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Income-Tax Bill, 2025: A Cosmetic Overhaul or Meaningful Reform?
Context:
In February 2025, the Union Finance Minister introduced the Income-Tax Bill, 2025, in Parliament, aiming to replace the Income-Tax Act, 1961.
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- The government asserts that the new legislation will simplify the tax system, making it more accessible for both taxpayers and administrators.
- The existing law, which has been in force for over six decades, is seen as overly complex, riddled with provisos, exceptions, and non-obstante clauses.
- The new draft seeks to enhance clarity, reduce litigation, and create a fairer, more predictable tax regime.
- However, a closer examination of the Bill reveals that beyond its structural changes, it does little to address the fundamental complexities of the tax system.
- In some areas, it even expands the government’s authority in ways that raise serious concerns.
Challenge of Simplification
- Transparency: Globally, there is a push towards drafting laws in plain language to enhance transparency and accountability.
- Some argue that legalese ensures precision, but experience shows that clear laws reduce confusion, improve compliance, and minimise litigation.
- Little Changes: Despite its stated goal of simplification, the Bill largely retains the convoluted and dense structure of its predecessor.
- For instance, one of the supposed simplifications involves replacing the phrase “notwithstanding anything contained to the contrary…” with “irrespective of anything to the contrary.”
- While this change may seem minor, it does little to make the law more comprehensible for the average taxpayer.
- Same Approach: The Bill’s failure to simplify tax laws stems from the fact that it does not fundamentally alter government policy on taxation.
- Without a shift in approach, the new draft serves as little more than a restructured version of the 1961 Act.
Superficial Revisions
- The Bill does make some improvements, such as eliminating outdated provisions and refining definitions.
- Some compliance timelines have been consolidated into tables and schedules, but these adjustments could have been achieved through targeted amendments rather than a complete legislative overhaul.
- Moreover, the Bill retains many of the inherent complexities of the existing tax system.
- Simply moving compliance timelines into schedules does not make the law less litigious, particularly when these schedules refer back to multiple sections of the Act.
- Additionally, while the new law is intended to replace the old, it still incorporates references to the existing legislation.
- For example, the definition of “income” under Section 2(49) includes various sources such as profits, dividends, and allowances, as well as all items covered under Section 2(24) of the current Act.
- If definitions still rely on the old statute, one must question the purpose of this legislative exercise.
- A more pressing concern is that by making textual changes without altering the core philosophy of taxation, the Bill risks reopening settled legal debates.
- Courts have spent decades interpreting the provisions of the 1961 Act, providing clarity to taxpayers.
- Now, the restructuring may lead to renewed litigation over provisions that were previously well understood.
Powers of Reassessment
- One of the most contentious aspects of the current tax law is the government’s power to reopen completed tax assessments.
- Until 2021, authorities could reassess taxes only if they had “reason to believe” that income had escaped taxation—a phrase that led to prolonged court battles.
- The law was later amended to allow reassessments based on “information” suggesting tax evasion, but this term was left vaguely defined.
- Although courts have addressed some of these ambiguities, the delegation of broad powers to tax authorities has raised concerns about potential misuse.
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- The Bill does little to resolve these issues. Instead, it largely reproduces the existing provisions, failing to offer greater safeguards against arbitrary reassessments.
Expanded Powers of Search and Seizure
- Perhaps the most troubling feature of the Bill is its approach to search and seizure.
- Under the current law, tax authorities have significant police-like powers to search individuals and properties and seize relevant materials.
- While these provisions have been upheld by courts, their validity has been questioned following the Supreme Court’s landmark judgment in Justice K.S. Puttaswamy v. Union of India (2017), which affirmed the fundamental right to privacy.
- Rather than addressing these concerns, the Bill expands the scope of search powers by allowing tax officials to inspect “any information stored in an electronic media or computer system.”
- The definition of a computer system is broad, encompassing not just physical devices but also email servers, social media accounts, and digital platforms.
- If a taxpayer denies access, authorities can override access controls and forcibly enter these systems.
- Currently, the law does not explicitly permit such digital intrusions, though officials have been known to demand access to electronic devices.
- If the Bill is enacted, tax officers would have legal authority to review personal emails, messages, and social media activity without judicial oversight.
- This raises serious concerns about privacy and the potential for abuse of power.
