It is not often that a sovereign nation attempts to repeal its tax legislation, replacing it altogether with a new one. The Income Tax Act, 1961, replacing the 1922 Act, has been in force for over six decades. The new Income Tax Bill 2025, upon enactment, is set to replace the present 1961 Act.
Enhanced clarity and structure: And there are small things that make a big difference. The look and feel of the Bill are distinct and attractive. Several redundant Chapters and Sections in the 1961 Act are omitted. A section has sub-sections and clauses with provisos and explanations conspicuously omitted. Sub-section and clauses of another section are referred as per prevalent practices in judicial orders — example, Section 276(2) instead of “sub-section (2) of Section 276”.
The sections’ grouping within a chapter head or their separate carve-out in Schedules remedies the disorderly presentation in the 1961 Act. Illustratively: (i) a registered non-profit organisation need not look beyond Part B of Chapter XVII; and (ii) Schedules II to VI, each enumerate exempt income based on specified criteria. The use of Tables enables precise understanding. The use of mathematical formulae brings out computational ease. Several terms, hitherto defined in the context of specific sections, are elevated as part of the general definitions having universal application to the Bill, unless the context otherwise requires.
Remarkably, the term “Permanent Account Number”, is defined only now. A “Senior Citizen” is an individual of the age of 60 years or more at any time during the relevant tax year who must also be resident in India! That “Accountant” is the first term defined in the Bill, displacing “Advance Tax” in 1961 Act, has not missed my attention!
Beyond just aesthetics
Beyond the modernised presentation, several substantive changes warrant careful consideration, as illustrated below.
a) The ‘unwieldly’ 1961 Act will be a perpetual escort since the Bill has its reference at several places. The expression ‘income’ itself has a reference to its definition in the 1961 Act. While this may serve legal completeness and protect legal precedents, the 1961 Act cannot be archived!
b) It is common for a tax code to bring out an overriding effect of one provision over others. The expression “notwithstanding” used in the 1961 Act for “sub-ordination of other provisions” as judicially held in context of specific provisions, is replaced with “irrespective of”.
c) Explanations in the 1961 Act, intended to clarify or to remove doubts in the provisions, are incorporated as sub-sections in the Bill. The reading of an Explanation must be harmonious with the substantive provisions while sub-section tends to have independent authority. Illustratively, Section 279(2) in the Bill may not be read the same manner as the Explanation under Section 147 in the 1961 Act.
d) Various expressions in the Bill are more conversational than legal. Owing to an altogether new presentation of the provisions in the Bill, the strength the 1961 Act acquired from judicial precedents will have to be re-established. Core aspects such as cumulative or separate reading of conditions in a provision, or the reading of ‘and’ versus ‘or’ must be adjudicated all over again with an additional onus of interpreting the language of the new tax code in comparison with the 1961 Act.
For example, the Bill paraphrases in Section 163(1), the definition of “international transactions” into various sub-clauses, and the expression “having a bearing on the profits, income, losses or assets of such enterprises” finding a place in clause (g) alone, may imply non-applicability of this expression to other clauses.
Not a mere recast of earlier Act
Significant differences exist between the provisions of the 1961 Act and the Bill. Some of these are detailed below. Clear explanations of these differences in the Bill’s Memorandum are crucial for understanding legislative intent.
a) The 1961 Act’s provisions regarding depreciation deductions for assets not exclusively used for business or professional purposes did not explicitly address situations where an asset is partially used for non-business/professional activities. The Bill now mandates that full depreciation is allowed only when an asset is used “wholly and exclusively” for business or professional purposes.
b) The 1961 Act allowed a domestic company to avail deduction for inter-corporate dividends (under Section 80M) in computing its total income and paying tax at the rate of 22 per cent under the new regime (Section 115BAB), which is conspicuously missed in the Bill.
c) The scope of “Information with the Assessment Officer” (Sub-section 6 of Section 280), which can trigger reassessment, has been broadened through the addition of new clauses, potentially increasing the instances in which previously finalised tax assessments can be reopened.
d) The Bill (Section 395) allows for TDS deductions at a lower rate. However, unlike the 1961 Act, which explicitly provided for a zero TDS deduction, this must now be inferred.
e) Granting an exemption or allowing a deduction in a tax code have different tax effects. While the 1961 Act places certain deductions in Chapter III dealing with exempt income, the Bill addresses the disputes arising out of mere placement of a section. Illustratively, the Bill recasts Section 10AA in the 1961 Act as Section 144, clarifying it as a provision for granting a deduction.
Misses in the Bill
As the Parliamentary Committee reviews the Bill, the following suggestions are offered for consideration prior to its enactment:
Dispute resolution: Addressing the significant backlog of appeals before the Commissioner (Appeals) through a more streamlined and effective dispute resolution mechanism would be a valuable addition.
Tax administration: Complementing the substantive provisions with measures to improve the efficiency and taxpayer-friendliness of tax administration would further strengthen the framework.
Judicial precedents: The Bill addresses only sparingly incorporation of judicial precedents. Incorporation of many more relevant judicial precedents would enhance clarity and reduce the potential for ambiguity.
Transitional guidance: Explicitly addressing the applicability of existing circulars and instructions issued under the 1961 Act to corresponding provisions in the new Bill would facilitate a smoother transition.
In a rapidly evolving economy, it’s anticipated that new amendments will be necessary to address emerging needs. Tax Administration should endeavour to maintaining the concise structure and ease of navigation of the Bill while accommodating future amendments.
The writer, a chartered accountant, is a corporate advisor
