New income-tax law: A case for simplification in language and format

Over the years, several attempts have been made to reform Income Tax Act, the first being between 1986 and 1991, second in 1996, third in 2010 in the form of Direct Taxes Code (DTC), and then in 2017

The Income Tax Act, 1961 replaced the Income Tax Act of 1922 following the recommendations of the Law Commission in 1958 and the Direct Tax Administration Enquiry Committee. The taxation philosophy of the time is best summarised in the 1962 Budget Speech, where the finance minister emphasised that tax policy was not just about raising revenue but also about augmenting savings, promoting exports, ensuring a balanced economy, and achieving social justice. 

Following this philosophy, over the decades, several exemptions/deductions were introduced by amending the Act, such as deductions for export income, setting up industries in specified areas/ specified sectors, expenditure made for rural development and so on. So, when the big cities required to be decongested, exemption was granted for shifting of industries (1965); when family planning was to be promoted, deduction for expenditure for this purpose was granted (1965); and when the widespread feeling of frustration was noticed amongst the scientific community, weighted deduction on R&D expenses were granted (1980). There are numerous other instances like this. 

Over time these exemptions led to a significant erosion of the tax base, generated litigation, increased administrative costs and compliance burdens. Between 1985 and 1990, several of these incentives were withdrawn, but were again reintroduced after economic liberalisation in the 1990s. The passage of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003 pushed for the gradual elimination of exemptions. 

The Act also kept aligning to shifting domestic and global economic trends. So, several new provisions were introduced relating to TDS, Minimum Alternate Tax regime, Transfer Pricing and Advance Pricing Agreement. Dispute resolution mechanisms like Dispute Resolution Panel and Advance Ruling, administrative reforms in the form of faceless assessment, appeals, reporting of significant financial transactions (SFT), GAAR (General Anti-Avoidance Rules) provisions, and the concept of significant economic presence were introduced. 

While constant evolution has preserved the vitality of India’s income tax statute, it has also rendered it unreasonably voluminous and complex.  Besides, it is written in traditional legal language, which may be challenging for a common person to comprehend. It uses long sentences with several provisos and explanations etc. For instance, Section 10(23)(c) has more than 20 provisos and 20 explanations. In this backdrop, tax administrators, taxpayers and other stakeholders alike have expressed concerns about the multi-layered statutory framework of the Income Tax Act. Thus, simplifying the language and format became not merely an aesthetic concern, it became imperative for the tax system to function as a reliable, equitable, and efficient pillar of India’s fiscal framework. 

Over the years, several attempts have been made to reform the Income Tax Act, the first being between 1986 and 1991, second in 1996, third in 2010 in the form of Direct Taxes Code (DTC), and last in 2017. These earlier efforts attempted a complete overhaul of the tax system following the “bundling” approach. While these efforts did not succeed, they sparked discussions on making the tax system easier to understand and more efficient, and suggested reforms in many fields of taxation. 

Since 2014, the direct tax administration and the Income Tax Act have undergone a series of sequential and incremental changes, resulting in changes in tax administration, provisions for incentives and exemptions,  and tax rates. In 2015, while presenting the Budget, the finance minister laid down the plan for the gradual reduction in corporate tax rate with the phasing out of deductions/exemptions. The Finance Bill, 2016 proposed several amendments to the Income Tax Act, 1961 to give effect to the phasing-out plan announced earlier. Subsequently, new tax regimes were introduced, faceless assessment and appeals became operative, and several exemptions were sunset. 

These sequential reforms rendered unnecessary the requirement of a big-bang reform and set the context for the final stage of reforms in the statute aimed at eliminating redundancies, enhancing simplicity, and providing certainty to taxpayers. This was announced by the finance minister in her Budget speech in July 2024: 

 “I am now announcing a comprehensive review of the Income Tax Act, 1961. The purpose is to make the Act concise, lucid, easy to read and understand. This will reduce disputes and litigation, thereby providing tax certainty to the tax payers. It will also bring down the demand embroiled in litigation. It is proposed to be completed in six months.” 

A beginning was made in the Budget for 2024-25 and the Finance Bill 2025 itself by simplifying the tax regime for charities, TDS rate structure, provisions for reassessment, search provisions and capital gains taxation. 

Following this announcement, a comprehensive review was undertaken by the Central Board of Direct Taxes (CBDT), and as a result, the Bill for the Income Tax Act 2025 has been introduced in Parliament. 

The writer is Member (Legislation), Central Board of Direct Taxes