India Income Tax Law Revision, Well Begun is Still Only Half Done

India Income Tax Law Revision, Well Begun is Still Only Half Done

Why in News?

On 21 July 2025, the Income Tax Bill, 2025 was introduced in Parliament with an aim to revise and simplify India’s complex Income Tax law. This move follows a long-standing demand from taxpayers and professionals for a clearer, more streamlined tax code. However, despite the positive intent and structural clean-up, experts have pointed out that the draft bill still lacks critical reforms on the substance side of taxation, such as clarity on exemptions, individual taxation burdens, corporate taxation rationalisation, and ambiguity in regulatory provisions.

Introduction

India’s Income Tax Act of 1961 has undergone nearly 4,000 amendments since its inception. Over the years, this led to immense complexity and increased litigation. Recognising the need for reform, a Simplification Committee was established in October 2024 to address this challenge. Their primary objectives were:

• Simplification of legal language

• Reduction of litigation

• Reduction of compliance burdens

• Removal of redundant and obsolete provisions

The draft bill tabled in Parliament is based on the recommendations of this Committee and a Lok Sabha Select Committee that followed. While the reform process has brought down the number of sections from 819 to 516, concerns persist on whether the Bill addresses deeper, substantive tax issues that impact both individuals and corporations.

Key Issues

1. Individual Taxation: Burden and Gaps

The Income Tax Bill 2025 continues to retain the maximum tax rate slab starting at an income of just ₹15 lakh annually. This threshold, experts argue, is unreasonably low, especially in the context of inflation and rising living costs.

Additionally, medical and education expenses, which have skyrocketed in recent years, still do not receive sufficient tax relief. The Bill does propose higher deductions for such expenses, but it’s unclear if these adjustments will meet the expectations of India’s salaried middle class.

Real estate deductions have also not seen any meaningful reform. While interest deduction on housing loans remains capped at ₹2 lakh per year, the rising real estate costs in urban centres make this outdated. These sections of the law demand immediate and bold revision to meet the realities of the current economy.

2. Corporate Taxation: Need for Structural Reform

India’s corporate tax rate, while globally competitive at 22%, still poses issues related to structure and clarity. For instance:

• Merger and acquisition (M&A) transactions often face hurdles due to lack of clarity in rules around ‘demerger’ taxation.

• Although demergers do not include “fast track” demergers, they are often implemented to reduce operational complexity and unlock shareholder value.

• The lack of proper alignment in tax rules to accommodate new business structures causes confusion and hinders investment.

The Bill does not address such long-standing concerns that affect India’s attractiveness as a business destination.

3. Missing Clarity in Definitions

Several sections continue to suffer from poor drafting or omissions. For example:

• The ‘deemed gift’ provision under section 56(2)(x) lacks clarity on whether a relationship is ‘mutually applicable.’ This can result in unfair tax implications even in genuine non-commercial gifts.

• The Bill should have defined the term ‘relative’ more clearly, especially for gifts between spouses or family members where tax exemption should ideally apply.

• Despite the recommendation from the Simplification Committee, some ambiguous definitions have not been corrected or updated.

These ambiguities lead to unnecessary litigation and harassment for taxpayers.

4. CBDT’s Role and Power Enhancement

Another major issue flagged by experts is the expanded role of the Central Board of Direct Taxes (CBDT). The Bill grants CBDT additional power to make legislative-type changes without parliamentary oversight. This could raise concerns over transparency and checks and balances in tax policymaking.

While flexibility is important for timely administration, unchecked delegation of authority to the CBDT may lead to overreach and unpredictability for taxpayers.

Alternative Approaches Suggested

To make this revision truly effective and meaningful, the following alternative approaches should be considered:

A. Rationalising Individual Tax Burden

• Raise the ₹15 lakh threshold for the highest tax bracket to a more realistic level, say ₹25–30 lakh, keeping in mind inflation and economic realities.

• Provide meaningful deductions for:

  • Medical expenses (especially for critical illnesses)

  • Children’s education and higher studies

  • Home loan interest in high-cost urban areas

B. Simplifying Gift Tax Provisions

• Clearly define ‘relatives’ for exemption purposes.

• Specify reciprocity conditions for gift exemption, especially between spouses, siblings, and parents.

• Remove ambiguity in inter-family transactions that are not aimed at tax evasion.

C. Clarifying Corporate Taxation Structures

• Offer a unified definition of ‘demerger’ that includes fast-track mergers, spin-offs, and restructurings.

• Simplify provisions for M&A transactions, especially for startups and tech companies where valuation and structure vary widely.

• Define clearer rules for loss carry-forward and amortisation in case of business combinations.

D. Restricting CBDT’s Legislative Powers

• Set up a system of parliamentary oversight or judicial review for rules issued by CBDT under legislative power.

• Mandate public consultation before introducing any rules that affect exemptions, rates, or compliance burdens.

Challenges and the Way Forward

While the new bill has attempted a long-overdue clean-up of the tax code’s language and format, the substantive tax structure remains largely untouched. Some key challenges going forward include:

1. Implementing Substance Reform

• Without addressing core issues like taxation thresholds, deduction limits, and outdated corporate structures, simplification remains superficial.

• The risk of future litigation continues due to incomplete definitions and uncorrected provisions.

2. Parliamentary and Bureaucratic Resistance

• Many substantive changes are not part of the Finance Ministry’s draft, which reflects resistance to overhauling long-standing systems.

• The delay in adopting reform recommendations signals an intent to prioritise procedural reform over material change.

3. Ensuring Balance Between Simplicity and Fairness

• While ease of administration is necessary, over-simplification at the cost of fairness can alienate genuine taxpayers.

• India’s socio-economic diversity requires tailored exemptions and provisions, not a one-size-fits-all model.

4. Administrative Modernisation Still Pending

• TDS and TCS reforms are partly addressed, but more changes are needed to align them with EoDB (Ease of Doing Business) principles.

• Automation and AI integration in compliance and assessments need a more robust legislative backing.

Conclusion

The Income Tax Bill, 2025 is an important step in the journey towards tax reform in India. By cutting down on outdated provisions and simplifying language, it marks the beginning of a modern, transparent tax code.

However, substantive reforms remain incomplete. Unless critical areas—such as individual tax relief, corporate taxation frameworks, definitional clarity, and delegation of authority—are addressed, the bill will remain only a half-done reform.

True simplification requires not just fewer sections, but also greater justice, clarity, and predictability in the tax law. The government must now move quickly to incorporate key feedback, go beyond mere structural changes, and adopt a substantive reform roadmap for India’s tax future.

Five Questions and Answers

Q1. What is the main purpose of the Income Tax Bill, 2025?
A: The Bill aims to simplify the language of the Income Tax Act, reduce litigation, remove obsolete provisions, and lower compliance burdens.

Q2. What are the major criticisms of the Bill?
A: The Bill fails to address substantive issues such as outdated tax brackets, insufficient deductions for medical and educational expenses, lack of clarity in definitions, and excessive powers to CBDT.

Q3. How many sections has the Bill reduced compared to the original Act?
A: The number of sections has been reduced from 819 to 516 in the new draft.

Q4. What specific challenges remain in corporate taxation under the new Bill?
A: Lack of clarity on ‘demerger’ rules, challenges in taxation of M&A, and outdated carry-forward provisions for losses.

Q5. What is the way forward for making this Bill a success?
A: Incorporating substantive reforms, increasing deduction limits, redefining ambiguous terms, rationalising CBDT’s powers, and ensuring public consultations before making major rules.