In a significant development, the Select Committee of the Lok Sabha has tabled its detailed report on the Income-Tax Bill, 2025, presenting 32 substantive observations and recommendations aimed at improving clarity, coherence, and fairness in the proposed legislation.
The 4574-page report was submitted to the Lok Sabha on Monday by Committee Chairperson Baijayant ‘Jay’ Panda.
The Income-Tax Bill, 2025—introduced on February 13, 2025, by Finance Minister Nirmala Sitharaman and referred to the 31-member Select Committee the same day—seeks to comprehensively replace the Income-tax Act of 1961. However, in its examination of the new draft, the panel has raised critical red flags on definitions, drafting inconsistencies, and ambiguities that could potentially burden both taxpayers and administrators.
Clarity over complexity
A recurring theme in the panel’s report is the need to simplify definitions and avoid reliance on outdated references. The Committee recommended realigning the definition of “capital asset” under Clause 2(22) to reflect recent changes in the Finance Act, 2025, especially concerning securities held by foreign investors and investment funds.
Similarly, the definition of “infrastructure capital company” was flagged for being overly complex and dependent on references from the repealed 1961 Act. The panel advised directly incorporating the definition of “infrastructure facility” into the new bill to make it self-contained.
Definitions of terms such as “micro” and “small” enterprises, “parent company,” and “co-operative bank” also came under scrutiny, with the Committee urging alignment with corresponding laws or clearer articulation to prevent misinterpretation.
Making deductions more transparent
Several of the recommendations focused on improving the fairness of income computations and deductions. For example, Clause 22 on income from house property should explicitly state that the standard 30% deduction is to be applied after deducting municipal taxes. The panel also proposed allowing deductions for pre-construction interest not just for self-occupied homes but also let-out properties.
Other deductions requiring greater clarity include those for scientific research, where the Committee urged redrafting to specify when approvals are necessary, and for employer contributions to pension schemes, where the absence of the phrase “by such individual” could lead to disputes.
The Committee also recommended restoring the term “adjusted gross total income” in clauses dealing with donations to avoid accidental tax benefits beyond what is legally intended.
Protecting small taxpayers and NPOs
In a move likely to benefit small taxpayers, the panel criticized the existing requirement for filing an income tax return solely to claim a refund of tax deducted at source (TDS). It recommended the removal of such provisions, which could expose low-income individuals to unnecessary prosecution for non-filing.
Non-profit organisations (NPOs) also received special attention. The report highlighted multiple areas where ambiguities could harm charitable institutions—particularly those with both religious and charitable objectives.
The Committee recommended:
- Reintroducing the “religious-cum-charitable” category for exemptions on anonymous donations;
- Using “income” instead of “receipts” for taxability, in line with the principle of taxing real income;
- Retaining the concept of “deemed application” of income, which was omitted in the draft but is vital for entities facing delays in income utilization.
Plugging legal loopholes and ensuring continuity
The Committee called for redrafting clauses to better preserve legislative intent, especially around the computation of capital gains (Clause 79), carry-forward of losses (Clause 119), and refund eligibility when one person’s income is included in another’s (Clause 432).
A particular concern was the replacement of “shall” with “may” in penalty-related clauses (Clause 441), allowing authorities discretion in cases where non-compliance is not deliberate.
On the issue of tax avoidance, the panel backed the General Anti-Avoidance Rules (GAAR) provisions but insisted on reinstating the phrase “in the circumstances of the case” to ensure assessments consider the context and are not applied indiscriminately.
Administrative efficiency and modernisation
From revising timelines for liaison offices of foreign entities to redefining who qualifies as a valuer under the new law, the Committee’s recommendations also focus on improving administrative ease. It proposed an extended compliance window—from 60 days to eight months—for non-resident liaison offices and advised removing fixed application fees in advance ruling cases to allow flexibility through prescribed rules.
Lastly, Clause 536, which repeals the 1961 Act, was approved with recommendations to cleanly consolidate all references and preserve continuity through savings clauses.
What’s next?
With these 32 suggestions, the Committee has provided a roadmap for refining the new income-tax legislation—balancing simplification with safeguards, and modernization with continuity. Whether the government chooses to adopt these recommendations in full or part remains to be seen, but their implications for individuals, businesses, and civil society could be far-reaching.
