IT Bill 2025

The Monsoon of Tax ‘Reform’ 

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It’s raining tax ‘reform’. Income Tax Bill, 2025 (‘IT Bill, 2025’) will soon replace the six decades old Income Tax Act, 1961. Goods and Services Tax (‘GST’) will ostensibly be simplified by Diwali of 2025. And we will have a two-tier GST consisting of 5% and 12%, with a ‘special’ tax rate of 40% applicable to select goods and services. Income Tax Return forms are being simplified, money limits for filing appeals across all tax domains are being enhanced to reduce tax litigation. Cumulatively, the changes – we are informed – are part of the larger goal of ushering in ‘Next-Generation Reforms’. There is a lot of activity, but something seems amiss.

Substantive tax reform is amiss. 

IT Bill, 2025: Simple Language, Uncertain Policy 

The use of simple, comprehensible, and coherent legal language is a goal worth spending thousands of hours. But such an exercise proves to be shallow and limited if the underlying policy is unclear and operating at cross purposes. Is faceless assessment scheme now the default manner of assessment or some aspects of human interaction are to be retained permanently? Do CSR activities deserve an unqualified tax-free status? What is the appropriate manner to levy tax on trusts? If the questions seem too narrow and pointed, what about the broader ones. Do we decisively move to the new tax regime and shed the old tax regime? Do we provide revenue targets to officers, but ensure that they don’t adopt absurd positions? Can we ensure that the Revenue Department does not adopt a position that is contrary to plain language of the statute? Do we repose faith in taxpayers and make policies from that starting point or is the default position otherwise? Should every tax treaty now be necessarily notified or was it just a convenient argument adopted by the Income Tax Department to deny benefits to a handful of taxpayers? I can go on, but you get the gist. 

If core income tax policies are in a state of flux, the language to express that policy can only provide limited clarity. Ironically, most clarity emerges in only in provisions which endow powers to the Income Tax Department. This includes powers of search and seizure, powers of arrest, and now that the dust has settled a bit: powers to reopen assessments. Otherwise, use of phrases such ‘tax year’ for ‘assessment year/previous year’ or use of ‘irrespective’ instead of ‘notwithstanding’ is a choice in favor of alternate words, not necessarily clarity. The IT Bill, 2025 may be more readable compared to its predecessor. The unending provisos and explanations may have been removed, redundant provisions to some extent been deleted, and use of legalese comparatively lesser. But improved readability should not be confused with clarity.    

GST: Multiple Tax Rates are not THE Enemy

Multiple tax rates in GST only take the heat because they are an obvious and low hanging target on which we like to hang all the flaws of GST. But the truth is that the Union and States cannot express their GST governance in clear and unambiguous terms. Why are purchaser’s dependent on suppliers to file their returns to claim Input Tax Credit? Why is provisional attachment of taxpayer properties so commonplace that courts must intervene repeatedly, and caution about the draconian nature of the power of provisional attachment? What policy is guiding levy of GST on health and life insurance? Why was online gaming target of ludicrous GST claims despite the law being obviously silent on come crucial issues? Why cannot the Revenue Department not digest any loss in courts? Any major loss in courts for the Revenue Department immediately triggers an amendment to nullify the decision. If possible, a through retrospective amendment. You want examples of these amendments? I’ve enlisted some here. 

The upward trajectory of GST collections hides the many flaws of GST governance. Instead of undertaking long, painful substantive reform, and building on the many gains of GST, we have chosen to focus on tinkering with GST rates. It is an easy sell on the political front. Come Diwali, it is easy to sell reduction of GST rates on cars and claim brownie points. But does that solve the broader issues caused by multiple tax rates in GST. The classification disputes – though source of occasional amusement – are unlikely to see end of the day until GST magically adopts a single-rate structure. Is revenue neutral rate now completely irrelevant to determine GST tax rates? If GST Compensation Cess is phased out, will the new policy be of no more cesses on GST? Because if the Union and States are simply going to levy ad hoc cesses on narrowed down tax slabs to compensate for revenue loss, we may as well stick with the current tax rates. And, while we at it, can someone tell me: why do gold and precious stones that they deserve a tax rate of their own?    

