Pre Budget Memorandum 2026: Tax Base, Avoidance, Litigations

The pre-budget memorandum suggests several reforms across tax administration, litigation, and policy to widen the tax base and streamline direct tax laws. To encourage voluntary compliance, the current practice of mandatorily increasing returned income during scrutiny, which creates a “physiological fear” among taxpayers, should be avoided. The tax base could be expanded by making PAN compulsory for property registrations above ₹1 lakh (currently ₹10 lakh) and for construction plan approvals above 500 sq.ft., and by lowering the Tax Deducted at Source (TDS) threshold for property sales from ₹50 lakh to ₹1 lakh. To check tax avoidance, the cash transaction limit for real estate should be reduced from ₹2 lakh to ₹50,000, mandating digital payments above this amount. To minimize litigation, the time limit for the department to dispose of rectification petitions and condonation petitions should be fixed at 30 days, matching the time given to taxpayers to respond to demands. The document also suggests simplifying the direct tax regime by moving to a single tax regime (the Old Tax Regime structure) to eliminate confusion and reinstate benefits for savings. It recommends a revised, simplified rate structure with higher exemption limits for general citizens, senior citizens, and super senior citizens, and proposes to remove Surcharge and Education Cess. Finally, it recommends withdrawing the high TCS rate of 20% on foreign travel and improving administrative processes, such as providing taxpayers with an opportunity to rectify incorrect information in Form 26AS directly with the reporting entity and fixing time limits for the disposal of appeals.

1. Suggestions for widening the tax base and increasing the tax revenue:

1.1 As of now more time is spent on scrutinizing the returns filed than the time spent on roping new cases. The more the ‘Income Returned’, the more the chances of getting enquiry and hearing. It is to be avoided. By existing practice, the ‘scrutiny assessments’ by NFAC are completed compulsorily by increasing the income returned either by disallowing certain expenditure or by enhancing the income earned, which results in additional taxes with interest and penalty proceedings. Once the ROI is taken up for scrutiny, the income returned is not accepted at all and huge demand is made by enhancing the income returned by hefty additions/disallowances. This is evident from the various decisions of the ITAT/High Courts wherein many of the high-pitched assessments are cancelled. Because of this attitude, physiological fear arises among assessees, which is deterrent to the cordial relationship between the Income Tax Department and the Assessee. Hence in general, the assessees are of the opinion that if they file returns voluntarily, they will be subjected to rowing enquiry. So, they wait till a compelling situation arises. If this is taken care of, more people will come forward to file returns of income voluntarily. Of course, the assessees should be aware of the fact that if there is willful default or concealment appropriate action would be taken by the Department.

1.2 Many of the properties are sold by registered documents up to Rs. 10,00,000/- (Rupees Ten Lakhs only) without PAN, since providing the PAN of the buyer and seller are not compulsory, there is a chance that such transactions may escape the attention of the Income Tax Department. Hence PAN should be made compulsory for registration of documents carrying value of above Rs. 1 Lakh. Likewise, as per the present law tax is deducted @1% if the sale value exceeds Rs. 50 Lakhs. This should also be reduced to Rs. 1 Lakh. At present the public receive notice after a long time after they complete the registration of the documents exceeding Rs. 30 Lakhs based on the information available in the AIR. But this value (reporting under AIR) should also be reduced to Rs. 1 Lakh and the notices should be sent as early as possible. If the capital gains arising there from are offered as Income and the taxes are paid in time, the assessees can save the interest they are paying due to nonpayment of Advance Tax and belated filing of return of income after receipt of notice and they need not be subjected to penalty proceedings also. They can avoid capital gains tax by investing the proceeds/gains in approved securities or in house property before the stipulated time, if they are eligible, provided they are alerted in time. This will also help to increase the tax collections.

1.3 One more area, where new assessees can be roped in is ‘Construction new buildings’, wherein PAN should be made compulsory say for construction above 500sq.ft., at the time of approval of plan, so that one cannot build new structure without the knowledge of the Income Tax Department. It is common to see advertisements by the private housing loan companies that ITR is not required to obtain a housing loan.

1.4 Many people, including associations, clubs, Social Service Organisations, Resident Welfare Associations, Flat owners’ Associations get PAN and they don’t care to file their Return of Income irrespective of their income. They do not apply for exemption under section 335 of the Income Tax Act 2025 (12 of the Income Tax Act 1961) even though they are eligible. If notices are sent to the registered addresses many assessees at the time of their getting the PAN itself many assessees can be roped in.

