A New Era of Tax Simplicity

The Income Tax Bill 2025 represents a significant legislative exercise by the government, aimed at simplifying and streamlining the nation's direct tax system. The bill's central objective, as articulated by the finance minister, is to create a tax law that is accessible and easily understood by all taxpayers, fostering greater compliance and reducing ambiguity.

A defining characteristic of the 2025 bill is its commitment to clear and concise language. The structure, employing a logical progression of clauses and sub-clauses, is designed for ease of comprehension, particularly for individual taxpayers and small businesses. The bill demonstrably departs from the previous legislation's reliance on provisos and explanations, which often led to interpretational ambiguities and protracted disputes. Instead, it opts for straightforward language and presents exclusions separately within each section, promoting clarity and significantly reducing the potential for misinterpretation.

For the sake of providing clarity, attempt has been made to use more accessible terminologies such as “Irrespective of” instead of "Notwithstanding", and “Tax Year” in place of “Previous Year or Assessment Year”. But it must be borne in mind that use of these legal terminologies have been passed through multiple judicial pronouncements. The apparent intent behind the proposed change is to replace the term with more accessible language, not to overturn existing legal precedent regarding its interpretation.

The simplification in language is evident across key sections of the bill. Illustratively, in the issue of depreciation, clarity provided in the computation of actual cost especially with respect to computation in the case of grant of subsidy is a welcome clarity. This is a frequently litigated provision. Regarding the carry forward and set-off of losses, the proposal aims to limit the indefinite carry forward of losses following business reorganisations. While this objective is understandable and would plug litigations on this issue, the restriction in Section 119 may no longer be necessary and should be reconsidered. Furthermore, limiting the carry forward of losses only to industrial undertakings and public companies warrants review. Business reorganisations should ideally be tax neutral and should continue the tax attributes to the successor entity.

The government has approached simplification in a phased manner. For instance, on the capital gains, simplification started from the earlier budget. This has aided using simple language in the bill. The bill introduces user-friendly tables and other visual aids to enhance understanding and facilitate compliance. Regarding TDS, while simplification efforts began in the previous budget and were continued in the recent one, further improvements are possible. While the current bill consolidates multiple sections into fewer, using tables, additional simplification could be achieved by consolidating payment types. Given the unified rate and threshold, the distinction between income classifications (commission, professional services, or contract work) is no longer relevant.

The bill addresses the discretionary powers of Assessing Officers (AOs) in levying penalties, introducing a more rationalised and predictable penalty structure for non-compliance. This move towards greater fairness and predictability is likely to enhance taxpayer trust and encourage voluntary compliance.

The bill upholds the established principle contained in Section 90(2) of the current Act, ensuring the continued application of the most beneficial provisions of either the Income Tax Act or the Double Taxation Avoidance Agreement (DTAA). A new provision with respect to interpretation of words not defined in the DTAA or the Bill is proposed to be introduced. This opens up the possibility of debate on the static vs ambulatory principle of interpretation. International commentaries on this subject are very relevant. Equally, there are multiple judicial pronouncements in the Indian content. it is important to align the statutory provision with the same.

One notable change is the placing of tax holiday for SEZ (found in section 10AA in the current Act) along with deductions. Even on this matter, there are many judicial pronouncements on the effect of exemption vs deduction. The proposed provision in the bill is intended to end this debate. This must be welcomed by the industry. Deduction under the new section 144 which refers back to section 10AA of the current Act for the purpose of computation. It is not clear as to how the computation could be carried out as per the old Act when the same would have been repealed. Certain other provisions of the Bill also refer back to the old Act. At least to this extent, the old Act may have to be saved so that there are no unintended consequences.

The government has successfully introduced new legislation without disrupting established frameworks. Effective implementation and long-term success of the simplified tax law depend on three key factors: continued and enhanced administrative reforms (making timeliness enforceable through the Taxpayer Charter), broader and more effective technology adoption (for efficient implementation, better taxpayer services, lower compliance costs, and transparency), and a sustained focus on ease of administration and application (crucial for fostering economic growth, taxpayer confidence, and realising the legislation's full potential).

The Hon’ble Finance Minister and the Income Tax Department deserve recognition for this significant legislative milestone. Given expertise and experience with the evolution of tax jurisprudence under the existing Act, the professionals should commit to partnering with the government and contributing to the successful implementation of the new legislation.

The writer is Chartered Accountant-Partner Deloitte. Views expressed are personal