The Income Tax Bill, 2025 (Bill) has been introduced with the objective of making the income tax “concise, lucid, easy to read and understand”. The Government has emphasised that since the income tax law is updated regularly, the Bill does not bring major policy changes. However, as we take a closer look, certain changes stand out as particularly significant, warranting closer examination. We have discussed some of these below.
No deduction of inter-corporate dividends for companies under the 22 per cent tax regime: The Bill introduces a change to the provision allowing a deduction for inter-corporate dividends. Currently, under the Income Tax Act (ITA), domestic companies paying tax at 15 per cent as well as 22 per cent can deduct the dividend income they receive from other companies or business trusts, so long as they distribute these dividends to their shareholders before the prescribed date. However, the new Bill removes this deduction for companies under the 22 per cent tax regime, while preserving the benefit for companies under the 15 per cent tax regime. It is hoped that this discrepancy arises from an inadvertent drafting error which will be rectified during the legislative enactment process. If this issue remains unaddressed, it could have significant implications for holding company structures from a tax efficiency perspective.
Definition of associated enterprise expanded: Section 92A of the ITA provides the definition of “associated enterprises” (AEs) for the purposes of the transfer pricing rules. The section has been a source of controversy, and the changes made in the Bill could significantly expand the scope of the transfer pricing provisions. To elaborate, section 92A(1) of the ITA lays down the broad management, control or capital test for two enterprises to be considered AEs. On the other hand, section 92A(2) sets out specific, objective criteria to determine if two enterprises are AEs. For example, if one enterprise holds a significant share (26 per cent or more) in another, the enterprises are deemed to be AEs.
Taxpayers have been of the view that for two enterprises to be considered AEs, at least one of the specific criteria set out in section 92A(2) must be fulfilled. However, the tax authorities have contended that the two sub-sections are mutually exclusive – i.e, two enterprises should be considered AEs if the requirements of either 92A(1) or 92A(2) are met. After long-drawn litigation, the controversy was decided in favour of the taxpayers. The prevalent view has been that two enterprises would only be considered AEs if they meet at least one of the objective criteria under section 92A(2).
However, the Bill seemingly departs from this settled position. The proposed verbiage suggests that the tests in section 92A(1) and section 92A(2) are mutually exclusive. This means that simply having participation in management, control, or capital could now be enough for two enterprises to be considered AEs. This change broadens the scope of the transfer pricing rules, potentially bringing more enterprises under the AE definition. Importantly, since participation in management, control, or capital may be quite subjective, this change is likely to lead to protracted litigation.
Provisions relating to the interpretation of tax treaties: The Bill proposes that any undefined term used in a tax treaty will have the same meaning as under the ITA or any explanation provided by the government. If the term is not defined in the ITA, the government can define it through a notification. The definition (as provided in the ITA or through a notification) will apply from the date the tax treaty came into force. Therefore, the Bill allows the Government to unilaterally define treaty terms by issuing notifications from time to time.
This could lead to inconsistency and conflicts with judicial interpretations, since courts typically interpret tax treaties based on their original intent. Such a provision would also not be consistent with the Vienna Convention, which provides that tax treaty partners are obliged to refrain from acts which would undermine the object and purpose of the tax treaty as intended at the time of signing. If enacted in its current form, this provision may be susceptible to judicial scrutiny.
Timely filing of income tax return for claiming a tax refund: The Bill proposes that taxpayers must file their income tax return on or before the due date to claim a refund. This is a departure from the current law, which only requires taxpayers to file a return (including a belated return) to claim a refund. While the income tax department has clarified that there are no policy changes relating to refunds, the wording of the Bill suggests otherwise. It is hoped that the enacted law will be revised to address this concern.
Indemnity for TDS: The Bill introduces a concept that isn’t found in the ITA – an indemnity for tax withholders. Clause 518 of the Bill provides that ‘Every person deducting, retaining, or paying any tax in pursuance of this Act in respect of an income belonging to another person shall be indemnified for the deduction, retention, or payment thereof’. Questions are likely to arise around the scope and coverage of this indemnity, and if it will include interest and penalty as well. Also, it would be interesting to see if parties will need to agree to the process and timing of indemnification, and if they can contractually agree to waive the indemnity, such as when the payer agrees to bear the TDS liability. These issues will need clarification.
Overlap of the ITA and the new law: The Bill proposes that the ITA will be repealed but will still apply in certain situations. For example, assessments and appeals for financial years up to 2025-26 will continue to be governed by the ITA. Further, the definition of ‘income’ in the Bill contains more than 20 sub-clauses, with the last clause providing that any other income referred to in the ITA will also be considered income under the new law. Essentially, even with the new law in place, parts of the ITA will still need to be considered. This could lead to some confusion or difficulty.
While the Bill is not intended to overhaul the ITA, it does introduce some key changes. Some of these changes are a clear departure from the current law, and a few provisions could use further clarification or reconsideration. That said, the Bill brings notable improvements, such as the consolidation of tax deduction at source provisions and the adoption of clearer terminology. The practical impact of these changes (once the Bill is enacted) will ultimately determine the success of the government’s efforts to strike a balance between simplifying the tax regime and maintaining legal certainty.
The writers are Partners, Tax Practice, Trilegal