1.5 Another area is submission of Form 60/60A by people at various situations where PAN is required or otherwise, they can give these forms. Though either Form 60 or Form 60A is to be obtained many (including Banks) get both the forms without filling the same and it is not known whether any authority is monitoring about the obtention and submission of the same with the Income Tax Department and further action taken on the forms so submitted. If more time is spent on this issue more assessees can be roped in. All the Form 60/60A given at various locations by a person should be clubbed with the help of ‘id proof’ or ‘Address Proof’ or ‘Aadhar Card’

2. Suggestions to check tax avoidance:

2.1 As of now, cash up to Rs. 2,00,000 (Rupees Two Lakhs) is allowed for real estate transactions. To bring them into the fold of taxation any transaction above Rs. 50,000/- (Rupees Fifty Thousand only) should be carried out in digital mode only so that they can easily be traced and brought to tax net.

3. Suggestions to reduce/minimize litigations:

3.1 As per the present Act the Assessing Officer/CPC/NFAC can take six months to dispose of the rectification petition filed under section 287 of the Income Tax Act 2025 (154 of the Income Tax Act 1961). It is not just and equitable to direct the assessee to respond within 30 days (1 month) for payment of the disputed demand and the department will take 6 months to rectify or reject the petition. As per the existing provisions of the law, even if the Assessing Officer does not attend to the petition he can not be questioned. To be fair and equitable, the Income Tax Act should be amended in such a way that the Assessing Officer/CPC/NFAC will also be given time of 30 days only for rectification and if the rectification order is not passed rejecting the petition within the time allowed, the petition made should be deemed to have been allowed and once the rectification petition is filed the assessee should automatically be given time till the disposal of the petition to pay tax as well as to prefer an appeal. Many assesses are suffering because even clerical errors are not rectified, and they are compelled to pay a minimum of 20% of the demand and go for appeal. While on-line rectification petitions are being filed even though there is an option to spell out the defects/errors in the order, the CPC simply re-process the return filed once again and sends the same order, which is of no use.

3.2 As per the present Act it seems that there is no limit for disposing of the various Condonation Petitions filed such as petition for condonation of delay in filing Form 10. Due to the delay the exemption is withdrawn, and heavy taxes are levied and the appellate authorities are not in a position to pass orders in such cases because the condonation petitions are kept pending with the concerned CIT (Exemptions) for years together. Hence a time limit of say 30 days may be prescribed for disposing of such condonation petitions by the concerned authorities.

3.3 Likewise, there is no time limit for passing the ‘revisional orders’, to be passed by the jurisdictional officers basing on the orders made by the CIT (Appeals)/ITAT which results in undue hardship to the assessees due to non-receipt of refund due. A time limit of 30 days is to be fixed for the Jurisdictional officers to pass orders based on the orders passed by the appellate authorities.

3.4 As of now, if there is a mistake in the order passed by the CIT (Appeals) and if the assessee applies for rectification there is no time limit for disposing of the rectification petition by the CIT (Appeals). It is just and equitable to fix a time limit of 30 days for disposing of such petitions.

3.5 For appeals made u.s. 253, for the orders passed us 250 by the CIT(Appeals), though e-appeal can be made through electronic mode, physical copies of the appeals and related papers are also to be filed manually. This requirement of filing hard copies should be dispensed with since all the required papers are filed electronically.

4. Suggestions for rationalization of the provisions of Direct Tax Laws:

4.1 Confusing Regimes Rates and Rebates

As per the Income Tax Act 2025 the tax slabs for individuals, Hindu Undivided Families, and other categories under the new regime are:

4.2 Rebate under Section 156:

• • For residents with total income up to Rs. 5 lakh, the rebate will be 100 percent of the income tax payable or Rs. 12,500, whichever is lower.
  • Under the new regime, residents with incomes up to Rs. 12 lakh can claim a rebate of up to Rs. 60,000. For incomes above Rs. 12 lakh, the rebate amount will reduce gradually, capped at the tax payable.

There is no relief for Senior Citizens (above the age of 60 years) or for the Super Senior Citizens (above the age of 80 years) under the New Tax Regime 

Old Tax Regime Rates (As per Income Tax Act 2025) 

These rates are not explicitly revised in the Income Tax Act 2025 and are expected to be updated annually via the Finance Act, as per tradition.

