UPSC CURRENT AFFAIRS – 18 March 2025
Will the new Income Tax bill reduce disputes and litigation?
Why in News:
The Income Tax Bill, 2025 aims to simplify India’s tax law, enhance clarity, reduce litigation, and modernize tax administration.
Introduction
- The Income Tax Bill, 2025, introduced by Finance Minister Nirmala Sitharaman in Lok Sabha on February 13, 2025, marks a significant effort to simplify and modernize India’s direct tax framework.
- The bill aims to replace the Income Tax Act of 1961, which has undergone numerous amendments over the decades, making its provisions complex and difficult to interpret.
- The bill has been referred to a 31-member Select Committee chaired by BJP MP Baijayant Panda, and its report is expected in the next Parliament session.
Need for Overhauling the Income Tax Act
The existing Income Tax Act of 1961 has been amended multiple times, leading to:
- Complex language and structure, making interpretation difficult.
- Increased compliance costs for taxpayers.
- Higher litigation rates due to ambiguity in provisions.
The Income Tax Bill, 2025, therefore, seeks to:
- Simplify the language for easier comprehension.
- Consolidate redundant provisions and reorganize sections logically.
- Use tables and formulae to enhance clarity, particularly for TDS provisions.
Notably, the bill does not introduce any policy changes in direct taxes.
Key Features of the Income Tax Bill, 2025
- Simplification of Provisions
- Consolidates 43 different sections on TDS into a single provision.
- Introduces clear tables categorizing residents, non-residents, and others for tax deduction.
- Removes repetitive and outdated clauses to make the law more concise.
-
Introduction of the ‘Tax Year’ Concept
- Replaces “financial year” and “assessment year” with a uniform “tax year”.
- Aims to eliminate taxpayer confusion regarding the tax liability period.
- Aligns India’s system with global tax practices (e.g., UK, Australia).
-
Enhanced Role of the CBDT
- The Central Board of Direct Taxes (CBDT) retains its authority under Sections 119 & 295 for issuing guidelines.
- Empowers CBDT to issue clarifications for tax regimes, addressing previous gaps in the law.
-
Strengthening Digital and Virtual Taxation
- Expands the definition of “virtual digital space” to include:
- Cloud servers
- Social media accounts
- Online financial assets
- Search and seizure powers extended to digital assets.
- Expands the definition of “virtual digital space” to include:
-
Increased Scrutiny on Cryptocurrency & Digital Assets
- Cryptocurrency is classified as a Virtual Digital Asset (VDA).
- Strengthens tax evasion checks by allowing authorities to block transactions suspected of avoiding taxation.
- Reinforces the government’s commitment to regulating digital assets.
Expected Benefits of the Income Tax Bill, 2025
- Improved Tax Compliance
- Easier interpretation reduces taxpayer errors and unintentional non-compliance.
- Streamlined provisions reduce administrative burden on tax authorities.
- Reduction in Litigation
- Clearer provisions minimize interpretation-based disputes.
- Faster resolution of cases leads to lower backlog in tax courts.
- Support for Non-Profit Organizations (NPOs)
- Consolidation of NPO tax exemption rules makes compliance easier.
- Smaller NPOs benefit from reduced dependency on tax advisors.
- Smoother Transition & Implementation
- Tax authorities to undergo training on new provisions.
- Government expected to introduce corresponding rules and IT system upgrades.
- A buffer period recommended for businesses and taxpayers to adapt.
Challenges and Concerns
- Implementation Readiness
- Tax officers must be trained to ensure smooth enforcement.
- Upgradation of IT infrastructure is necessary to align with the new system.
- Concerns Over Digital Taxation and Privacy
- Expanded search and seizure powers raise privacy concerns.
- Mandatory compliance for taxpayers to provide access codes to digital assets may be seen as government overreach.
- Cryptocurrency Regulations and Investor Sentiment
- Increased scrutiny on crypto holdings may deter investors.
- The power to block transactions raises concerns over arbitrary actions by tax authorities.
Previous Attempts to Revise the Income Tax Act
- 2009: Finance Minister Pranab Mukherjee proposed the Direct Tax Code (DTC) to modernize taxation but could not pass it before the 2014 elections.
- 2017: PM Narendra Modi called for redrafting the Income Tax Act, leading to a six-member task force that submitted a report in 2019.
- 2025 Bill represents the first major overhaul of the tax system since 1961.
Conclusion
- The Income Tax Bill, 2025, is a crucial step toward simplifying India’s direct tax regime, improving clarity, and reducing disputes.
- While digital taxation and privacy concerns remain, the bill is expected to enhance compliance, reduce litigation, and improve tax administration. The success of this initiative will depend on efficient implementation, ensuring a smooth transition for taxpayers and authorities alike.
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