As India prepares for the upcoming Union Budget, a leading tax expert has cautioned the government against making significant alterations to the newly enacted Income-tax Act, 2025. This landmark legislation, set to become operational from 1 April 2026, was formulated after extensive consultations with a Parliamentary Committee and various stakeholders.
Why Premature Changes Could Be Problematic
Dinesh Kanabar, Chairman and CEO of Dhruva Advisors, argues that the forthcoming Budget should ideally refrain from substantive changes to direct tax laws. He emphasizes that the new Act is a clean-slate, simplified statute that hasn't even been implemented yet. "Any premature tinkering with the framework risks diluting the objective of introducing a clean-slate, simplified legislation," Kanabar states. Instead, he believes the immediate focus should be on addressing concerns around tax administration and implementation.
Kanabar has outlined four key policy expectation baskets for the government to consider, which focus on easing compliance and fostering growth rather than rewriting the law.
1. Rationalising TDS for Easier Compliance
One of the most critical areas needing attention is the simplification of Tax Deducted at Source (TDS). The current system, with its multiple rates across numerous sections, creates significant interpretational challenges and frequent litigation. Disputes often arise over the applicable rate, payment classification, and procedural issues, even when there's no actual loss of revenue.
Kanabar proposes a major rationalisation: streamlining TDS rates into just two or three broad categories.
- One standard rate for salary income.
- One uniform rate for most non-salary payments.
- A separate, higher rate for exceptional categories like lottery winnings.
"Large taxpayers today maintain sizeable teams merely to manage withholding tax compliance and litigation risk. Simplifying TDS rates would lower compliance costs, reduce disputes, and free up productive resources, without materially impacting revenue collection," he explains.
2. Tax Levers to Boost High-Tech Manufacturing
With India aiming to become a global hub for capital-intensive sectors like artificial intelligence, semiconductors, and advanced electronics, the current lack of meaningful tax incentives for Research & Development (R&D) expenditure is a gap. Many competing nations actively use tax policy to attract cutting-edge innovation.
Kanabar sees the Budget as an opportunity to reintroduce or recalibrate targeted R&D incentives, especially for sunrise sectors vital to India's long-term competitiveness. This move is even more crucial given the evolving global mobility landscape, where skilled Indian professionals in science and tech may consider returning home due to visa constraints abroad. "Creating a robust domestic ecosystem for research and innovation, supported by sensible tax incentives, could help India productively absorb this talent," he states.
3. Addressing the Mountain of Tax Litigation
Prolonged tax litigation is a burden for both the government and taxpayers. The Revenue department waits years for dues beyond the standard 20% pre-deposit, while businesses grapple with contingent liabilities that affect cash flow and decisions.
Kanabar points to the success of past dispute resolution schemes, like those in 2020 and 2024, which saw significant participation and helped mobilise revenue. "There is a strong case for re-imagining a comprehensive dispute resolution framework, both for direct taxes and for indirect taxes, particularly customs, where litigation has accumulated over decades," he argues. A well-designed scheme could unclog the appellate system and provide certainty.
4. Building a Facilitative Tax Administration
The final expectation revolves around reinforcing a taxpayer-friendly administration. Concerns persist about the indiscriminate issuance of notices, mechanical reopening of assessments, and a lack of accountability, which erode taxpayer confidence. While faceless assessments reduced some friction, they introduced new challenges in responsiveness and proportionality.
Kanabar concludes that what's needed is not more legislation, but administrative sensitivity. The approach must recognize taxpayers as partners in nation-building, where certainty, fairness, and predictability are fundamental to ease of doing business.
As the Budget formulation enters its final stages, the expert view is clear: stability in the new tax code and focused administrative improvements should take precedence over sweeping new changes.
