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Direct tax law simplification to set stage for fresh reforms

New Delhi: The Income Tax Bill 2025, set to be moved in the monsoon session of Parliament to simplify the direct tax law, will set the stage for another round of reforms which will be more substantive in nature in subsequent years, said two people informed about the discussions in the government The finance ministry is of the view that once the over-six-decade-old Income Tax Act, 1961 is simplified and made more readable, targeted reforms can be achieved in taxation of personal and corporate income. This will be done through the annual Finance Acts, said one of the persons quoted above. Major areas of dispute set to be ironed out in the future include how multinational corporations value their cross-border transactions with group entities, which in turn has an impact on the profits offered for taxation in India. Reforms may also target disputes on whether certain income is to be classified as capital gain or as business income; eligibility of tax exemptions; and existence of a business presence or 'permanent establishment' in India by offshore companies which make profits attributable to them taxable in India, according to experts. "The new Income Tax law has to be implemented from 1 April 2026, not from 'a date to be notified,' - the usual language used in framing laws. Once the new law is in place, further reforms can be considered but it has to be weighed against the need for not further complicating the law," said the person quoted above, who spoke on condition of not being named. Read more: Simplify GST: It's time for a single all-India identification mandate The government has received suggestions for reforms not just for simplifying the income tax law, but on more substantive issues as well, said the person. "The current legislative effort is restricted to just rewriting and renumbering of the direct tax law while emerging tax challenges have to be addressed separately in future," explained Ved Jain, former President of Institute of Chartered Accountants of India. Jain gave an example from the arena of digital economy - specifically, the virtual delivery of services from across the border and its taxation. "This is increasingly becoming relevant as physical presence is becoming less relevant for delivery of services," said Jain. A third person, who also spoke on condition of not being named said that the Lok Sabha select committee formed to examine the income tax bill, led by Bharatiya Janata Party MP Baijayant Panda, met on Wednesday to finalize its report. "The committee unanimously approved the report, which is tentatively scheduled for tabling in Parliament on the first day of the monsoon session," the person said, adding that the report entails about 285 suggestions. The monsoon session is set to begin on Monday. The select committee's recommendations for modification cover sections dealing with undisclosed income as well as definitions of beneficial owner, capital asset, associated enterprise and investment funds but retains the other concepts and provisions in the draft bill as tabled by the government, said a fourth person, who also spoke on condition of not being named. The Select Committee left provisions relating to taxes deducted at source (TDS) and income deemed to arise in India largely untouched with only marginal changes, this person said. The concept of tax year is left unchanged in the committee's report, this person said. The draft bill introduced the concept of tax year to specify the year of earning income for which the tax liability is computed. Read more: Tax rules for F&O, intraday, and stock trading -- what you must know Queries emailed to the finance ministry, the Central Board of Direct Taxes and to the Select Committee on Wednesday seeking comments for the story remained unanswered at the time of publishing. Jain said one issue that should ideally be addressed by the Select Committee is the concern around the power of tax officials to access the computer systems of assesses by overriding the access code in certain circumstances, as was provided in the draft bill. The draft bill explicitly allowed officials to gain access to any computer system or virtual digital space by overriding the access code to get information, with permission from superiors. The select committee approved the government's proposal on such access to information, with minor change in wordings. The committee also sought to remove ambiguity in drafting the bill across sections, including on the issue of securing tax refunds. Experts have several suggestions for further reforms. "The New Income-tax Bill, 2025, while being positioned as a simplification and modernization of India's tax code, has not addressed several expectations and long-standing demands raised by industry bodies, tax professionals, and taxpayers," said Amit Maheshwari, Tax Partner AKM Global, a tax and consulting firm. These expectations include rationalization and simplification of the capital gains tax regime -- unifying holding periods, tax rates, and treatment across asset classes, explicit exclusions or clearer thresholds for General Anti-Avoidance Rules (GAAR), especially in cases involving commercial substance, liberalized and clearer rules for non-resident status and mandatory time limits for disposal of appeals, said Maheshwari. GAAR prohibits transactions designed to avoid tax and how those should be taxed.

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