Tax Administration IS Tax Policy

There is a credible viewpoint in tax law scholarship: tax administration IS tax policy. You can understand this pithy quote in any number of ways. First, that tax administration can elevate or bury the most prudent tax policy. Delay in processing bona fide tax refunds can defeat a well-intentioned policy of reducing tax burdens of certain taxpayers. Cancelling GST registrations for sham reasons can defeat the policy of providing registrations within three working days of filing an application of registration. The above viewpoint can also be understood to mean that tax administration is an integral part of tax policy. Or if not integral, tax policy is certainly not distanced from tax administration. And that any tax reform or change in tax policy that does not bring a simultaneous change in tax administration is a flawed, if not a doomed tax reform. 

We cannot expect a rewrite of a law or a change in the tax rates to simply reduce unnecessary litigation, improve compliance, or otherwise improve tax governance. We need accompanying changes in attitudes of tax officers which in turn may require a broader systemic change in the administration of our Revenue Departments. Forsaking pedantic interpretation of law, aspiring for tax coherence, letting go of smaller tax demands in the short run for long term gains of simplicity and coherence can be some of the changes. But, as I write and advocate for these changes, I’m already convinced that they will take a long time to be realized. If at all.   

Conclusion – Buzzwords Abound  

The landscape of tax law and policy is increasingly being populated by buzzwords of no consequence. ‘One Nation, One Tax’ was a slogan that hid the reality that some indirect taxes will survive the implementation of GST. Now the ‘Diwali gift’ of GST tax rates restructuring is being thrown around as if sane tax policy is a largesse of the state and not a basic expectation of taxpayers. Income tax law has a ‘new look’ while it retains its old soul. And, while one cannot grouse political priorities because buzzwords sell, it is vital to understand the substance or the lack of it that hides behinds these quasi-marketing slogans. India’s tax landscape needs reform – deep, wide, and substantive. Anything else is activity, not meaningful change.    

Income Tax Bill, 2025: In Search of a Big Idea

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The Department of Revenue claims that Income Tax Bill, 2025 – tabled in the Parliament on 13 February 2025 – marks a significant step towards simplifying the language and structure of the Income Tax Act, 1961. Does it? Yes. Was it needed? Yes. Is it a major reform? No, and herein lies the rub.  

The Press Release accompanying the IT Bill, 2025 makes it clear that the ‘simplification exercise’ did not implement any major tax policy changes to ensure continuity and certainty for taxpayers. This statement presumes two things: first, that there isn’t much uncertainty in the current IT Act, 1961 or certainly not worth immediate attention; second, that simplification and policy changes are easily separable. Both contain an element of truth without being completely true. 

In more than six decades of its existence, the IT Act, 1961 has ensured some stability and continuity in the direct tax domain, despite repeated amendments. But that does not mean that any major policy change in direct taxes should be frowned upon and sacrificed at the altar of certainty. There is enough ambiguity on various issues in income tax that could do with more clarity and better policy direction. Capital gains tax is one example. 

Equally, if the underlying policy is muddled, then the legislative language can only be that ‘simple’. Merely because the Provisos have been rearranged into sub-sections, Schedules have been appended, or ‘notwithstanding’ has been replaced with ‘irrespective’ will not be enough to reduce income tax litigation and disputes. Straightforward policy decisions usually lead to simpler statutes. Ad hoc policy changes cause frequent amendments and an eventual bloating of the statute. As it happened with IT Act, 1961. To aim for simplification of language without ensuring adequate clarity in policy is a limited exercise.   

In this post, I intend to highlight three major things: one achievement of IT Bill, 2025; one major flaw, and the way forward. 

IT Bill, 2025: Improves Readability, Not Comprehension  

IT Bill, 2025 has achieved one thing: it has improved reading flow of the proposed statute, the provisions are easier to locate without unnecessary alphanumeric numbers and caveats obstructing one’s view. The multiple Explanations, Provisos, non-obstante clauses, some with prospective, others with retrospective effect have been realigned into sub-sections to make the provisions easier to follow. Schedules are more informative, some redundancies have been eliminated, and overall, it is much easier to navigate the law as compared to the IT Act, 1961. But the ease of readability, and improved navigation is only for tax professionals. 

