The Finance Ministry has indicated that it is unlikely to introduce a new Income-Tax Bill during the upcoming Budget session in 2025. In July 2024, Finance Minister Nirmala Sitharaman announced a comprehensive review of the Income-Tax Act of 1961, signaling a major overhaul to make the tax code more user-friendly, transparent, and simpler for taxpayers. However, despite expectations that the amended legislation might be presented in the 2025 Union Budget, the timeline appears to be more extended, and the new Income-Tax Bill is not expected to be introduced immediately in that session.
The review process is being carried out by a high-level internal committee led by the Chief Income-Tax Commissioner, V.K. Gupta. This committee has been tasked with reviewing the existing Income-Tax Act to identify areas for improvement and simplification. The committee is expected to submit its final report before the Budget is presented on February 1, 2025. However, the new legislation based on the committee’s findings will likely take more time to be finalized. The official process of drafting the Bill will involve collaboration with the Ministry of Law, and once the draft is ready, it will be referred to the Standing Committee on Finance for further examination and feedback.
Committee’s Approach and Key Focus Areas
The Income-Tax Act of 1961 has been the cornerstone of India’s tax system for decades, with roots tracing back to the Indian Income-tax Act of 1922. The Act, in its current form, consists of 298 sections divided into 23 chapters, covering everything from the charge of income tax to penalties for non-compliance. While it has served as the foundation for the taxation system, many experts and taxpayers find the legislation complex, difficult to navigate, and outdated in some areas. Hence, the review committee’s primary aim is to simplify the Act, eliminate redundant provisions, and make it more concise and accessible for individuals, businesses, and tax professionals.
Importantly, the committee is not expected to recommend changes to the tax rates in its review. The focus is entirely on simplifying the structure of the Act, particularly the provisions and sections that have become cumbersome over time. According to senior government officials involved in the process, the committee is working on streamlining the Act to make it easier for taxpayers to understand and comply with.
The review process, which began in mid-2024, is structured around examining each of the 23 chapters of the Income-Tax Act. The committee is expected to submit its review report by mid-December 2024. As of now, eight reports have already been submitted to the Central Board of Direct Taxes (CBDT), with the remaining reports being finalized by various sub-committees. These reports aim to address specific areas of the Act, including compliance, exemptions, penalties, and tax deducted at source (TDS) regulations.
Areas Under Scrutiny
- Compliance and Simplification One of the key objectives of the review is to improve tax compliance. The committee is examining ways to make the provisions of the Act easier to understand and apply for taxpayers. Simplification of compliance requirements will reduce the administrative burden on both taxpayers and the tax department. By eliminating ambiguities and streamlining complex provisions, the aim is to ensure that individuals and businesses can file returns accurately and promptly without the need for excessive legal or professional advice.
- Exemptions Under Section 10 Section 10 of the Income-Tax Act provides various exemptions, such as house rent allowance (HRA), leave travel allowance (LTA), and exemptions for agricultural income. These exemptions have often been criticized for their complexity and the potential for misuse. The committee is reviewing these provisions to determine if they can be simplified, made more transparent, or aligned with contemporary tax practices.
- Income from Trusts (Sections 11-13) Income derived by trusts, charitable organizations, and institutions is governed by Sections 11 to 13 of the Income-Tax Act. These sections are often seen as intricate, with various stipulations and conditions for exemptions and deductions. The committee is considering ways to simplify these provisions and ensure they are more practical for trust administrators, auditors, and beneficiaries alike.
- Penalty Provisions The Act currently includes complex penalty and interest provisions for non-compliance. The review committee is focused on making these provisions clearer and fairer. There is an effort to ensure that penalties are not overly punitive while still encouraging compliance. A balanced approach will help reduce litigation and make the process more predictable for taxpayers.
- Redundant Provisions Over the years, certain provisions in the Income-Tax Act have become obsolete or irrelevant due to changes in the economic landscape. The committee is working on identifying such provisions and recommending their removal. This will help in streamlining the Act, ensuring that only the most relevant and necessary rules remain in place.
- TDS/TCS Rules Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are crucial parts of the Indian tax system. The committee is reviewing these rules to ensure they are efficient, easy to follow, and not overly burdensome for taxpayers. The aim is to create a more efficient and transparent system for the collection of taxes at the source, making it easier for individuals and businesses to comply.
Public Consultation and Feedback
As part of the review process, the committee has launched an online portal to gather suggestions from the public. This initiative is designed to involve stakeholders in the process and ensure that the reforms align with the needs and concerns of taxpayers. The portal allows individuals, businesses, and tax professionals to provide feedback on the existing provisions of the Income-Tax Act and suggest areas for improvement.
The inclusion of public feedback will play a vital role in shaping the final recommendations of the committee. By engaging a wide range of stakeholders, the government aims to ensure that the revised Income-Tax Act is not only simpler but also more inclusive and aligned with the needs of the modern economy.
The Income-Tax Act of 1961
The Income-Tax Act of 1961 is a comprehensive piece of legislation that governs the taxation system in India. It outlines the rules for the imposition, collection, and administration of income tax on individuals, companies, and other entities. The Act covers a broad spectrum of tax-related issues, from the charge of income tax to the determination of income, deductions, exemptions, and penalties.
Key provisions of the Act include:
- Charge of Income Tax: The Act imposes taxes on the total income of individuals, companies, and other entities.
- Heads of Income: It classifies income into five categories—salaries, house property, business or profession, capital gains, and income from other sources.
- Tax Rates: The Act specifies tax rates based on income levels and taxpayer categories (individuals, Hindu Undivided Families, companies, etc.).
- Deductions and Exemptions: It allows for various deductions (e.g., under sections like 80C) and exemptions (e.g., agricultural income) to reduce taxable income.
- Assessment and Collection: The Act provides detailed procedures for filing returns, assessment, and tax collection.
- Penalties and Interest: It also includes provisions for penalties and interest for non-compliance with tax rules.
The review of the Income-Tax Act of 1961 is a significant step towards modernizing and simplifying India’s tax system. The committee’s efforts to make the Act more user-friendly and accessible are expected to lead to greater compliance, reduce litigation, and promote a more transparent tax environment. While the new Income-Tax Bill may not be introduced during the 2025 Budget session, the ongoing review process will likely pave the way for comprehensive changes in the near future.
The focus on simplification and removal of redundant provisions, rather than changes to tax rates, reflects a broader intent to modernize India’s tax system while maintaining its effectiveness. With the involvement of the public and key stakeholders, the revised Income-Tax Act promises to address long-standing concerns and align the tax system with the needs of a growing economy. This review could ultimately result in a tax framework that is not only simpler but also more efficient and conducive to long-term economic growth.
