When Finance Minister Nirmala Sitharaman promised in her Budget speech that a comprehensive review of the Income Tax Act of 1961 was underway, it raised high expectations. Stakeholders expected reform and overhaul of tax laws on the lines of Direct Taxes Code, 2010.
In the event, the new Bill takes an earnest shot at simplification and rationalisation of tax laws, but doesn’t attempt changes in tax rates or policy. Over the last three Budgets, the Finance Minister has rationalised capital gains tax and materially widened slabs and rates under the new tax regime. The proposed changes now focus on simplifying convoluted language, weeding out obsolete sections and introducing tables and formulae to explain provisions in the old Act. They do render the Income Tax Act less voluminous and make it more coherent. This could also lead to less subjective interpretations by tax officials — the root cause of tax disputes. But for the income tax regime to be truly taxpayer-friendly, the compliance burden needs to be lightened, and the statute itself pared down and divested of its excessive complexity. This is still a work-in-progress.
Like most other laws, the Income Tax Act over a span of six decades has become riddled with amendments, provisos and footnotes, as legislators have plugged loopholes and factored in court judgments. The new Bill has deleted over 1,200 provisos and 900 explanations and integrated them into the main sections. Case law has been incorporated, saving readers the trouble of referring to past judgments. Obsolete sections such as those relating to SEZ taxation and fringe benefits tax have been deleted. Confusing concepts of ‘assessment year’ and ‘previous year’ have been replaced by ‘tax year’. Verbose text has been tabulated or shunted to the schedules. All this has made the new statute less daunting with 622 pages instead of 823. The number of sections/ sub-sections has been whittled down to 536 from 819. While all this makes the job of navigating the Act easier for tax professionals, laymen may still have a hard time deciphering it. For instance, Clause 11, which lists the incomes to be excluded for calculating tax, has been made more compact by shunting the list of items to the schedules. But a taxpayer wanting to know whether a specific type of income is excluded will still need to wade through over 89 items tucked away in five schedules. As the new Bill has redrafted clauses and clarified litigious ones, the fine print can throw up surprises in days to come.
Since there has been an overhaul of clauses, it is perhaps just as well that no changes in tax law or policy have been attempted in this exercise, as it may have added to the confusion. Overall, the ordinary taxpayer will still need the services of a chartered accountant or tax professional to navigate income tax. For tax professionals, the renumbering of clauses will take some getting used to. This is perhaps why the new Act is proposed to take effect only from April 1, 2026.