans.
2. Cost of Money: Promote zero-MDR government payment and wallet services (Rupay and UPI). All payment gateways should implement this immediately as not all have done so after three years. Paper currency and digital currency should have no transaction expenses. The 2.5% MDR makes digital Rs. 100 Rs. 97.5 today (need to fix it soon).
3. EZ Loans to SMEs: Allow GST turnover and sector-specific variables to determine online EZ Loans. Eliminate non-material third-party / professional balance sheet certifications to create STP loan criteria.
4. Cost of Credit: 1 year of interest-free, collateral-free credit for qualified MSMEs (providing components to military space) with credit history or collateral.

HIGHER EDUCATION

1. In last year's pre-budget projections, we suggested the Institutional Industry Quotient (IIQ) for scaled innovation in India that boosts GDP. It remains a low-cost, high-impact effort.
2. Increase the institution-industry quotient (IIQ) for synergy and innovation. Increased funding must include IIQ. Start with the institution and encourage entrepreneurship.

BANKING SECTOR

1. Re-enforcing asset value to reduce NPAs, privatizing some banks, and redefining banks' roles as strategic rather than infrastructural will provide significant funds for the government to invest in next-generation infrastructure.

AUTOMATION

1. Enhance the domestic sourcing mandate for public sector expenditures to promote automation prospects for domestic technology companies and startups.

SUMMARY

In conclusion, despite a decline in GDP growth from 7% to 6.7%, the economy demonstrates signs of growth, resilience, and confidence, particularly within the rural agricultural sector.

Urban spending appears to be declining slightly due to uncertainty in the job market. However, the long-term confidence in the Indian economy remains exceptionally robust.

The budget should prioritize increasing liquidity, easing the tax burden on the middle class for short-term gains, expanding the tax base, and enhancing defence spending for long-term stability, all while maintaining fiscal prudence.