Ahead of the Budget, major changes in the tax structure are under discussion.
New Delhi: 2025-29 will witness a speeding up of the reform process across several sectors. Major changes in the tax structure are under discussion so as to make the burden of taxation lighter and less onerous in terms of regulatory requirements. Legacy anomalies such as an outdated Waqf Act in a secular society, as the absence of a Uniform Civil Code (UCC) are in line for reforms better suited to the times. The Waqf Act for instance could be argued as going against the Constitution of India. Both the Waqf Act as well as the absence of a UCC are in line for changes. Business regulations are on track for changes, so as to remove the colonial-era ubiquity of excessive criminalisation in law even of what ought to be regarded as standard business practices in India, practices that are commonplace in advanced democracies such as the US. When the UPA was adding to rather than reducing the colonial legacy, the present columnist had warned at the time that regressive edicts have a boomerang effect on those enacting them. No political party in a democracy stays in power forever. The Congress Party lost its majority in 1977, as did the UPA to the Modi-led NDA in 2014. When political winds shift and the government changes, those who supercharged a process of extending criminal law and decreeing harsher penalties could be on the receiving end. Leader of the Opposition Rahul Gandhi appears to have done little to get dropped the contra-democratic provision of criminal defamation during the UPA days. He was himself subsequently found guilty years later by a court of the same offence, and given the maximum penalty. PM Modi has done away with several colonial-style statutes and decriminalised several fields of activity. The making of such progressive changes will continue. As a consequence of the colonial legacy that was once pervasive across the legal structure, several potential investors across the decades had, instead of investing in India, taken their money and themselves out of the country. To promote an investment-friendly ambience, fear is being replaced by business confidence, and this is taking place with increasing force during Modi 3.0, where progress has been especially rapid in the field of startups.
This columnist had warned before 2024 that the effort of the Anti Modi Movement (AMM) was to restrict the Lok Sabha tally of the BJP to 220 in the Lok Sabha. The AMM came within 20 seats of succeeding in their mission in the last Lok Sabha polls. With the 2029 Lok Sabha polls as their target, headwinds are being sought to be created against Prime Minister Modi by those seeking to push India back into the past era of low growth and social divisions. In the process, they seek a return of the country to an era not just of slow growth, but of high inflation and shrinking investment both domestic and external. PM Modi is determined that such a path should never be allowed to come back. In such a process, tax reform assumes significance. Beginning during the 1950s, citizens were at the receiving end in tax policy. In terms of Purchasing Power Parity, exemption limits as well as tax slabs remained sticky, with the consequence that individuals with lower and lower levels of real income in terms of what money retained by them after taxes can buy remained at tax rate slabs far higher in real terms than what they earlier were. Greater rise in exemption limits and in the income limits of slabs for imposing higher rates of direct tax are needed. The good news is that the Union Budget 2025-26 being presented by Finance Minister Nirmala Sitharaman on February 1 is anticipated to make a strong start in this direction. Exemption limits and slabs are slated to be brought closer in sync with real rather than money income levels.
The private sector in India in 1947 was poised to enter the Numero Uno position in Asia, but was cut to pieces and shrunk through state takeover and monopolies during the 1950s. After the passing of Sardar Vallabhbhai Patel in 1950, whatever checks there were on Soviet-style policies disintegrated. Such trends multiplied thereafter so that the Sarkari Sector could get the “commanding heights” of the economy. After 2014, the private sector has been encouraged to play not just an important but the primary role in preference to the Sarkari Sector.
The past should never be forgotten. In the 1970s, marginal tax rates for individual income rose to 97.25%. When enquiries were made about how individual enterprises would survive such rates, the reply in private from the politicians responsible was that their own incomes were almost 97.25% in cash, on which no tax was paid. So they did not care about high rates. While the dishonest reaped the benefit of evading taxes, the honest were penalised. When the advantages of being dishonest far outweigh the risks associated with it, illicit income rises. Elsewhere, since 2014 and especially after 2019, the policy being followed by Prime Minister Modi is geared towards making it more and more difficult to resort to cash transactions in several fields of activity. Once income tax slabs come down in the manner anticipated by supporters of the Prime Minister, any remaining incentive for concealing income will diminish.
Several GST reforms have so far been held up by opposition from a few state governments, but such reforms too are anticipated to enter into the fast lane during this year itself. Regressive rates, such as rates that are constant across all income classes of GST taxpayers, may be replaced by progressive rates in the interests of equity. The lower the rates, the higher will be the compliance and hence the collections. High rates cause the proliferation of practices such as keeping duplicate receipt books where receipts without GST in the total will be more those with GST. Such illicit receipts are of no value in proving ownership subsequently. Finance Minister Sitharaman and the ministry which the FM heads are working closely on matters of GST reform with the PM and the Prime Minister’s Office to actualise his goals.
A loophole caused by the increasing difficulty of using cash in substantial amounts for purchases in India has been the spending money of unaccounted money abroad that was transferred through hawala channels. The good news is that cash is being accepted in fewer establishments in India. Should payments be made while abroad by Indian nationals through credit or debit cards supplied by a link in the hawala chain, information on these could be made available to authorities in India by governments complying with requests for such input from the Government of India. Conversion into a digitalised economy is gathering speed thanks to PM Modi, with even pushcart vendors becoming expert in getting and making digital payments, although not as much as their sons. Opportunities in tech are rising in India, and nationals as well as those settled abroad are playing an indispensable role in the development of Artificial Intelligence as an aid to human development. EAM Jaishankar has been diligent in ensuring that India navigates successfully through the transition of the US to the Trump administration, which is by its nature transformational in the way the Modi government has been in India. Overall, the objective seems clear. Not 220 but at least 340 Lok Sabha seats for the BJP in 2029, and a tally past 400 for an expanded NDA.