Mint Explainer | New income tax bill: Why was there a need for a new legislation?

India is among the many countries trying to simplify its tax laws to reduce conflicts in interpretation which often lead to litigations, align terms with those used in tax treaties and make the law comparable with those of other jurisdictions. It has mostly succeeded in simplifying the law, though some ambiguities remain. One such ambiguity pertains to the eligibility to claim tax refunds due to what appears to be inconsistencies in two separate sections. Tax professionals may find other conflicts in the Bill as they analyse it further. Any inconsistencies identified are expected to be addressed before the Bill is enacted into law.

The Bill has been referred to a select committee of Parliament for review, and its recommendations are expected before the monsoon session. The Bill is expected to be passed by both houses of Parliament, assented by the President before the end of the current financial year and implemented as law from April 2026.

Mint explains why the Income Tax Act needed an overhaul and why the amended bill is unlikely to upset taxpayers.

Why was there a need for a new piece of legislation?

About 4,000 amendments have been incorporated into the 1961 Act since it came into force in April 1962. The amendments introduced sub-sections, provisos and explanations to the original Act, making the reading of the law and its interpretation onerous. Many provisions had become redundant, sometimes due to sunset clauses, but remained in the Act. The changes over the years made the Act bulky, created confusion for the tax administrators and taxpayers and led to a rise in litigations due to conflicting interpretations. Tax advisors and assessees often had to refer to multiple sections, sub-sections and provisos which were scattered all over the Act due to multiple amendments.

The need for revision of the law was felt from within the government and outside. Two attempts were made in the past to rewrite the tax law—in 2009 after a committee presented a draft direct taxes code together with a bill and again in 2019 when another committee on tax reforms submitted its report and a draft bill. Significantly, both these attempts involved not just reformatting the tax law but also a change in substance. Some of those changes were controversial.

This time, the government wanted to focus on just simplifying the law to make it easier to read and interpret and reduce litigations. Tax professionals too advised against writing the law ab initio or starting with a clean slate. They wanted the revised law to retain words, phrases, definitions, concepts and principles that were tested and settled.

Also Read: New Income Tax Bill: Simpler, lighter and future-ready

How is the Bill an improvement over the existing Act?

The Bill is more concise as it consolidates related provisions under single or fewer sections and has no provisios or explanations. This recast of the law ends the need to refer to multiple sections, provisos (more than 1200 in the current Act) and explanation (more than 900), which often resulted in confusing and conflicting interpretation. The Bill has reduced the number of chapters from 47 in the Act to 23 and the number of sections from 819 (effective) to 536.

The Act contains over 125 sections that were omitted or repealed over the years. This Bill has removed these sections in the process of recasting the chapters and provisions. It has also removed the alpha-numeric numbering of sections—the alpha-numeric numbering had been assigned to new sections inserted under related sections whenever the Act was amended.

The presentation has also improved, with the Bill tabulating certain provisions for easier understanding and interpretation. For instance, in the section on tax deducted at source and tax collected at source, tables have been used to list the threshold and rate of tax applicable to different transactions. These easy-to-read and understand tables leave no room for confusion on the tax to be paid.

Attempts have also been made to reduce the need to cross-reference to other laws as definitions provided in those laws have been embedded in the Bill.

Also Read: India’s new income tax bill: It’s more concise and makes for a friendly tax law

Will the government consider another major overhaul to income tax laws as attempted in 2009 and 2019?

Unlike the 2009 and 2019 proposals, the current Bill has not proposed changes to tax rates and tax laws. However, that does not mean there will not be any tax reforms or changes in tax rates in future. Significantly, some of the changes proposed in the 2009 Draft Direct Taxes Code (DTC) have already been implemented through various amendments in the past few years. For instance, the DTC proposed to remove deductions and lower taxes on incomes - it proposed to tax personal income up to ₹10 lakh at 10%, income between ₹10 lakh and ₹25 lakh at 20% and income above ₹25 lakh at 30%.

Under the new tax regime for personal income introduced by the NDA government, income between ₹20 lakh and ₹24 lakh will be subject to 25% tax and income above ₹24 lakh to 30% tax from the next financial year. Taxes were reduced for lower income slabs. The draft DTC had proposed to lower tax on corporation income to 25%. This was implemented before the outbreak of the Covid pandemic.

A one-time major overhaul of income tax laws looks improbable – the government is more inclined to make changes as the situation demands. For instance, changes for taxing global incomes at a certain minimum rate are expected to be made when a multilateral agreement is finalised.

Also Read: After a tax cut and a rate cut, it's time now for a GST cut

What could prevent the implementation of the new Act in April 2026?

In addition to getting the Bill passed in Lok Sabha, approved by Rajya Sabha and assented to by the President, the Central Board of Direct Taxes will need to update hundreds of rules and regulations which need to be read together with the Act. It is a fairly mammoth task. 

Additionally, the information technology infrastructure of the tax department will need to be updated to give effect to the changes in the Act. Further, enterprise resource planning software used by companies, tax advisors and various private tax return filing platforms will need to be updated by then. Delays in the processes can postpone the implementation of the new Act.