The Income Tax Act, 2025 – Last lap towards achieving the milestone?

By Ashish Jain, Tax Partner, EY India

It has been the stated intention of the present and past Governments that there is a need to simplify the direct tax laws of India. Steps in this direction includes, but not limited to, the proposal to introduce the Direct Tax Code, 2009 (‘DTC’). As per the then Hon’ble Finance Minister’s speech, the DTC was intended to consolidate and amend the law relating to all direct taxes, thereby simplifying the tax structure, improving compliance and enhancing the efficiency of the tax administration. Although the DTC was not implemented, its introduction underscored the pressing need for reform and set the stage for subsequent steps in this direction to simplify India’s direct tax framework.

Journey so far….

The Union Budgets from the years 2020 to 2023 have brought some amendments in this regard with introduction of certain taxpayer-friendly measures. Illustratively, a new simplified personal income tax regime, introduction of the Vivad Se Vishwas Act, 2020 to reduce pending litigation, exemptions for non-residents from filing Return of Income (‘ROI’) under specific conditions, incorporating pre-filled income tax return details, deploying Joint Commissioner of Income-tax (Appeals) to expedite small appeals, introducing amendments to promote timely payments to Micro and Small Enterprises and so on.

Amendments by the Finance Act (No. 2), 2024

The Finance Act (No. 2), 2024 [‘FA (No. 2), 2024’] has taken a significant leap in the journey towards direct tax simplification. The Hon’ble Finance Minister announced a review of the Income-tax Act, 1961 (‘the Act’) to make it concise, clear, and easy to understand. This aims to reduce disputes and litigation, providing tax certainty and fostering a more transparent and efficient tax system.

In line with the above, the FA (No. 2), 2024 has introduced amendments aimed at simplifying the provisions of the Act. Some of these amendments are rationalisation of holding period and rate of tax for capital gains purposes, introduction of Vivad Se Vishwas Scheme, 2024, removal of 2% equalisation levy and angel tax provisions, rationalisation of certain Tax Deducted at Source (‘TDS’) rates, etc.

The Road ahead….

While the Government's efforts to simplify direct tax laws in India dates to the year 2009, recent amendments in Union Budgets and more particularly in the FA (No. 2), 2024 seem to have accelerated the efforts towards simplification.

This is further supported by the fact that while moving the Finance Bill (No. 2), 2024 for approval by the Lok Sabha on 7 August 2024, the Hon’ble Finance Minister introduced certain amendments. While the amendments were largely intended to address certain ambiguities/ uncertainties from the proposals in the Bill, one notable amendment was restoration of indexation benefit for computing long term capital gains on sale of immovable property acquired before 23 July 2024 by resident individual or Hindu Undivided Family (‘HUF’).

One would expect the review of the Act to bring in amendments which would not only simplify the existing direct tax law but also bring greater certainty to taxpayers and aim at reducing litigation. Following are certain illustrative amendments which one would desire to be made in the new avatar of the income tax law:

• Currently, there are multiple tax regimes and rates which coexist for different classes of taxpayers. For instance, corporate taxpayers have basic tax rates ranging from 15% to 30%, LLP’s/ partnership firms are subject to a high tax rate of 30%, individuals have the option of the old and default tax regime, etc. It may be desirable to simplify the rates preferably by having maximum two tax rates (one for new manufacturing companies as contemplated under section 115BAB of the Act i.e. 15% and another tax rate of 22% for other corporates without incentives and deduction) for corporate and one tax regime for other classes of taxpayer. Further, surcharge and cess may be done away with and tax rate may be rationalised to that extent.

• There are multiple rates and conditions prescribed for ensuring compliance with provisions related to TDS /TCS provisions. With the Government’s intention to track transactions by bringing them under the TDS/ TCS net, it would be convenient if the same is further classified into fewer rates and compliances with various provisions like section 194R can be simplified with the intended objective.

• There are certain adjustments/ additions made by CPC basis the difference in reporting as per ITR utility and processing by the CPC return processing software. Also, since CPC is faceless, resolution of queries regarding refunds, adjustments, etc. can be time consuming. Simpler procedures and clarity on steps/ actions required by taxpayers (including time bound resolution by CPC) would go a long way in making the CPC more effective.

• There are time limits prescribed in the current law regarding disposal of OGE’s/ rectification applications by the tax department. However, there are instances whereby said timelines are not adhered to leading to protracted litigation. It is expected that suitable amendments/ directions are issued by the Government to provide for stricter enforcement of timelines with respect to OGE’s/ rectifications and similar proceedings.

• As per the tax department, around 3.60 lacs appeals are pending at the first appellate level as on 1 July 2024. It is the need of the hour to provide stricter enforcement of the law for a time bound disposal of appeals at the first appellate level to reduce litigation burden.

It is presently unknown whether the simplification would be through changes in the existing law or introduction of a new Act. If the Government can deliver its stated objective effectively in a defined time frame, it would not only boost investor confidence but also help in widening the tax base thereby contributing to the Government’s overall objective to make India ‘Viksit Bharat’ by 2047.

Manthan Shah, Senior Tax Professional, EY India and Bhavesh Kumar, Senior Tax Professional, EY India also contributed to this article. Views expressed are personal.

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