4.3 Rebate Under the Old Tax Regime

• Eligibility: Resident individuals with net taxable income up to Rs. 5,00,000
• Maximum Rebate: Rs. 12,500
• Effective Tax Payable: Zero

Old Tax Regime followers are denied Marginal Relief if their income is marginally above Rs. 5 Lakhs, which is totally unfair. Rebate is available up to the taxable income of Rs. 5 Lakhs and they need not pay any tax if their income is Rs. 5 Lakhs. But if the income exceeds Rs. 5 Lakhs, the rebate is not available and they have to pay the tax from Rs. 2.5 lakhs onwards. For example, if the taxable income is Rs. 5,01,000 the tax payable including education cess will be Rs. 13,208, which is totally unfair; for an additional income of Rs. 1,000 the tax payable is Rs. 13,208. Marginal Relief should be given to the extent that the tax payable should be restricted to the income that exceeds Rs. 5 Lakhs.

4.4 While it is widely publicised that the New Act will be simple and easy to understand by the common man it is not understood why they are continuing the two regimes by prescribing two sets of taxation and rebates, which is confusing the assessees.

It seems that there is no logical reasoning to have the basic exemption limit under NTR at Rs. 4 lakhs by prescribing rates ranging from 5% to 10% up to Rs. 12 lakhs and allowing the entire tax as rebate for income up to Rs. 12 lakhs and under OTR keeping the exemption limit at Rs. 2.5 lakhs and allowing the entire tax as rebate for income up to Rs. 5 lakhs.

4.5 Instead, to have simplicity and to gain confidence amongst the tax paying public it is better to have only one tax regime i.e. the ‘OLD One’ due to the following reasons:

It is not understood as to why the Government is in favour of a ‘Spending Economy’ by discouraging SAVINGS which is considered to be a backbone of Indian Economy. In fact in the past the Government promoted savings by encouraging people to invest in the specified savings scheme including the payment of Life Insurance Premium and giving deductions for repayment of housing loans and in allowing deduction up to Rs. 2 lakhs for the loss under house property due to interest on Housing Loans. Many assessees have entered into long term commitment by purchasing Life Insurance Policies and have constructed houses by getting housing loans from the Banks and Housing Finance Companies on the belief that they will be able to save income tax under section 80C for the repayment of housing loan and premium for life insurance policies and for the interest on housing loans up to Rs. 2 Lakhs under the head ‘Income from House Property’. Now all of a sudden, these benefits were withdrawn putting the assessees in trouble who have purchased Life Insurance Policies and availed Housing Loans (which are long term commitment in the form of yearly payment of premium and repayment of housing loan with interest) mainly for the purpose of saving Income Tax believing that the Government will continue to give concessions to promote savings. In addition since Bank Fixed Deposits are also eligible for the deduction and interest from Banks are also deductible to the specified limits  from the Gross Total Income by following the OTR the Deposits in Banks will increase substantially.

Suggested Rates of Tax

Senior Citizens (60 years of Age) Exemption Limit Rs. 12,00,000

Super Senior Citizens (80 years of Age) Exemption Limit Rs. 16,00,000

All deductions will be allowed and there will be no Rebate.

Surcharge and Education Cess should not be levied.

4.6 This TCS @20% on foreign travel expenses is exorbitant and it seems there is no logical reason for this increase. Why do the law makers fail to understand that TCS is not like TDS, which is nothing but collection tax in advance from the recipient who earns an income above a certain limit whereas TCS is for collecting a fraction of the expenses mainly for bringing such transactions to the knowledge of the I T Department so as to ascertain whether the particular assessee has sufficient sources of income or taxed money in hand to incur such an expenditure or make an investment is not known.  Of late in recent years the TCS rates are increased without understanding the purpose for which TCS was introduced. In most of the cases the TCS are refunded. This increase will primarily burden the foreign travelers which should be withdrawn.

4.7 Under Section 58 income is arrived @ 8% of the turnover and the rate is lowered to 6% for receipts other than cash for Business Income. But such a concession is not made available for professional income which is calculated @ 50% of the gross receipts, wherein to promote non-cash transactions in this category also for receipts other than cash, 40% may be taken as income. Likewise for goods carriages  Rs. 1,000/- p.m. per ton for Heavy Goods Vehicle and Rs. 7,500/- for other vehicles are estimated as income. Here also concessions may be given for promoting non-cash transactions by allowing deduction of 5% of the receipts in mode other than cash. For professionals, income is arrived @ 50% of the Gross Receipts, which may include reimbursement of expenses also, wherein calculation of income @ 50% on the receipt of reimbursement of expenses in not correct. Hence such receipts should be allowed to be deducted from the gross receipts for arriving at the calculation of 50%.