I don’t intend to speak for an ‘average’ taxpayer, but I’m going out on a limb to say that any claim that IT Bill, 2025 will be easier to comprehend for an average taxpayer is a bit of a stretch. The proposed law does not in any way remove the legalese to such an extent that the average taxpayer can fully understand the tax implications of their transactions. It is self-serving for tax administration to sell hope on the back of this simplification exercise, but let us draw a line and stop them from selling a fantasy. Let me illustrate: 

Section 9(1), IT Bill, 2025 states that income deemed to accrue or arise in India shall be the incomes mentioned in sub-sections (2) to (10). Section 9(2) then states that any income accruing or arising, directly or indirectly, through or from the transfer of capital asset situated in India shall be deemed to accrue or arise in India. Section 9(9) refers back to Section 9(2) and elaborates the latter via seven clauses with almost each clause containing various sub-clauses. We expect an average taxpayer to not only read this legal language, but also understand it, make a reasonable prediction as to how the tax officers and courts will interpret it? It should not even be an expectation. It is pure fantasy.

And if anyone still doubts my assertion, let us show an average taxpayer the Revenue Department’s explanation of what is a ‘tax year’ and the need for its introduction. The clueless expression that a taxpayer may respond with will give us some answers about the simplicity of language and lucidity of the IT Bill, 2025. Don’t get me wrong, tax year as a concept is welcome and can be easily understood by tax professionals. Not by a layman. And the claim that somehow by rearranging the provisions and improving flow of the statute may make it easier for an average taxpayer to comprehend it is something that I’m unable to accept.

In fact, improved readability is all the simplification exercise offers to tax professionals. For all intents and purposes, the changes in the IT Bill, 2025 will not make it easier to understand and interpret. IT Bill, 2025 remains as complicated and dense a statute as its predecessor and is likely to attract similar volume of litigation and same nature of interpretive disputes.      

Simplistic Understanding of Simplification  

Is simplifying the language of statute a ‘significant step’? Rarely. 

Simplification of legal language is a desirable step. It is not necessarily a significant one. 

Tax law, like every other law, is a constant site of interpretation. Judiciary performs the prime role in statutory interpretation. One can then argue that simplifying the language of statutory provisions may make it easy for the judiciary to understand ‘legislative intent’. It is a phrase that is often-invoked by the Revenue Department. However, the expectations should be muted on this front. A simple language in a statute does not guarantee that the judiciary will always agree with the Revenue’s interpretation. An outcome that the latter terribly desires, but rarely achieves. 

IT Bill, 2025 contains provisions of charge, exemptions, deductions, corporate taxation, tax evasion, assessments, clubbing of income, powers of tax officers, to name just a few. Each of these provisions require constant interpretation and re-interpretation depending on the transactions and facts that emerge. It is the dynamic nature of personal and commercial transactions, their shape shifting nature that provides scope and opportunity for tax officers to interpret the law and determining tax liabilities of taxpayers. And depending on the fate of disputes, the law changes frequently to address the emerging circumstances. If the Revenue Department disagrees with a particular interpretation, changes to income tax law happen soon thereafter. Why? Because protecting revenue’s interest is primary, policy direction is easily divorced. Simplification, is thus, rarely about drafting provisions in easy-to-understand language. Simplification emerges from clear policy.    

Simplification of provisions of IT Act, 1961 currently seems like a desire that legislative language will be easier to decipher during adjudication of tax disputes. The desire will only become a fact once the judiciary starts interpreting the ‘simple’ statutory provisions. And if one goes by the track record of Department of Revenue, each time the judiciary disagrees with it, the statute is amended to reflect its position and interpretation via an Explanation, a Proviso, an insertion or deletion of a clause. Will that not happen in the future? We don’t know because there have been no such commitments. Also, because we don’t know what tax policies are driving the simplification of provisions, apart from generic statements such as ‘improving ease of business’, ‘rationalisation of tax law’, ‘improving compliance’, etc.  

In Search of a Big Idea 

There is no big idea that underscores the IT Bill, 2025. Admittedly, if the official Press Release itself admits no major policy change has been introduced, then highlighting lack of substantive changes is an obvious comment. But it doesn’t and shouldn’t distract us from the fact that India’s direct tax policy is not ideal. The claim that direct tax policy shouldn’t be disrupted to prevent ‘instability’ is shallow and insincere. To be sure, India’s income tax has witnessed some changes in recent times, the primary one being the introduction of new tax regime. And, of course, the recent introduction of income tax exemption on income upto 12 lakhs per annum. What else? Nothing. Political parties continue to enjoy a durable income tax exemption, there is no movement to tax agricultural income, charitable organisations keep facing undue scrutiny and onerous compliance requirements, tax officers continue to enjoy unbridled powers of search, seizure, and survey without any meaningful scrutiny. Faceless assessments and attempts to limit powers of reassessments were well intentioned reforms, but both are embroiled in tangles that seem to have limited their administrative reform potential. 

