Reshaping India’s Fiscal Future: The Transformative Impact of Recent Tax Reforms

~Sura Anjana Srimayi

INTRODUCTION

India’s journey toward a $5-trillion economy is being underpinned by a sustained and strategic focus on fiscal reform. The country’s tax landscape—historically criticized for its complexity and litigation backlog—is now undergoing one of its most significant structural transformations since the introduction of the Goods and Services Tax (GST).

The recent reforms, outlined in the Finance Bill 2024-25 and subsequent GST Council resolutions, are guided by three primary objectives: simplifying compliance for taxpayers, reducing compliance costs for businesses, and enhancing India’s competitiveness in the global economy.

These reforms span direct taxation (income tax), indirect taxation (GST), and cross-border transactions, collectively aimed at stimulating domestic consumption, reducing uncertainties for investors, and fostering an ecosystem conducive to economic growth.

Direct Tax Reforms: Simplifying Taxation for Individuals

A cornerstone of the recent direct tax reforms is the New Tax Regime (NTR), which has now been made the default for individual taxpayers. This shift addresses long-standing concerns over the Old Regime’s complex structure of deductions and exemptions that often dictated investment decisions.

Key Enhancements in the New Tax Regime:

• Amended Tax Slabs and Rebate: The basic exemption limit has been raised from Rs 2.5 lakh to ?3 lakh. The tax rebate under Section 87A has been increased, resulting in zero tax liability for individuals earning up to Rs 7 lakh (and up to Rs 7.5 lakh for salaried taxpayers, including the standard deduction).

• Increased Standard Deduction: Salaried employees and pensioners under the NTR can now claim a Rs 75,000 standard deduction, up from the previous Rs 50,000 available only under the Old Regime.

• Surcharge Rationalisation: For High Net-Worth Individuals (HNIs), the top surcharge rate has been reduced from 37% to 25% for individuals earning above Rs 5 crore who opt for the NTR.

Impact on Taxpayers and Savings

These reforms provide immediate relief to the middle-income segment, potentially boosting disposable income and consumer spending—a key driver of GDP growth. While individuals with substantial investments may still find the Old Regime advantageous, the NTR’s simplicity significantly reduces compliance complexity, particularly for younger or newly employed taxpayers.

Rationalizing Capital Gains and Minimizing Litigation

The government has also introduced significant measures to simplify capital gains taxation and reduce the litigation backlog:

• Uniform Holding Period & Indexation Adjustments: The holding period for securities to qualify as Long-Term Capital Gains (LTCG) has been standardized at 12 months. Indexation benefits have been removed for certain assets, simplifying computations, though potentially raising effective tax rates on non-equity financial assets.

• LTCG Rate Adjustments: LTCG on listed equity shares (Section 112A) has seen a marginal rate increase, accompanied by a higher exemption limit from ?1 lakh to ?1.25 lakh, striking a balance between investment incentives and revenue generation.

Reducing Litigation Burden

The Vivad se Vishwas Scheme 2024 offers taxpayers a streamlined mechanism to resolve outstanding tax disputes by paying a proportionate amount of the disputed tax with complete interest and penalty waivers. This initiative aims to unlock frozen revenues, reduce compliance costs, and improve administrative efficiency.

Indirect Tax Reforms: GST 2.0 and the Consumption Boost

The Goods and Services Tax has entered its next phase of evolution, often referred to as “GST 2.0”, marked by extensive rate rationalization to simplify taxation and stimulate demand.

Key Features:

• Two-Slab Structure: The GST Council has largely consolidated the four-slab system into two main rates: 5% and 18%, with exceptions for nil-rated items and luxury/sin products.

• Consumer and Industrial Benefits: Household essentials, consumer durables, cement, and small vehicles have seen reductions in GST rates. Lower input costs for manufacturers and price cuts for consumers are expected to boost production and private consumption.

• Economic Impact: These reforms are likely to drive year-round consumer activity, supporting employment and economic growth while requiring careful monitoring of revenue stability.

Corporate Taxation and Global Competitiveness

India has also reoriented its fiscal policy to attract Foreign Direct Investment (FDI) and bolster domestic corporate competitiveness.

Key Measures:

• Streamlining International Tax Norms: The Equalization Levy (2% tax on e-commerce operators) has been removed, and the headline corporate tax rate for foreign firms has been reduced from 40% to 35%, signaling a pro-business environment for multinational companies.

• Incentivizing Growth Hubs: Tax incentives for units operating under the International Financial Services Centre (IFSC) have been extended, supporting GIFT City’s ambition as a global financial gateway.

• Startup Relief: Tax holidays for eligible startups under Section 80-IAC have been extended for firms incorporated until April 1, 2030, reinforcing government support for innovation and entrepreneurship.

CONCLUSION

The recent wave of tax reforms represents a decisive shift in India’s fiscal policy, emphasizing simplicity, compliance, and economic stimulation.

• The New Tax Regime empowers taxpayers with more disposable income and reduces compliance burdens.

• GST simplification encourages consumption, reduces manufacturing costs, and supports broad-based growth.

• Reforms in corporate and cross-border taxation enhance global competitiveness and attract investment.

Challenges remain—educating taxpayers on regime choices, monitoring state revenue performance, and ensuring long-term fiscal stability—but the trajectory is clear. By minimizing friction in the tax system and aligning international tax standards, India is transforming taxation from a bottleneck into a catalyst for economic growth. These measures are not just about revenue collection; they represent a transparent, predictable, and competitive framework for realizing “Viksit Bharat 2047.”

"Unlock the Potential of Legal Expertise with LegalMantra.net - Your Trusted Legal Consultancy Partner”

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc