Background & Context
- Old regime: Income-Tax Act, 1961 has governed direct taxation in India for over 6 decades.
- Need for reform:
- Cumbersome provisions, multiple amendments, and interpretational ambiguities.
- Globalisation of economy and digitisation of financial systems require a modern tax code.
- Aim: Simplification, removal of anomalies, legal clarity, and alignment with present-day business realities.
- Process:
- First draft of I-T Bill tabled in February 2025 → Withdrawn after criticism.
- Select Committee headed by Baijayant Panda gave recommendations (July 21, 2025).
- Revised Bill (624 pages) introduced in August 2025, incorporating corrections and most recommendations.
- Passed by Lok Sabha (Aug 12, 2025) and Rajya Sabha (Aug 13, 2025).
- Effective date: April 1, 2026 (FY 2026–27 onwards).
Relevance : GS 2(Governance ) ,GS 3(Taxation)
Key Features of Income-Tax Bill, 2025
Clarity & Rationalisation
- Refunds:
- Earlier draft: Refund claim restricted to returns filed before due date.
- Final Bill: Restriction removed → Refund possible even for belated returns.
- Alternate Minimum Tax (AMT) for LLPs:
- Earlier draft: Expanded scope would have taxed LLPs even without special benefits.
- Final Bill: Restriction deleted, aligning AMT provisions with existing law → Prevents undue hardship.
- TCS (Tax Collected at Source):
- Clarification: Nil TCS on LRS remittances for education & medical purposes financed by financial institutions.
Fixing Errors & Removing Anomalies
- Inter-corporate dividends: Drafting errors corrected to align with actual intent.
- Donations to NGOs:
- Ambiguity in treatment resolved → Non-profits exempt up to 5% of total donations (not anomalous base).
- TDS exemption certificates:
- Companies at 18.5% MAT rate (vs 25% preferential) clarified → Can obtain nil-TDS certificate if no liability.
- Transfer pricing: Ambiguities in provisions removed.
- Carry forward & set-off of losses: Clarified to reduce litigation.
- Beneficial ownership reference (Sec 79): Omitted to simplify corporate restructuring compliance.
- House property income: Explicit clarification of 30% standard deduction (after municipal taxes) retained.
Structural & Conceptual Changes
- “Tax Year”:
- Defined as 12 months starting April 1 → Brings certainty and consistency in terminology.
- Information-gathering powers:
- Tax authorities can collect data from email servers, social media, and online investment platforms → Tightens compliance net.
- Sovereign wealth fund exemptions:
- Saudi Arabia’s Public Investment Fund (PIF) granted full tax exemption, as already given to Abu Dhabi Investment Authority (ADIA).
Incentives & Simplification
- NPS withdrawals:
- Amendment in Taxation Laws Bill, 2025: Tax-free withdrawal of 60% lump sum corpus at retirement under National Pension System (aligns with global best practices).
- Focus on simplicity:
- Consolidated drafting, removal of duplications, harmonised provisions with Finance Act amendments.
Additional Measures via Taxation Laws (Amendment) Bill
- Passed alongside I-T Bill.
- Extends market-linked NPS tax benefits.
- Aligns sovereign wealth fund exemptions for foreign investment inflows.
Implications
- For taxpayers:
- Greater flexibility (refunds, belated returns).
- Reduced compliance burden for LLPs & NGOs.
- Certainty in property income, transfer pricing, and carry forward of losses.
- For corporates:
- Clearer dividend rules, removal of ambiguity in beneficial ownership, aligned AMT provisions.
- For government:
- Strengthened tax enforcement with digital surveillance tools.
- Boost to FDI inflows via sovereign fund exemptions.
- For economy:
- Long-awaited modernisation of tax law.
- Expected to reduce litigation, improve ease of doing business, and broaden tax compliance base.
Comparison: February Draft vs August Bill
- Refund restricted → Refund liberalised.
- LLP AMT expanded → LLP AMT aligned with old regime.
- TCS omission on LRS → Explicit Nil TCS provided.
- Drafting anomalies (NGOs, dividends, losses, TP) → Corrected.
- Ambiguities in Sec 79 → Removed.
- Saudi PIF exemption newly added.
