In the Union Budget 2024, the Finance Minister of India had called for a comprehensive review of the Income Tax Act, 1961 (‘Act’). The purpose as cited in her speech was to make the Act concise, lucid, easy to read and understand. The endeavour was to reduce disputes and litigation, thereby providing tax certainty to the taxpayers.
To spearhead this initiative, the Central Board of Direct Taxes (‘CBDT’) established an internal committee. Recognizing the importance of public participation, the committee issued a press release on October 7, 2024, inviting valuable insights and suggestions from the public. The suggestions were invited for simplification of language, litigation reduction, compliance reduction and redundant/obsolete provisions.
Since the issuance of this press release, there has been guarded silence from the Government regarding the progress of this crucial review. As Union Budget 2025 looms on the horizon, speculation is rife regarding the potential introduction of a new income tax law.
This article discusses some of the key amendments that may be introduced in the upcoming budget to achieve the Finance Minister’s vision of a more streamlined and taxpayer-friendly tax regime.
Simplifying language of provisions
The current income-tax law is complex for average taxpayers due to its technical jargon and numerous provisos, circulars, and notifications. This necessitates reliance on tax lawyers and consultants. Simplifying the language, especially for provisions concerning individual taxpayers like salary, house property, and other income, is crucial. This can be achieved by making the provisions more comprehensible and by including illustrations to aid interpretation. Furthermore, rearranging and regrouping the sections in a manner to bring all connected provisions together may make it easier for taxpayers to understand their tax obligations and related compliances.
Removal of old and redundant sections
Presently, there are 298 sections in the existing income-tax law. The same is further supplemented by various circulars and notifications. Repeal of various redundant provisions itself will considerably reduce the length of the law.
For instance, provisions such as section 10A, section 10B, section 10BA and section 10C provided for certain profit-linked deductions to specified businesses in the past. As of now, not only the sunset date for commencement of such specified businesses has expired but also the maximum period for which deductions could have been claimed under these sections stands expired. Accordingly, in today’s context, the provisions do not have any relevance and may end up creating unnecessary confusion in the minds of the taxpayers. Accordingly, the same can be omitted from the Act.
Publication of income-tax compendium of clarifications
One of the key reasons for piling up a plethora of cases before various forums is that the legal position which the taxman intends to take with respect to a particular legal provision is not informed to the taxpayers at the very inception. While steps have been taken by CBDT in the recent years to keep the taxpayers pre-informed about Taxman’s position by issuing guidelines such as for section 194O, 194R and 194Q, however, still there lies a huge gap.
In this relation, one of the steps which can be taken by the Government is to mandate publication of a compendium of clarifications by the CBDT. The compendium can provide the tax department’s understanding of each provision and also its position on ambiguous issues. All the circulars which have already been issued should also get consolidated to form part of such a compendium. Also, the clarifications issued and positions stated in the compendium must be binding on the tax department. The compendium shall act as a one-point reference for the taxpayers and provide them certainty regarding tax implications on their proposed businesses or transactions.
Schemes to pay tax on gross basis instead of net basis
A significant chunk of tax disputes which are pending before multiple forms in India are on account of allowability of deductions while computing income especially under the head ‘profits and gains from business and profession’. Also, considerable amendments are made each year to provisions which further adds to the complexity.
In order to provide certainty to taxpayers and also reduce prolonged litigation, taxation on presumptive income or gross basis of taxation should be promoted. For instance, in the existing law, certain payments to non-residents such as royalty/ fee for technical services are taxable on a gross basis. Similar provisions can be introduced for taxation of certain categories of income earned by residents as well.
Also, in the existing law, there are provisions such as section 44AD and section 44ADA which provide for taxation of presumptive income. However, only limited taxpayers are able to obtain the benefit of said schemes considering the narrow eligibility criteria. The upcoming budget can consider expanding the coverage of such schemes by extending the same to more businesses and by increasing the monetary limits.
Inclusion of new transactions under the ambit of Transfer Pricing Safe Harbour Rules under Rule 10TD of the IT Rules
Another welcome move would be rationalisation of safe harbour rules provided for transfer pricing purposes. In the existing rules, safe harbour criteria are provided only for 11 transactions. Amendments should be proposed to expand the list and also to make the safe harbour criteria more reasonable considering the existing business trends. Today, even though the taxpayers may wish to avail the benefit of safe harbour rules, they are discouraged due to significant margin requirement in the rules in comparison to the industry benchmarks.
Conclusion
The aforementioned measures will enable the Government to move a step forward for achieving its overall objective of simplification of income tax law. It shall also enable the taxpayers achieve more certainty and reduce prolonged litigation. With Budget 2025 around the corner, the expectations are running high. Let us hope the revamped income tax law is worth all the wait.