We had the opportunity to create a trailblazing direct tax policy for cryptocurrencies, instead we opted for and continue with a punitive regime that all but discourages all kinds of cryptocurrency transactions in India. Digital taxation continues to hang in balance, with India participating in the OECD’s attempts to overhaul the corporate and international tax landscape without being able to fully retain its autonomy and wriggle space for autonomous domestic policies. How about capital gains tax? No major idea on the anvil. Tax evasion? GAAR, introduced as a reaction to Vodafone case, alongside the Principal Purpose Test in tax treaties require constant reassurance to calm investors. But no major clarity has emerged on applicability and scope of either. Certainly not until the Revenue’s clarifications are tested in actual cases. Presence of wide-ranging anti-tax evasion provisions while conferring extensive and intrusive powers to tax officers are not typical hallmarks of a tax law attempting to inspire confidence in taxpayers. And, certainly do not boost taxpayer morale. 

Finally, burgeoning bots, robots, and deployment of artificial intelligence seem to have not made a dent in India’s substantive direct tax policy. We are still waiting for someone else to show us the path and then incorporate derived version of AI-related tax policy in India. AI is the biggest idea in today’s tech obsessed world and needs a tax response. How about promoting environment friendly activities? Better and more encompassing tax policies for electric vehicles? Environment taxes on polluting corporates? We refuse to engage with such ideas and instead and are focusing on renumbering our statute instead of unveiling new tax ideas.        

Conclusion 

India’s direct tax policy needs big ideas. Simplification of statute is not one. It is a reform, but we do ourselves a disservice by calling it a major milestone or a significant step. We need better ideas as to how to rethink source rules in a digital world, and how to guard our revenue interests while engaging with OECD, evolving a suitable anti-tax avoidance approach – domestically and in our tax treaties – as well as ensuring that our residence principles do not remain stuck in the past while the contemporary world increasingly inhabits digital nomads. And, not the least, ensure tax administration reforms are not just about ‘using’ AI, data processing, big data but also sowing seeds of substantive tax policies towards these technologies. We also need a first principles approach towards powers of tax officers to ensure that they have sufficient powers, but are not unaccountable for their actions. The only solace is that the simplification of language of IT Act, 1961 may prove to be the launchpad of such major reforms of income tax law. Time will tell if there is appetite for such reforms.  

Skeletal Timeline of Income Tax Reform in India

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1860-1886: 

Income tax was introduced in India for the first time in 1860 to overcome the financial difficulties due to First War of Independence of 1857. The period of 1860-1886 saw the Govt alternating between income tax and license tax as a source of revenue. Income tax became the preferred option when the first systematic form of income tax law was passed in 1886. 

1860: Income Tax Act, 1860 enacted in India

  • First income tax law of India 
  • Income was divided into four schedules to be taxed separately 
  • Four schedules were: income from landed property, income from professions and trades, income from securities, and income from salaries and pensions

1863: Income Tax Act, 1860 ‘expired’ 

1869: Income tax was reintroduced due to financial difficulties faced by the British Govt 

1873: Income Tax Act, 1869 ‘expired’  

1878: Income tax was replaced by license tax to raise money for famine insurance

1886: Income Tax Act, 1886 enacted with important changes 

  • Income was divided into four classes
  • Four classes were: salaries, pensions or gratuities, net profits of companies, interest on securities of Govt of India, and income from other sources 
  • Agricultural income was exempt from income tax and so were properties devoted to charitable and religious purposes  

1918-1961: 

The foundation for modern Indian income tax law – as we know it today – was laid with enactment of 1918. Income tax reforms were initiated after the First World War and eventually led to a broad review of income tax collections leading to enactment of Income Tax Act, 1922, foundational legislation for the current Income Tax Act, 1961. The foundation for tax administration was also laid during this period.   

