Effective streamlining

In the Budget presented in July, 2024, the Finance Minister announced that the current Income Tax Act, 1961 will be reviewed and scrutinised in order to make it “concise, lucid, easy to read and understand”.

In her 2025 Budget speech, Finance Minister Nirmala Sitharaman asserted “I reaffirm the commitment of the tax department to ‘trust first, scrutinise later”. The Government is encouraging taxpayers for proper compliance and reposed faith in the taxpayers. Such an approach of the Government is visible over the last couple of years where we are witnessing lesser scrutinies being conducted by the department. With such progressive policies and reforms, the Government is determined to promote ‘ease of doing business’ by replacing the old model of ‘fear of doing business’. Sitharaman also pointed out that for attaining the vision of ‘Viksit Bharat’, taxation reforms play a crucial role.

With this background, the new Income Tax Bill, 2025 (“the Bill”) was tabled on February 13, 2025. The new bill is likely to replace the current Income Tax Act, 1961 (“the Act”) and may come into force from April 1, 2026. The Bill aims to streamline various scattered provisions under the existing Act by removing obsolete and redundant provisions, provisos, explanations, clauses, references, and creating a crisper and simpler income tax framework.

Over the years, the Act of 1961 had been extensively subjected to amendments and modifications every year vide the Finance Acts. The introduction of new sections, sub-sections, provisos, explanations, references, etc. had changed the Act of 1961 so much so that it barely resembled the form it had when it was enacted for the very first time. The conflicting provisions gave rise to innumerable litigations which, in turn, required further additional clarifications and explanations. With the passage of time and to cope with the changing socio-economic scenario and the fiscal needs of contemporary India, such change was indispensable.

This process of review of the Act of 1961 started with the formation of a dedicated committee of around 150 officers of the Department which was entrusted with the said work. Recommendations and proposals were also invited from tax administrators, tax practitioners, tax payers, other stakeholders and experts of different hierarchies from all over the country. Such an outlook of the Government is praiseworthy and deserves a huge applause. Suggestions were sought under four broad categories of – (a) Simplification of Language, (b) Litigation Reduction, (c) Redundant / Obsolete Provisions and (d) Compliance Reduction. Various sessions were held and meetings with industry and tax experts were undertaken to scrutinize the suggestions that were received. Also, certain international tax consultancy bodies were approached. While undertaking this simplification process, a number of international and domestic articles and guidance materials were also perused. The Legislative Department of the Ministry of Law also actively participated in drawing out a draft of the Bill.

The first look at the bill signifies that there has been a substantial reduction in the text of the new Bill, in comparison to the existing Income Tax Act. The Bill runs to 622 pages and incorporates more sections and sub-sections by doing away with explanations and provisos.

Besides, about 300 existing provisions, 1200 existing provisos and 900 explanations in the existing Act of 1961 have been discarded and hence the increase in number of sections in the new Bill of 2025. Certain provisions are placed in schedules and presented in the form of tables. Efforts are made to include specific details and / or procedural aspects by way of Rules. This ensures a more streamlined and segmented framework while maintaining comprehensiveness. By simplifying the language and replacing provisos and explanations with sections, the Bill intends to reduce the scope of multiple interpretations. Sections governing similar issues are consolidated at one place to the extent possible. Provisions of redundant sections of the Act of 1961 as applicable to earlier assessment years will be governed by Repeal and Savings provisions. Also, certain provisions of the Act of 1961 have found existence in the new Bill and will continue till their respective sunset period is reached. Thus, the Government here ensures smooth transition. The new income tax bill is designed in such a way that it is understandable to everyone. This change aims to reduce errors during tax filing by individual taxpayers. The bill replaces terms like 'notwithstanding' with 'irrespective' for better clarity and removes redundant legalese. Various deductions for savings instruments available to the taxpayers are integrated in a single list under Schedule-XV which makes it easier for taxpayers to analyse deductions available to them and plan their investments accordingly. It is anticipated that because of simplification of tax laws, litigations & disputes will reduce to a large extent and thus it will save time and resources of the nation.

A 31-member select Parliamentary Committee will now take up the new Bill for further refining and improvisations after which it will return to the Lok Sabha for approval. The new income tax bill is expected to come into effect from April 1, 2026, thus providing taxpayers ample time to adapt to the new law.

However, ease of compliance, pursuant to such redrafting of the Act, would also require a simultaneous updating of various applicable forms and utilities for effective implementation of such law. Also, such mammoth exercise cannot be expected to be free of errors giving rise to ambiguities. A few articles have appeared pointing out such anomalies. For instance, clause 263(1)(a)(ix) of the Bill stipulates that a person claiming refund should file his return within the prescribed due date. On the other hand, clause 263(4) of the Bill provides mechanism wherein if return of income could not be filed on due date, it can be filed within 9 months from the end of the tax year (termed as belated return). A combined reading of such clauses raises ambiguity regarding grant of refund in case of belated return. All these concerns will be debated and are expected to be addressed before the Bill is passed. Taxpayers and tax professionals may have to understand, adapt and adjust to the new taxation framework by updating their software and infrastructure in order to comply with the new law. Unnecessary hue and cry need not be raised over this issue as such cost is a pittance compared to the benefits of such simplification of law.

The introduction of the concept of ‘tax year’ is one of the main highlights of the Bill. Tax year is a 12-month period, which will replace the dual system of financial year and assessment year. The ‘Previous Year’ will become ‘tax year’ and the concept of ‘Assessment Year’ is now buried. The Bill does not bring significant policy or structural changes in so far as tax rates, assessments, penalties, etc. are concerned. The draft version of the Income Tax Bill 2025 includes no changes to the income tax slabs and rates (under the new tax regime) from those announced in the Union Budget 2025 for the fiscal year 2025-26. The emphasis remains on simplification while continuity of the existing legal provisions of the Act. The new bill also empowers CBDT to introduce tax schemes and compliance frameworks anytime during a year which presently can be done only after parliamentary approval. This will reduce bureaucratic delays and improve efficiency in tax governance.

This bill is a premeditated step of the Government directed to strengthen India’s global image along-with solidification of the domestic treasury by unlocking and improving potential areas of growth. The Hon’ble Finance Minister rightfully hinted that the new income tax bill symbolizes “Nyaya” in the context of direct tax structure of the country following the same manner in which “Bharatiya Nyaya Sanhita” replaced “Bharatiya Danda Sanhita”.

Views expressed are personal