With the Union Budget for FY 2026 set to be presented on February 1, 2025, the debate over merging India’s old and new tax regimes has gained momentum. Experts and policymakers are weighing the benefits and challenges of combining these systems to create a unified tax structure that simplifies compliance and maximizes taxpayer benefits.
The Evolution of India’s Tax Regimes
India’s taxation system for individual taxpayers currently offers two distinct choices:
- Old Tax Regime: Higher tax rates with numerous exemptions and deductions.
- New Tax Regime: Lower tax rates but minimal deductions or exemptions.
The new tax regime, introduced in the Union Budget 2020, is now the default option. However, taxpayers can opt for the old regime, leading to a dual-system structure that, while flexible, adds complexity.
Why Simplification is Needed
Taxpayers often struggle to compare the two regimes and determine the best option for their income and investments. This complexity underscores the need for a unified tax system that retains the best features of both regimes.
Benefits and Challenges of a Unified Tax Regime
Benefits of Merging
A unified tax regime could offer:
- Simplified Compliance: Taxpayers would no longer need to analyze two systems.
- Enhanced Savings: Retaining deductions from the old regime and incorporating the lower tax rates of the new regime could lead to significant tax savings.
- Increased Transparency: A single system reduces confusion and makes compliance easier for taxpayers and administrators alike.
Subhash Chand Aggarwal, Chairman of SMC Global Securities Limited, observed:
“Merging the old and new regimes could streamline processes but might disadvantage individuals who don’t invest enough to claim deductions under the old system.”
Challenges of Merging
However, experts caution against potential downsides:
- Diminished Deductions: Individuals relying heavily on deductions may face reduced benefits.
- Revenue Loss for the Government: Simplified slabs with lower rates may reduce tax collections.
- Complex Transition: Implementing a unified regime would require significant administrative changes.
Expert Opinions on a Unified Tax System
Moving Toward the New Regime
Kinjal Bhuta, Secretary of the Bombay Chartered Accountants’ Society, believes the government is gradually phasing out the old tax regime:
“The government is unlikely to merge the regimes. Instead, we expect the old regime to be scrapped in the near future, with deductions like Section 80D for medical premiums and Section 80CCD under the National Pension Scheme retained in the new regime.”
Adjustments in Tax Brackets
Balwant Jain, a prominent tax expert, suggested:
“To make the tax system more progressive, the 30% tax rate should apply only to income levels above ₹20 lakh, reflecting current economic conditions and inflation.”
These adjustments could make the new tax regime more attractive, encouraging more taxpayers to switch.
Potential Tax Tweaks in the Upcoming Budget
Rationalizing Tax Brackets
One expected reform is an adjustment of income tax slabs to make the regime more inclusive and fair, particularly for middle-income earners.
Simplifying Compliance
The new tax structure aims to eliminate the need for mandatory investments for tax savings, giving taxpayers more disposable income.
Fewer Deductions
Experts believe the government may reduce deductions to streamline the system further, making compliance less cumbersome while focusing on voluntary investments.
Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors, emphasized:
“A unified regime could bring back the complexities that the new system sought to eliminate. Simplicity and transparency should remain key priorities.”
FAQs
What is a unified tax regime?
A unified tax regime is a single tax system that combines features of both the old and new tax regimes to simplify compliance and offer greater benefits.
Why is there a need to merge the old and new tax regimes?
The dual-system structure creates confusion and complexity for taxpayers. A unified regime could simplify compliance and streamline the taxation process.
What challenges could arise from merging the two systems?
Potential challenges include reduced benefits for those reliant on deductions, administrative hurdles during implementation, and potential revenue loss for the government.
Will the government scrap the old tax regime?
Experts predict the government may eventually phase out the old tax regime, retaining only a few essential deductions like medical premiums and retirement benefits.
How does the new tax regime differ from the old one?
The new regime offers lower tax rates but minimal deductions, while the old regime has higher tax rates with more exemptions and deductions.
What reforms are expected in the upcoming budget?
Possible reforms include adjustments in tax brackets, simplified compliance measures, and reduced deductions to streamline the system.
How does merging tax regimes impact government revenue?
A unified regime with lower rates may reduce tax revenue, but it could also encourage higher compliance, offsetting some of the losses.
Will a unified tax regime benefit all taxpayers?
While a unified system may simplify compliance, it could disadvantage taxpayers who rely heavily on deductions under the old regime.
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