4.8 Section 58(7) reads as under:

Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).

 From the above clause it is clear that the assessee cannot opt for ‘Presumptive Tax’ for six years (including the year in which he has come out of the scheme), if he has not offered income under this scheme for consecutively for six years including the first year in which he has opted for the scheme. Does it mean that if has opted for the scheme for six years consecutively, afterwards he is free to opt for the scheme, whenever he likes?

If the intention of the statute is to deny the benefit to those who opts out of the scheme, it is sufficient to mention that once if he fails to opt for the benefit of this section in any year (instead five years) subsequent to the year he has availed the benefit he cannot claim the same for next five years, i.e., he cannot return for five years.

Hence the clause 7 is to be replaced as:

Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any year relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).

4.9 In the case of Partnership Firms, it will be fair and just to allow interest and salary to partners so that those Partnership Firms which opt for presumptive tax are also treated on par with others who get their accounts audited. Further in the present situation if a partner gets interest and salary from a Partnership Firm, which has offered income under presumptive taxation scheme, whether such interest and salary are exempt from Income Tax in the hands of the partners is not specified in the Act though they are not allowed as expenditure in Firm’s hands. Since all the expenditure is deemed to have been allowed in Firm’s hands the interest and salary would be subject to tax in partners’ hands also, which will lead to double taxation. In the normal course in the case Firms, which are subject to audit and offer less income than the rates prescribed under this scheme, such interest and salary (which are allowed as deduction) are not taxable in the hands of the partners as Income from Business/Profession, Hence it suggested that the assessees who offer income under this scheme are to be allowed to deduct interest and salary to partners up to the existing limits from the income offered at the prescribed rates so that they are also treated on par with those who offer less income with audited accounts.

4.10 As of now under section 35 the expenditure made in cash is totally disallowed if it exceeds Rs. 10,000/- (Rs. 35,000/- in case of lorry hire charges). Instead, the excess payment above the limit may be disallowed. For such expenditure for the Trusts they have to pay income tax @30% in addition to disallowance for the calculation of 85% of the receipts. It is sufficient to disallow, and payment of tax @ 30% should be dispensed with.

4.11 Regarding cash transactions u.s 185, 186, 189 of Income Tax Act 2025 (269SS, 269T, 269ST of Income Tax Act 1961) for acceptance and repayment of loans and for expenditure allowable under the Act u.s. 36 and 37 exemption may be provided for direct payment of cash in the other party’s account by the assessee, because now-a-days due to ‘Anywhere Banking’ the public can deposit cash at any Branch near to them. If the amendment is made it will go a long way in augmenting large-scale business transactions, because these sections were brought in to curb the black money transactions.

4.12 While re-opening cases u.s 280, the reasons for opening the case should be mentioned in the notice itself, because many such re-openings were structed down at appellate stages because there is no valid reason at all for re-opening. Because of this so many man hours are wasted in ascertaining the reasons from the department and then contesting the same about the reasons spelt out are valid or not.

4.13 In the case of Income from House Property now-a-days the property owners have to necessarily register the rent agreement because they cannot legally proceed against the tenants if they are not able to collect the agreed rent unless the rent agreement is registered and this registration process is very costly if the period of rent is more. For example, if the period is 10 years the registration expenses will be nearly three months’ rent. The expenses incurred by the landlords are to be allowed as deduction over the period of lease from the rent received over and above the 30% deduction, now allowed towards repairs and maintenance.

5. Suggestions for removing administrative and procedural difficulties relating to Direct Taxes:

5.1 As of now if discrepancies are found in Form No. 26AS such as ‘receipt of maturity amount of the Policy and the TDS’ are found in the Form 26AS, whereas the assessee, in whose Form No. 26AS it appears, has not received any such amount during the year and if the return is filed without taking into account such information, the assessee will be getting notice from CPC for the differences in Form No. 26AS enhancing the income and demanding additional tax. Filing rectification or appealing for such issues is time consuming. Hence it is suggested that in such instances the assessee should be given an opportunity to apply for rectification with the entity concerned which had uploaded the wrong information with an option to inform the CPC also about the discrepancies. For this purpose, a separate window may be provided in the site for the assessees to make representations so that automatic alerts may be sent to the concerned authorities who had uploaded incorrect information.

