What made the Indian govt. to change the taxes slabes?

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 The government's decision to reduce tax deductions in the Union Budget FY 2025-26 can be attributed to several key economic and fiscal factors:

1. Transition to a Simplified Tax Regime

  • The government has been promoting the new tax regime, which has lower tax rates but fewer deductions and exemptions.
  • The aim is to simplify tax compliance, reduce tax evasion, and increase transparency in the taxation system.

2. Boosting Direct Tax Collections

  • India’s tax-to-GDP ratio needs to improve for long-term fiscal sustainability.
  • By reducing deductions, the government ensures a broader tax base, leading to higher direct tax revenues.
  • This move compensates for tax cuts under the new regime.

3. Reducing Dependence on Tax Exemptions

  • The government wants to discourage tax-saving loopholes used by high-income individuals.
  • Many high earners reduce tax liabilities by over-utilizing exemptions under HRA, 80C, 80D, and housing loan interest deductions.
  • A simpler regime prevents misuse of such deductions.

4. Encouraging Consumption and Economic Growth

  • By reducing deductions, disposable income remains more predictable, encouraging higher consumer spending.
  • Higher spending leads to increased demand for goods and services, which boosts economic activity.

5. Fiscal Deficit Control & Revenue Mobilization

  • India aims to reduce its fiscal deficit and manage higher public spending on infrastructure, healthcare, and energy transition.
  • The removal of excessive deductions allows better revenue generation without increasing tax rates significantly.

6. Aligning with Global Best Practices

  • Many developed economies have shifted to simplified tax structures with minimal deductions.
  • The government is aligning with global standards to improve India’s Ease of Doing Business ranking and attract foreign investments.

7. Encouraging Investment in Key Sectors

  • Instead of tax-saving instruments (like PPF, LIC, and ELSS), the government wants citizens to invest in infrastructure bonds, renewable energy, and manufacturing.
  • This move supports Make in India and Atmanirbhar Bharat initiatives.

Conclusion

The government’s tax policy shift is aimed at simplifying taxation, increasing direct tax revenues, and promoting economic growth while reducing reliance on outdated tax-saving schemes. The impact will depend on how individuals and businesses adapt to the changing tax structure.


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