The story so far: Finance Minister Nirmala Sitharaman introduced the Income Tax Bill, 2025, in Lok Sabha on February 13 to make India’s direct tax law “concise, lucid, easy to read and understand”. During her Budget presentation in July last year Ms. Sitharaman announced the government’s decision to overhaul the more than six decades old law. “This will reduce disputes and litigation, thereby providing tax certainty to the taxpayers. It will also bring down the demand embroiled in litigation,” she reasoned, for the new law. The bill has been referred to a 31-member Select Committee of the Lok Sabha, to be chaired by the Bharatiya Janata Party MP Baijayant Panda. The committee is expected to table its report on the first day of the next Parliament session.
What is the purpose of the entire exercise?
The existing Income Tax Act of 1961 has been amended numerous times, “overburdening” the law and making its language complex, argues the new IT Bill. This, it says, has increased compliance costs for taxpayers and impeded direct tax administration. The latest bill aspires to address such inefficiencies.
Three broad measures have been adopted to pursue this objective. The first entails simplifying the language of the Act to make it more readable. It also attempts to remove redundant and repetitive provisions and re-organises sections for better navigation with logical links. The proposed IT Act also uses tables and formulae where needed. For instance, the existing Act has 43 sections for various incomes liable for tax deducted at source (TDS) depending on the status of the payer or payee and applicable monetary limits have been mentioned. The proposed bill consolidates them all into one section. To make this more understandable, the bill mentions tables for three broad categories of payees–residents, non-residents and all others. It does not distinguish between Indian and foreign nationals.
Significantly, the Bill does not entail any policy changes in direct taxes.
How does this help then?
According to Anshul Khemuka, Partner at law firm Khaitan & Co, just the changes in language and better comprehension would simplify interpretation and raise compliance and efficiency of tax administration. Anil Talreja, Partner at consulting firm Deloitte India, wagered this would raise scope for minimum interpretations. “A good part of the litigation pending in courts comes on the back of interpretation of the section. A lot of tax money is locked up as a result,” Mr. Talreja told The Hindu, adding clarity would reduce confusion.
Gouri Puri, Partner at law firm Shardul Amarchand Mangaldas & Co observes this could be beneficial to smaller non-profit organisations (NPOs). She said since 2021, there have been multiple amendments to the exemption regimes for NPOs. All of them have been consolidated enhancing their comprehension. “There are smaller NPOs doing good work who may not be able to afford a tax advisor or hire a professional. They tend to manage these things in-house to save costs,” Ms. Puri observes, adding, “This would help them to comprehend what the act envisages.”
What about the transition?
Mr. Khemuka argues that the impact of the Act would be felt when its transition to implementation is seamless. “Ensuring tax administrators are well-versed with the changes and understand the nuances of the new system is essential for a smooth transition,” he said.
Samir Kanabar, Tax Partner at EY India, told The Hindu that with the introduction of the bill, corresponding rules and the IT systems of the revenue authorities are likely to be introduced or upgraded. He suggested “a reasonable buffer period for government and taxpayers to update their respective systems and processes, train field staff and come out with aligned rules and regulations.” Pointing to repeal and savings clauses in the bill, Mr. Kanabar said, they would be useful in addressing transitional measures such as carry forward of losses, options selected for tax regime and so on.
What is a ‘tax year’?
The new Bill seeks to replace the use of “financial year” and “assessment year” with a standard “tax year”. The latter would refer to the (taxable) twelve-month period in a financial year. According to the IT department, use of the terms “financial year” and “assessment year” confuses taxpayers, giving them the impression that they are two separate tax payments. For context, an existing business would pay taxes for its income in the concluded financial year, and so the following financial year is labelled as the “assessment year”, while, a business incorporated say last September, would have its “assessment year” beginning at the time of inception, that is, when it reports its first income. The government hopes that the term “tax year” would avoid this confusion and make clear that entities and individuals would be taxed for the time they have an income.
The government also says this would standardise the domestic tax system to those in comparable jurisdictions, such as the U.K., Australia, and so on.
To be clear, ‘tax year’ would be the year of taxation whilst “financial year” would be used to facilitate procedural actions and compliances, such as filing returns and rectifications, among other things.
What about the powers of CBDT?
Mr. Khemuka from Khaitan and Co. observes the powers of the Central Board of Direct Taxes (CBDT) under Sections 119 and 295 remain “substantially the same” in the proposed Bill. The two sections deal with the authority of the board to issues instructions, directions and rules for tax administration and to ensure compliance and uniformity in tax laws.
But he observed, the Bill goes further and seeks to address ‘gaps’ in empowering the CBDT to issue guidelines. “For example, under sections 115BAB, the CBDT can issue guidelines to help domestic companies meet the conditions for the alternate tax regime. However, there was no similar provision under Section 115BAE for resident cooperative societies,” he said.
What changes have been proposed in the virtual space?
The new Bill has introduced the concept of a “virtual digital space” and expanded the powers of search and seizure in that realm. Simply put, the powers of search and seizure have been expanded from physical or local assets to digital and virtual ones. The text defines virtual spaces as an “environment, area or realm” through which the digital world is experienced such as email servers, social media accounts, websites used to store details of ownership of any asset, cloud servers, and so on.
Mr. Khemuka also said, Section 253 of the Bill empowers tax officers to seek “technical assistance, including access codes” during surveys, making it mandatory for taxpayers to comply with providing access to cloud storage, computers, digital devices, online accounts and servers. “The broad scope of this definition raises concerns about privacy and government overreach, as it potentially grants tax authorities extensive access to personal and financial data,” he warned.
What is the discussion about cryptocurrency?
The Bill considers ‘cryptocurrency’ among virtual digital assets (VDAs). This means crypto assets cannot be transferred to evade tax liabilities, enhancing scrutiny of such assets by tax authorities. Mr. Khemuka pointed out authorities can block transfer of VDAs if they suspect tax evasion. “Increased scrutiny for crypto traders and investors, with tougher enforcement on undeclared holdings reinforces the government’s intent to regulate and tax digital assets more strictly,” he observed.
Is this the first time the Income Tax Act has been proposed to be revised?
No, similar attempts to revise the income tax law were made in 2009 and as recently as in 2019.
In 2009, then Finance Minister Pranab Mukherjee unsuccessfully attempted to introduce the Direct Tax Code (DTC). It aspired to give “a competitive edge to the country while dealing with international taxation issues”. Among the issues it sought to address were concerns relating to the residential status of foreign companies—their control and management, taxation of charitable organisations; shift from EEE (exempt-exempt-exempt) to EET (exempt-exempt-tax) method of taxation of savings and capital gains. Drafts of the bill underwent revisions in 2012 and 2014. But it could not be passed as Parliament was dissolved in 2014 following the General Elections that year. In Sept 2017, Prime Minister Narendra Modi, observed the need to redraft the Income Tax Act. This led to the constitution of a six-member task force by the Finance Ministry in November that year to draft the new legislation. The committee submitted its report in August 2019.
Published – February 18, 2025 07:00 am IST
