New Tax Bill may allow late ITR refunds, protect NGO income from heavy tax

A parliamentary panel reviewing the Income Tax Bill 2025 has recommended allowing TDS refunds even if ITR is filed late, easing compliance for small taxpayers.

In a key move that could impact millions of taxpayers and not-for-profit organisations (NPOs), a Parliamentary Select Committee led by BJP MP Baijayant Panda has recommended critical changes to the draft Income Tax Bill, 2025, which seeks to replace the six-decade-old Income Tax Act, 1961. The panel's 4,575-page report, tabled in the Lok Sabha on Monday, focuses on simplifying the tax code while safeguarding key exemptions for religious-charitable institutions and easing compliance for small taxpayers.

 

Relief for Religious-cum-Charitable Trusts

One of the most significant recommendations is to retain the existing tax exemption on anonymous donations made to religious-cum-charitable trusts. Clause 337 of the new Bill had proposed a flat 30% tax on all anonymous donations, except for those made to purely religious trusts. This marked a sharp departure from current law, under which religious and charitable trusts receive broader exemptions unless the donations are specifically earmarked for hospitals or educational institutions they run.

 

 

The Committee flagged this as a "critical omission" and urged the reintroduction of a provision similar to Section 115BBC of the current Act to prevent adverse consequences for religious-charitable trusts. “The proposed clause could significantly disrupt the NPO ecosystem,” the report warned.

 

Tax Only ‘Income’, Not ‘Receipts’

Another major concern addressed is the proposed shift from taxing “income” to “receipts” of NPOs. The Committee strongly opposed this move, arguing it goes against the principle of real income taxation. Taxing gross receipts would unfairly include capital recoveries and inflows that do not represent actual earnings, it said.

 

Instead, the Committee recommended a return to net income-based taxation, urging a rewrite of Clause 335 to ensure only surplus income is taxed, not donations or reimbursements.

 

TDS Refunds Without ITR Filing

In a taxpayer-friendly move, the Committee also proposed allowing TDS refunds without mandatory ITR filing. The current draft Bill requires individuals to file a return within the due date to claim a TDS refund — even if their total income is below the taxable limit.“This may inadvertently criminalise small taxpayers who are otherwise non-filers,” the report cautioned. The Committee has therefore suggested removal of Sub-clause (1)(ix) from Clause 263, which mandates return filing for refund claims.

 

Shift to ‘Tax Year’ Welcomed

The Committee has also welcomed the government’s decision to replace the concepts of ‘previous year’ and ‘assessment year’ with a unified ‘tax year’. This move is expected to streamline tax references, reduce confusion, and improve accessibility of the law to non-specialists.

 

Additional Recommendations

According to experts, the Committee has made over 566 suggestions aimed at refining the draft Bill. These include:

 

Modernising definitions such as "capital asset" and "infrastructure capital company"

 

Clarifying property-related deductions

 

Re-emphasising the "actual payment" rule for claiming business expense deductions

 

Making penalties for non-maintenance of books discretionary

 

Creating procedural safeguards to prevent excessive penalisation of honest taxpayers

 

Nangia Andersen LLP, M&A Tax Partner, Sandeep Jhunjhunwala said the Committee has suggested modernising definitions such as "capital asset" and "infrastructure capital company", clarifying property-related deductions, and reinforcing the "actual payment" rule for business expenses. It has also recommended procedural safeguards such as making penalties for non-maintenance of books discretionary and permitting refund claims even where returns are not filed on time.

 

According to Amit Baid, Head of tax at BTG Advaya:

 

1) Reintroducing Nil withholding certificates helps prevent refund backlogs for genuine zero-tax cases — including non-residents entitled to treaty relief on cross-border transactions.

 

(2) Disallowing all deductions just because a return was late would have punished lakhs of genuine taxpayers. The Committee’s fix restores sanity by limiting this to only certain income-linked deductions.

 

(3) Without the phrase ‘in the circumstances of the case’, GAAR could have become a tax sledgehammer - treating even bona fide restructurings as abuse. The Committee’s intervention restores balance and guards against overreach on honest transactions.

 

(4) Many legacy trusts were staring at disqualification under vague definitions. By recommending clarity on ‘wholly for charitable or religious purpose’, the Committee saves hundreds of older institutions from legal limbo.

 

 Chance missed 

The Committee missed the chance to resolve the double taxation risk in holding company structures. Denying inter-corporate dividend deduction under the 22% concessional regime not only breaks with past policy logic, but could make this regime unattractive for investment vehicles and cross-border structures.

 

Tax-neutral treatment for fast-track demergers could be challenging. By not addressing this, the Committee has left a key gap that may discourage intra-group restructurings."

 

As the Monsoon Session of Parliament begins on July 21, the debate on the Committee’s recommendations will shape the final contours of the Income Tax Bill, 2025, before it replaces one of India’s longest-standing laws.

 

"The report provides clause by clause evaluation of the Bill with total 566 observations / recommendations for change. This is a mammoth task performed in a record time with precise and relevant recommendations. Now the Lok Sabha has to debate the recommendations and identify the changes that are required in the current Bill to make it futuristic and relevant for common tax-payers. It is highly desirable to defunct the old law and bring a new law which is transparent, easy to comprehend, in line with current business requirements and help to reduce tax disputes," said Preeti Sharma, Partner, Tax and Regulatory Services, BDO India.