The Income-tax Act, 2025, marks a comprehensive overhaul of India’s six-decade-old direct tax law, replacing the Income-tax Act, 1961, with a simplified, principle-based framework. Aimed at reducing litigation and improving tax certainty, the new law seeks to streamline provisions, remove redundancies, and align tax administration with a digital-first compliance environment, while retaining the core structure of India’s income tax system. The forthcoming Budget 2026 must aid its transition.Sameer Gupta, National Tax Leader, EY India, said, “The direct tax framework is expected to undergo critical changes aimed at enhancing certainty and compliance. Detailed guidelines and FAQs should be provided to minimize confusion during the transition from the old I-T Act to the new one. This is crucial to avoid litigation and ensure a smooth transition for taxpayers.”EY-India also outlined certain direct tax reforms, which if introduced, could unlock private capital, enhance competitiveness, and support inclusive economic growth.• Certainty and predictability: Establishing a stable tax environment by minimizing frequent changes in tax rates is essential. A predictable tax policy builds trust and improves compliance, which is vital for enhancing revenue collection.• TDS Rationalization: With 37 different types of payments to residents where TDS rates vary from 0.1% to 30%, TDS provisions become a fertile ground for disputes relating to categorisation and interpretation. In many instances, industry faces cash flow blockages awaiting refunds, and the government incurs avoidable interest costs on such refunds. Budget 2026 should lay down a roadmap for rationalisation of TDS rate structure with no more than three-four rates. B2B payments subject to GST may be exempted from TDS as information relating to such transactions is already captured in Form 26AS/AIS.• Incentivise manufacturing and employment: To boost investment and stimulate growth in the manufacturing sector, the government should consider reintroducing accelerated depreciation as a targeted fiscal incentive. This should be made available as part of existing concessional corporate tax regime of 22% or 15% (plus surcharge and cess) itself, so that this higher depreciation does not trigger Minimum Alternate Tax (MAT) for companies. In the wake of global economic uncertainties and India’s ambition to become a manufacturing hub under initiatives like ‘Make in India’, reinstating this benefit could provide much-needed support to domestic manufacturers. It would not only enhance competitiveness and productivity but also attract both domestic and foreign investment, generating employment and driving long-term economic growth.While an employer organisation can claim a 30% deduction of ‘additional’ employee cost for three consecutive assessment years if new employees are hired – there is a salary cap prescribed. A new employee is treated as an additional employee only if the salary of such employee does not exceed Rs. 25,000. “To incentivise business entities to generate new employment opportunities, the monthly employee cost limit should be increased to Rs one lakh. Many new hires fall outside this incentive because salaries are higher today – especially in the upcoming niche sectors like AI and robotics – this threshold needs a relook,” states Gupta.On the indirect tax front, the current customs tariff framework should be simplified to reduce compliance burden on importers. This includes sector-wise customs duty rationalization and aligning tariff rates with global standards ensuring Indian goods remain competitive in international markets. Further, the validity of advance rulings (for customs) should be extended from three to five years to enhance tax certainty and mitigate disputes.Gupta is of the view that providing tax certainty to foreign investors is critical. “Since existence of a permanent establishment of the foreign entity in India and profit attribution define India’s taxing rights, the absence of specific rules has led to recurring litigation; clear codification would enhance certainty.” He adds that an optional presumptive regime could be considered for foreign entities in certain sectors such as turnkey projects, technical services, digital and e-commerce, general services like consultancy, management and software.
About the Author