5.2 Presently the NFAC gives two- or three-days’ time with intermittent holidays for submitting the required particulars, which is too short. It is suggested that time of at least 15 days is given for responding to notices. From the notices received from NFAC, it is understood that back files are not given to them either in physical mode or in electronic mode and hence they raise primitive questions on the nature of business, maintenance of accounts, investments in foreign country etc. The very same questions are asked for with an assessee regarding nature of business, source of income etc., every year. It can be avoided if they are supplied with basic records of the assessee so that the time spent on collecting basic information can be avoided. Moreover, the questions raised are in the form of taking an interview of a candidate who is seeking employment or applying for loan. Irrelevant questions are raised by NFAC; for example, ‘Details of Insurance Commission earned/paid during the year’ is asked for. How can an individual give insurance commission? Likewise details of godown and warehouses owned are asked for an individual who runs cars on hire.

5.3 NFAC uses the sections 102 & 103 of Income Tax Act 2025 (68 & 69 of Income Tax Act 1961) indiscriminately and taxes are levied u.s 195 of Income Tax Act 2025 (115 BBE of Income Tax Act 1961) @ 60% with interest, wherein the tax and interest exceed the income assessed especially in old cases opened u.s 280. In addition, penalty proceedings are initiated and if penalties are levied the taxes and penalties are many times more than the assessed income, which is unfair. These sections are brought into the statute for the main purpose of assessing the cash deposits of SBNs made during the demonetisation period. Since they are widely used to harass the assessees as seen by the orders of appellate authorities and writs of High Courts, it is high time they are scrapped.

5.4 As of now while filing an appeal, the assessment order against which the appeal is preferred is to be uploaded by the assessee, which should be avoided because it is already available with them in the system. It should be made sufficient to mention the order number (DIN) and date so that the appellate authorities can view the same in the system itself.

5.5 There are lots of cases pending before Assessment/Appellate Authorities viz. NFAC (National Faceless Appeal Centre) the CIT (Appeals) and ITAT (Income Tax Appellate Tribunal). It is high time that a time limit is fixed for disposal of appeals by all of them. Time limit should be fixed for taking up the case for hearing in appellate stage; say they should be taken up for hearing within at least six months from the date of filing an appeal. Once the case is taken up for hearing another time limit should be made mandatory, say three or six months from the date of first hearing, the appellate order should be passed unless the delay is attributable to the assessee. This will reduce the pending cases and finality will be reached faster.

5.6 If an assessment order is passed by an Assessing Officer demanding a huge amount and if the assessee was able to succeed in proving in appeals the wrong assessment made by the assessing officer and get the demand deleted, he should be compensated for the mental agony undergone by him in running from pillar to post in either paying the tax fully or partially and for applying for stay of collection of taxes and the loss sustained by him in paying the demand and in incurring expenses for filing appeal and for representation at higher levels. The compensation should be equal to the demand made at least.

5.7 While paying ‘Appeal Fees’ under e-tax in the Income Tax site, after selecting ‘Appeal Fees’ the system displays ‘income-tax’, sur-charge’ ‘cess’ etc. This should be removed. There is no option to pay the late fees payable u.s. 234F.

5.8 As of now hearing notices are sent by mail to the assessee’s mail id as well as alternate mail id. But there are some cases where the assessees deny having received the hearing notices sent to both email ids. There is no mechanism to prove the mail sent or received by the Department. Likewise, there is no record to prove the replies sent by the assessee via mail. It is requested to devise a full proof system for the mails sent by the Department with date stamp for having sent and for the mails received by the department with date stamp for having received the mail from the assessees. Since the Registered A.D. Post has been dispensed with by the Postal Department they can send the notices by Speed Post or approved couriers so as to ascertain the date of service through tracking by the acknowledgement number provided at the time of dispatch.

5.9 While responding for notices for ‘Pending actions’ under ‘e-proceedings’ the latest notice for which the assessee has to respond should come in the top. As of now all the notices for which responses have been filed for all the years appear, which makes the responding forum clumsy. They should be arranged ‘Assessment Year war’ and chronologically listed.

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(Republished with amendments)