1918: Income Tax Act, 1918 replaced the Income Tax Act, 1886 

  • Broad shape of contemporary income tax law started emerging  
  • Act of 1918 replaced ‘schedular income tax’ with ‘total income tax’ 

1922: Predecessor to the Income Tax Act, 1961 enacted 

  • Income Tax Act, 1922 was enacted based on recommendations of All India Committee
  • Income tax rates were determined annually via ‘Finance Acts’ (Annual Budget) and were not encoded in the Income Tax Act itself 

1939: Special Enquiry Committee comprised of experts from India and England 

1941: Income Tax Appellate Tribunals were established 

  • First specialist tribunals constituted in India 

1956: Union of India stresses on reform of IT Act, 1922

  • It was acknowledged that IT Act, 1922 had grown in an unplanned manner 
  • It was decided to re-examine the IT Act, 1922 to simplify it and make it more intelligible and referred the task to Law Commission of India  

1958: Law Commission of India submits it report 

  • 12th Report of the LCI made extensive suggestions for rearrangement of provisions
  • LCI stated that income tax law was in a state of ‘hopeless confusion’ due to constant tinkering with the IT Act, 1922 via short sighted amendments 

1959: Tyagi Committee submitted its report 

  • The Committee was formally called ‘Direct Taxes Administration Enquiry Committee’ 
  • The Committee acknowledged that simplification of tax laws was not an easy task. It recommended that provisions of IT Act, 1961 should be rearranged more logically and expressed in clearer language to remove ambiguities in the law

1961: Income Tax Act, 1961 was enacted 

Promise of IT Act, 1961

Promise of Income Tax Act, 1961: 

Morarji Desai promised the following when introducing the income tax law in 1961: 

Simplification has been sought to be obtained by replacing obscure and ambiguous expressions with clear ones and by re-arranging the provisions of the Act so as to make them more easy of comprehension than they are at present. 

1961-Present: 

Over years, Income Tax Act, 1961 grew complex, longer, and difficult to decipher due to various reasons. The Union of India’s propensity to amend the law every year, frequently with retrospective effect, emergence of novel forms of business transactions, incomes, tax evasion techniques, and divergence between the Revenue Department’s understanding of income tax law provisions and judicial interpretation of such provisions contributed to the complexity. Not least was the use of extensive ‘Provisos’, ‘Explanations’ in the statute which made the law difficult to understand and administer.   

1963: Central Boards of Revenue Act, 1963 passed 

  • Repealed the Central Board of Revenue Act, 1924 
  • Central Board of Revenue was replaced by two entities: Central Board of Direct Taxes and Central Board of Indirect Taxes and Customs. Former is the ape administrative body for income taxes in India  

1991-92: Raja Chelliah Committee examined India’s entire tax landscape 

  • Formally called the ‘Tax Reforms Committee’, it recommended a series of tax reforms for direct and indirect taxation 
  • The Committee though did not suggest enacting a new income tax law, only suggested various changes including but not limited to corporate taxes, interest taxation, agricultural income, and gift tax  

2009: First notable attempt to replace the IT Act, 1961 

2010: Revised version, Direct Taxes Code Bill, 2010 presented in the Parliament 

  • Revised version incorporated some comments received on the 2009 version
  • Direct Taxes Code Bill, 2010 referred to the Standing Committee on Finance

2012: Standing Committee on Finance submitted its Report on Direct Taxes Code Bill, 2010 

2014: Revised version of Direct Taxes Code Bill, 2010 was again put up for comments 

  • Direct Taxes Code Bill, 2010 lapsed with dissolution of the 15th Lok Sabha 
  • No clear commitment by the new BJP Govt to take the process forward 

2017: Task Force on Direct Tax Code setup 

  • Initially the Task Force was led by Mr. Arbind Modi and later by Mr. Akhilesh Ranjan 

2019: Task Force submitted its Report 

  • Report was never released to the public 

2024: Ms Nirmala Sitharaman announces a review of IT Act, 1961

  • CBDT forms an ‘Internal Committee’ to substantively review IT Act, 1961 
  • It was announced that the review will be completed within 6 months 

2025: Ms Nirmala Sitharaman announces that new income tax bill will be introduced 

  • Promises that new income tax law will be based on ‘trust first, scrutinize later’ principle 
  • New law will be substantively shorter and simpler as compared to IT Act, 1961
  • Also indicates that the income tax bill will be referred to the Standing Committee 

Promise of Income Tax Bill, 2025: 

Nirmala Sitharaman promised the following in her Budget Speech of 2025 

New IT bill will carry forward the spirit of  ‘nyaya based on the concept of trust first, scrutinise later’ and ‘the new bill will be clear and direct in text with close to half of the present law, in terms of both chapters and words. Also ‘It will be simple to understand for taxpayers and tax administration, leading to tax certainty and reduced litigation.’ [Not verbatim]

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