The new Income Tax Bill presented in Parliament is an exercise to make it “concise, lucid, easy to read and understand”, in the words of the Finance Minister. This echoes the wisdom of Sage Thiruvalluvar, who, centuries ago, observed in the Thirukural (verse 649): Pala cholla kamaruver mandramaa chatra sila chollal thetrathavar (Thirukural 649), meaning “Unaware of the artful use of a few flawless words, Men become enamoured with excessive syllables.” This adage aptly describes the current Income Tax Act (the Act).
Originally enacted in 1961, the Act has, over time, gathered considerable girth and complexity, a far cry from its original form. It stands out as one of the most frequently amended pieces of legislation in the country.
Over the past 3-4 decades, we’ve seen the introduction of many new concepts in the Act like Tax Deduction at Source (TDS), Minimum Alternate Tax (MAT), Transfer Pricing, Advance Pricing Agreements, and a whole host of dispute resolution mechanisms.
A plethora of sector-specific, region-specific, and profit-based incentives were introduced, turning the Act into a patchwork quilt. While these incentives and amendments contributed to economic growth and government revenue, they also added layers of complexity, making the Act increasingly difficult for the average taxpayer to decipher.
Obsolete provisions litter the Act like relics of a bygone era. The language is often dense and convoluted, making it a challenge for return-filers to understand the implications of seemingly simple transactions. This complexity breeds inconsistency in interpretation, leading to a surge in litigation between taxpayers and the tax authorities.
Recognising these significant challenges, the government wisely initiated a comprehensive review of the Act. This was not an attempt to alter the basic structure of tax policy but a far more modest, though equally important, undertaking. The focus was on simplifying the often-impenetrable language, streamlining the unwieldy structure, and purging the Act of its outdated provisions. And, crucially, time was of the essence.
Remarkably, this complex project was completed in a record six months. This stands in stark contrast to similar initiatives undertaken elsewhere. The UK’s Tax Rewrite project, launched in 1996, went on for 14 years before being abandoned in 2010, recording partial success of its goals. Even the subsequent Office of Tax Simplification, established to carry on the work, was abolished in 2023.
Similar notable efforts were made in Australia and New Zealand. Globally, efforts to simplify tax law have consistently taken longer than anticipated, often falling short of their intended results. Therefore, the Income Tax Department deserves considerable praise for completing this daunting exercise so efficiently.
Key improvements
Turning to the specifics of this rewrite exercise, several key improvements stand out. Notably, the new Bill significantly reduces the reliance on provisos and explanations, often contributing to legal complexity and ambiguity. Brevity and clarity make the new Bill leaner, lighter and less litigious.
Many complex scenarios and situations are now explained clearly and concisely through tables, making the information far more accessible. Specific issues have been logically grouped within the Schedules, preventing the main body of the text from becoming cluttered and easier to navigate.
Furthermore, a concerted effort has been made to use straightforward language, avoiding unnecessary legal jargon to enhance readability and comprehension for the average taxpayer. Doing away with the concept of “previous year” and “assessment year” aligns with the international practice of referencing a tax year or financial year. The use of formulae to explain computation methods may avoid misinterpretations and provide clarity to taxpayers.
A particularly noteworthy achievement is the creation of a dedicated chapter on non-profit organisations. This represents a genuine attempt to simplify the often complex and litigious regime applicable to these institutions, providing much-needed clarity. Attempt has also been made to clarify some of the litigious positions.
This exercise of comprehensive review should be seen within the context of broader tax policy reforms implemented in recent years. These include the introduction of the introduction of new tax regime for both individuals and corporations and the recent restructuring of the individual tax rates, the implementation of faceless assessment and appeals, the significant changes to the reassessment process and a reduction in associated timelines, the rationalisation of provisions related to TDS and capital gains etc.
Tax policy is, by its very nature, a continuous process of evolution and requires responsiveness to the needs of the stakeholders and the broader fiscal landscape.
However, consistency and continuity in a broader policy framework are crucial for fostering stability and predictability. While delivering much-needed clarity and simplicity, this new Bill also wisely maintains continuity with established policy aspects, avoiding unnecessary disruption and ensuring a smoother transition for taxpayers.
The only disruption resulting from this overhaul is undoubtedly the need for tax professionals to abandon their well-worn mental maps of the old section numbers and learn a new topography of the Act. However, this temporary inconvenience is offset by the long-term benefits of a more logical and orderly arrangement.
With its focus on clarity and simplicity, the new Income Tax Bill is undoubtedly an attempt to rally all stakeholders — taxpayers, professionals, and administrators alike — around a more accessible, understandable and responsible tax system. It’s an invitation to engage with the tax code, not with apprehension, but with confidence.
Nageswaran is Chief Economic Adviser, Government of India; and Krishnamurthy, is Joint Secretary – (TPRU, FATF and State Taxes), Department of Revenue, Ministry of Finance
