Why in news?

Parliament has passed the Income Tax Bill 2025, designed to modernise and replace the decades-old Income Tax Act of 1961.

The new legislation is notably shorter, more streamlined, and clearer in its drafting. Yet, it also introduces several new provisions that may pose challenges or raise concerns, depending on their implications and implementation.

What’s in Today’s Article?

• Need for a New Income Tax Law
• Need for a Second Version of the Income Tax Bill
• Key Changes in the New Income Tax Bill 2025
• Concerns Over Expanded Search Powers

Need for a New Income Tax Law

• The Income Tax Act, 1961 had become outdated after decades of numerous amendments, making the legislation complex, lengthy, and difficult for citizens to understand.
• Its vague provisions gave tax officials significant discretion, often leading to harassment of taxpayers.
• The Income Tax Bill, 2025 addresses these issues by streamlining and simplifying the law.
• It reduces the number of chapters from 47 to 23 and sections from 819 to 536, cutting down on redundancy and confusion.
• To ensure clarity, the Bill expands the use of tables (57 vs. 18 earlier) and formulae (46 vs. 6 earlier).
• Most importantly, the language has been simplified, removing legal jargon and including practical examples where necessary, making tax law far more accessible to ordinary citizens.

Need for a Second Version of the Income Tax Bill

• The first version of the Income Tax Bill 2025, introduced in February, was ambitious but required deeper scrutiny due to its importance.
• To ensure fairness and robustness, it was referred to a Select Committee comprising MPs from across parties.
• The Committee submitted a comprehensive report in July, which retained much of the Bill’s simplified language but also recommended several changes.
• To avoid confusion between multiple versions, the government decided to withdraw the original Bill, and incorporate all suggested changes into a single, updated draft.

Key Changes in the New Income Tax Bill 2025

• The primary objective of the new Income Tax Bill is simplification and rationalisation, not altering tax rates or slabs, which continue to be adjusted separately through the Union Budget.
• Provisions for Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) have now been separated into two distinct sub-sections, improving clarity.
• Taxpayers now have the option to update their returns up to four years from the end of the relevant assessment year, allowing mistakes to be corrected without penalty or extra tax liability.
• Additionally, the period for which assessments can be reopened has been reduced to five years, ensuring greater certainty for taxpayers and preventing long-drawn scrutiny.
• Introduction of “Tax Year”
  • A new concept of “tax year”, defined as April 1 to March 31, has been introduced.
  • The law has been significantly streamlined:
    • Sections reduced from 819 (1961 Act) to 536.
    • Chapters reduced from 47 to 23.
    • Word count halved from 5.12 lakh to 2.6 lakh.
    • Tables and formulae increased to provide clarity (57 tables, 46 formulae).
• Digital Provisions and Virtual Space
  • The Bill retains the definition of “virtual digital space”, giving tax authorities powers during searches and seizures.
  • This includes email servers, social media accounts, online investments, cloud servers, and digital applications.
  • Finance Minister assured that SOPs will be issued to safeguard personal digital data seized during searches.

Concerns Over Expanded Search Powers

• While the new Income Tax Bill 2025 aims to simplify tax compliance, it also introduces provisions that raise serious privacy concerns.
• Under the old Income Tax Act, 1961, officials could inspect electronic documents and physically break locks if access was denied.
• The new law goes much further:
  • Taxpayers in control of electronic documents are now legally required to provide “reasonable technical and other assistance”, including sharing passwords of their systems.
• Since the law does not restrict what kind of electronic information can be accessed, this could extend to personal emails, social media accounts, and private data.
• If the taxpayer refuses to share passwords, tax officials are empowered to override access codes to any computer system directly.
• These expanded powers have triggered concerns that they could be misused, undermining citizens’ right to digital privacy and creating scope for overreach by authorities.
• However, govt contends this was necessary as in today’s financial ecosystem, significant financial information is no longer confined to physical records or formal documents.
• Instead, it is often shared over messaging platforms, stored in personal emails, or maintained on digital accounts.