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.
