Implementation of New Tax Regime and Its Impact on Direct Tax Revenue

1.Introduction: A tax is a compulsory transfer of funds from the private sector to the government. Among different sources of finance available to the public economy, taxation is a unique source from more than one point of view. Different stakeholders like tax administrators, tax payers have raised concerns about the reduction of tax rate in the tax structure of the Income Tax Act 1961. Direct tax reforms are necessary to increase the number of tax payers, to minimize the burden of tax-payers and to generate more revenue. The introduction of the new tax regime signals a tremendous shift in the tax structure of India. The thrust of the new tax regime is to improve efficiency and equity of the tax system by eliminating almost all deductions and exemptions. The objective of this study is to show the degree of impact on direct tax revenue due to implementation of new tax regime.

2. Implementation of new tax regime: The new tax regime system i.e. Section 115BAC was introduced from the financial year 2020-21. This regime introduced concessional tax rates with reduced deductions and exemptions. Section 115BAC was amended in the Budget 2023, and the new regime was made the default regime from the financial year 2023-24.

Table:1 Present tax slab under new tax regime for financial year 2025-26

Source: Budget speech on 1^st February, 2025 by Finance Minister, Govt. of India

Tax structure has been simplified by cutting tax slabs. In the financial year 1965-66 number of tax slabs was ten (10), in the financial year 1975-76 number of tax slabs were nine (9)  but in the current financial year number of tax slabs are seven (7). Limit of standard deduction against salaried income is Rs. 75,000. Rebate will be available upto total income of Rs. 12,00,000.

3. Central Board of Direct Taxes: The Central Board of Direct Taxes, created by the Central Boards of Revenue Act 1963, is the apex body entrusted with the responsibility of administering direct tax laws in India. The matters relating to the levy and collection of all direct taxes are looked after by the CBDT i.e. Central Board of Direct Taxes. The CBDT is implementing a comprehensive computerization programme in the Income Tax Department with modern information technology as a key driver. The programme is aimed to establish a taxpayer friendly regime, increase the tax-base, improve supervision and generate more revenue for the Government.

4. Widening of Tax Base: The new tax regime offers a rational and simplified approach to income tax calculation. It provides lower tax rates for individual tax payers. It increases basic exemption limit. Thus the new tax regime attracts tax payers to pay income tax and to file income tax return. As a result total number of persons filing income tax return has been gradually increasing since 2020-2021. The number of new assessees added during the Financial Year 2023-24 is 6,89,3046.The number of persons filing income tax return  over the  last five  years is as follows:

Table:2 Number of persons filing income tax return

Source: Time Series Data, Income Tax Department, 2023-2024

During the financial year 2023-24 total number of persons filing income tax return was 8,09,03,315.  It was 6,72,08,614 during the financial year 2020-2021. So there is an increase of 1,36,94,701 persons from 2020-2021 financial year to 2023-2024 financial year. This increase is due to introduction of new tax regime system i.e. Section 115BAC.

5. Sharp rise in Direct tax- GDP ratio : Direct tax occupies a considerable source of revenue for the government. The direct tax-GDP ratio measures a country’s tax revenue relative to the volume of its economy. Direct taxes affect a nation’s gross domestic product by increasing the amount available to the government. The collected direct tax is used by the government for social and economic development of the country.

          Table: 3 Direct Tax -GDP Ratio

Source: Time Series Data, Income Tax Department, 2023-2024

 During the financial year 2023-2024 there was a significant achievement in tax collection. As a result Direct tax- GDP ratio was 6.64% in the financial year 2023-2024.  From the above table it is clear that there is a gradually increasing trend in result of Direct tax- GDP ratio from the financial year 2020-2021 to the financial year 2023-2024. This is due to implementation of new tax regime.

6. Increase in direct tax collection: The central government levies direct taxes such as personal income tax and corporate tax. The government also levies indirect taxes like custom duties, excise duties and Goods and Service Tax (GST). The contributions of direct taxes to total tax revenue over the last four years are as follows:

 Table: 4 Contributions of Direct Taxes to Total Tax Revenue

Source: Time Series Data, Income Tax Department, 2023-2024

During the financial year 2020-21 the share of direct taxes to the total central taxes collection was 46.84% but after four years i.e. during the financial year 2023-24 the share of direct taxes to the total central taxes collection was 56.72%.

7. Conclusion: Salaried assessees constitute a significant number in the direct tax population in India. Removal of existing deductions and exemptions causes disappointment especially for the salaried employees and assessees belong to middle income group who took different tax savings scheme. More thought needs to be given to ensuring the economic security of senior citizens. The old tax regime needed simplification, modernization and rationalization but not total rejection of different deductions and exemptions. Budget 2024 has already increased the standard deduction under the new tax regime from Rs.50,000/- to Rs.75,000/-. The old tax regime would increase the habit of saving of the taxpayers but the new tax regime benefits taxpayers who earn more or less but invest less. Every taxpayer must carefully evaluate their financial position, quantum of deduction, investment portfolio, and exemption limit before opting for either regime. To increase tax net and to increase Tax-GDP ratio the new tax regime is playing a pivotal role. If some deductions and exemptions are allowed to the taxpayer under the new tax regime then it will be more attractable to all classes of taxpayers across the country.

By: Dr. Jaydeb Bera

Associate Professor and Head, Department of Commerce

Pingla Thana Mahavidyalaya