The Income Tax Act, 1961 is the backbone of India’s direct taxation system, but its complexity and outdated provisions hinder its effectiveness. The government’s recent announcement of a comprehensive review is a welcome step. However, as we await the new Income Tax Bill, announced by finance minister Nirmala Sitharaman in her FY25 Budget speech, it is crucial to examine the reforms required for simplification and modernisation of the IT Act.
The upcoming overhaul of the Income Tax Act seeks to address the law’s complexity by making it concise, lucid, and easier to navigate. An internal committee led by Chief Income Tax Commissioner V.K. Gupta is spearheading this review, and its report is expected before the FY26 Budget. Key focus areas include simplifying the tax deduction at source and tax collection at source systems, consolidating penalty provisions, and replacing outdated procedures with digital alternatives. The proposed changes seek to reduce disputes and litigation while fostering tax certainty, setting the stage for a draft bill to be scrutinised by the standing committee on finance before eventual enactment.
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Simplifying TDS and TCS
One of the most significant sources of complexity is the TDS and TCS framework, currently governed by over 71 intricate sections. Consolidation of these into a single comprehensive schedule will be a step in the right direction. Eliminating redundant procedures such as the issuance of TDS certificates now replaced by Form 26AS, will further ease compliance. Simplification here is not merely administrative but pivotal for fostering transparency and reducing litigation.
The scattering of penalty provisions across 45 sections has created a labyrinthine system prone to confusion and disputes. Consolidating these into two or three sections, as recommended by the Gupta Committee, would ensure clarity for taxpayers and reduce the scope for legal ambiguities. This reform, coupled with streamlined enforcement mechanisms, could significantly enhance compliance rates.
India’s adoption of technology in tax administration, including tools like Form 26AS and annual information statements, has garnered appreciation. However, over-reliance on technology, particularly faceless assessments, has created challenges in scrutinising high-value transactions and combating black money. Strengthening on-ground manpower in tandem with technological tools is essential to mitigate systemic inefficiencies and ensure equitable tax collection.
Addressing systemic challenges
Black money remains a significant obstacle to India’s economic growth. Issues such as inadequate scrutiny of high-value entities, rampant corruption, and selective assessments of politicians have compounded the problem. A revamped Income Tax Act must prioritise stricter enforcement and leverage local intelligence to uncover and address undisclosed transactions, which currently dominate domestic high-value dealings.
Corporate entities frequently struggle with complexities in transfer pricing, penalty provisions, and reassessment processes. The Deloitte survey reveals that 64% of industry leaders find transfer pricing laws excessively intricate, while over 70% demand streamlined corporate Income Tax Return (ITR) filing processes. Simplifying these laws will not only reduce compliance burdens but also attract foreign direct investment (FDI), bolstering India’s economic competitiveness.
Learning from global tax systems
Comparisons with simplified tax systems of countries like Vietnam and Malaysia often overlook India’s unique demographic and economic realities. India’s vast population, diverse socio-economic structure, and judicially driven taxation framework necessitate a detailed and adaptive tax code. While the new Income Tax Bill can simplify processes, its sustainability will depend on accommodating the evolving needs of the economy and maintaining clarity.
Prolonged tax litigations and high associated costs remain barriers to business operations, especially for small and medium enterprises (SMEs). Streamlined dispute resolution mechanisms and efficient appellate systems are essential to alleviate these burdens. Faster resolutions will not only save costs but also build trust among taxpayers. Any legislative reform must undergo comprehensive public consultation. Engaging industry stakeholders, legal experts, and citizens will ensure that the new or amended Income Tax Act addresses ground realities and garners widespread acceptance.
While the government’s intent to revamp the Income Tax Act is commendable, its success depends on addressing systemic inefficiencies and balancing technological advancements with manpower requirements. Simplification efforts must prioritise reducing compliance burdens, enhancing enforcement, and fostering equitable tax policies to ensure that the new tax regime is not just legally sound but also economically impactful. With bold and inclusive reforms, the revamped Income Tax Act can become a catalyst for economic growth, reducing disparities, curbing black money, and fostering a business-friendly environment.