The Income Tax Bill, 2025, was introduced in parliament on February 13 to fulfil the finance minister’s promise during her Budget speech of July 2024 of a comprehensive review of the income tax law. The media release of the Central Board of Direct Taxes on the same day states that the new Bill aims at a textual and structural simplification of the existing income tax law for greater clarity and coherence. It says that in the interest of continuity and certainty in tax policy and preserving predictability for taxpayers, no major policy changes or changes in tax rates were made in the new Bill.
It stated that the government undertook a wide-ranging consultation exercise and examined simplification models adopted by Australia and the UK while drafting the new law. However, it would be worthwhile to note earlier efforts made in India to reform, modernise, and simplify the income tax law. A Direct Taxes Code Bill, drafted in 2009, proposed substantial policy changes and a simplified structure. This Bill went to the Standing Committee of the Lok Sabha, which examined the draft provisions in detail and made voluminous recommendations.
The Bill was redrafted in the light of the recommendations, but then the Lok Sabha was re-constituted in 2014, and the Bill could not be taken up. Subsequently, another task force was set up in 2017 to draft a simplified income tax law aligned with current economic realities and the country’s needs. This task force submitted its report in August 2019 and the draft of a new and simplified income tax bill. The report was not made public, but several of its recommendations are said to have been implemented. The media release now issued does not say whether these earlier drafts were also referred to in any way.
Commendable effort
It cannot be disputed that the 4,000-odd amendments made to the Income Tax Act, 1961, over the years to keep pace with new and emerging economic circumstances and an evolving tax policy have made the existing law extremely complex and difficult to understand. The latest Bill constitutes a major step towards simplifying the legislation’s language and structure; the mammoth exercise carried out to this effect by the group of CBDT officers concerned is truly commendable.
The consolidation of provisions relating to the same subject, removal of obsolete provisions, doing away with cross-referencing that is a source of major complexity in the existing law, reducing several distinct but related provisions to a consolidated tabular form, simplifying the language and recasting the provisions into more comprehensible and easily understood text—these have all been used extensively to produce an income tax law that is more concise, more coherent and easier to understand and comply with.
Missed opportunity?
However, it will be difficult to say that the Bill represents a major reform of the income tax law or even a significant modernisation of the direct tax system. The finance minister spoke of a ‘comprehensive review’ of the income tax law, leading to expectations of a new modernised law that would help India in its quest to realise the vision of a Viksit Bharat by 2047. These expectations have not come true. Even if it was considered necessary to maintain the continuity and certainty of tax policy and the stability and predictability of the tax rate structure, several measures could have been taken to enhance the ease of doing business and boost the economy’s competitiveness. It could have provided greater tax certainty, lowered costs of litigation and compliance, and created an environment more amenable to investment and growth.
For instance, transfer pricing disputes that constitute the major chunk of litigation cases could be largely prevented by building on the multi-year transfer pricing audits proposed in the Finance Bill, 2025 and delinking the audits from regular assessment proceedings. Such delinking and an appropriate mediation/compromise mechanism that can waive penal consequences could potentially settle disputes before they get into the appellate stream. Similarly, several other fault lines already observable in the present law need not wait for the annual Budget exercises to be addressed.
Managing the transition
As things stand, the Bill is likely to be enacted into law very soon, with minimal changes that the select committee would be able to recommend in the time made available to them. Hopefully, the committee will be able to identify most of the inadvertent errors, omissions and potential misinterpretations of the new language, enabling a relatively smooth implementation of the new law.
Notably, the work of rewriting the law will not end with the enactment of the new Bill. A large mass of delegated legislation in the form of income tax rules, various prescribed forms, notifications (particularly those granting approval or allowing exemptions), and circulars need reviewing to align with the new provisions. This may not call for the same level of effort that went into drafting the Bill, but changes may be needed in the references in these rules and notifications to sections of the existing act or to specific terms used in the existing provisions that do not appear in the Bill.
Further, the tax administration in India is now highly digitalised, possibly needing modifications to relevant programmes and processes to reflect the new provisions. Similarly, taxpayers (particularly large corporates who rely extensively on tax technology to make their compliances) may need to change their accounting and reporting systems.
Taxpayers would also welcome the CBDT continuing with its new initiative of issuing FAQs and circulars to clarify the intention behind the changes in the language of particular provisions already being discussed and debated in legal and professional circles. Taxpayers and tax professionals would be well-advised to point out all potential misinterpretations and uncertainties in the meaning of new words and phrases that they come across. Such combined efforts and cooperation will be constructive in successfully transitioning to the new Income Tax Act, 2025.
(Views are personal)
Akhilesh Ranjan | Advisor, Tax and Regulatory Services, Price Waterhouse & Co LLP, and former member of Central Board of Direct Taxes (CBDT)