Efficient tax system: A clear income-tax law will help all stakeholders

In a rapidly developing economy like India, the state must adapt quickly, enabling economic agents to focus on economic activities. One of the areas of engagement of individuals and businesses with the state is in the context of taxation. The government, with increasing demands on the Budget, is often looking to maximise revenue. However, for long-run stability in revenue generation, taxpayers must not face excessive difficulty in paying their fair share. The Income Tax Bill, 2025 — introduced by Union Finance Minister Nirmala Sitharaman in Parliament on Thursday — is aimed at achieving this objective. Although the government has been working on improving the experience of taxpayers, such as with the introduction of the Faceless Assessment Scheme, the new Bill aims to take the process forward. 

A comprehensive review of the Income Tax Act, 1961, was announced by Ms Sitharaman in the July 2024 Budget speech. The idea was to “make the Act concise, lucid, easy to read and understand”. Accordingly, the number of pages in the Bill has been reduced to 622 compared to 823 in the existing Act. More importantly, the number of words has been reduced to about 260,000 from around 520,000 in the existing Act. It is worth noting that the goal was not to overhaul the tax structure but to simplify the law, making it easier for taxpayers to understand. The existing law with amendments and additions over the years had become cumbersome. 

Among the other highlights, the Bill provides that the Central Board of Direct Taxes will adopt a “Charter for Taxpayers”, which will be expected to enhance trust and transparency in the system. The number of Sections in the existing Act increased with the introduction of new provisions from 298 initially to 819. The new Bill has reduced it to 536. To improve ease for salaried taxpayers, all deductions have been consolidated under one Section, which will improve understanding and compliance. The Bill has also clearly defined virtual digital assets and how they will be taxed. For simplicity, it has also done away with concepts like the “assessment year” and “previous year”. It uses the term “tax year” in which the income is generated and tax is payable. After being passed by Parliament, the new law will take effect on April 1, 2026. 

While the intention behind introducing a new law cannot be faulted, the impact will depend on how well it is implemented. According to a report in this newspaper last year, there were about 544,000 appeals before the Commissioner of Income-Tax (Appeals) with a disputed amount of well over ₹10 trillion. The real test of the law will be whether it significantly reduces tax litigation. This not only affects taxpayers adversely but also engages state capacity, which can be used elsewhere with better outcomes. Further, while the Bill intends to simplify the tax law, it is also necessary to simplify the tax structure. In the context of personal income tax, the government has done well to introduce a simple new tax regime. Budget 2025-26, presented on February 1, announced there would be no tax up to income of ₹12 lakh per annum. However, the structure is still burdened with rebates and seven tax slabs. For simplicity, the government can decide a threshold for taxation and reduce the slabs to three. A simple tax structure with simplified law will help all stakeholders.