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The income tax gambit to ramp up India’s growth
- The Union cabinet approved the income tax bill on 7 February to replace the existing law, and it is expected to be tabled in Parliament on Monday.
The new income tax bill must align with global best practices to attract foreign investment, support domestic businesses, and benefit individual taxpayers, experts said as India’s tax regime prepared for a major overhaul.
Global best practices should include those on investment incentives for venture capitalists, a threshold-based approach for MSMEs—similar to models in the UK and US—and measures to modernize tax administration, tax experts said.
The Union cabinet approved the income tax bill on 7 February to replace the existing law, and it is expected to be tabled in Parliament today.
“With India’s growing role in the global economy and the increasing relevance of digital transactions, it would be difficult for the country to ignore international best practices,” said S.R. Patnaik, head, taxation at Cyril Amarchand Mangaldas. “We are certain the new Act will align with global standards and India’s economic commitments.”
Sudhakar Sethuraman, partner at Deloitte India, agreed that adopting global best practices in tax administration and policy will enhance India’s competitiveness. “A balanced approach will modernize the tax system, incentivize investments, and boost job creation,” he added.
Sethuraman further suggested that the new bill should incorporate incentives for angel investors and venture capitalists investing in startups. These could include tax exemptions on capital gains or a reduction in the minimum holding period to make startup investments more attractive.
“R&D tax credits or incentives for startups engaged in research and innovation—similar to what is offered in countries like the US and the UK—can be considered,” he said. Additionally, he emphasized the need for tax incentives in sustainability-driven industries.
“Keeping in view the sustainability-focused economy, incentives can also be provided for investments in renewable energy resources and eco-friendly housing.”
Experts also suggest incorporating internationally tested frameworks to improve tax compliance and efficiency.
Dipesh Jain, partner at Economic Laws Practice, said, “Some of the global best practices—such as Large Taxpayer Units (LTUs), transparent interfaces with tax authorities, 24/7 helpline numbers, and Advance Pricing Arrangements (APAs)—go a long way in instilling taxpayer confidence in the tax system. Some of these are already embedded in India’s framework but require further refinement to maximize their impact.”
Views on the Bill
India’s formal income tax system was first introduced in 1860 by the British to recover losses from the 1857 rebellion. The Income Tax Act was enacted in 1886 and has since undergone multiple revisions to adapt to economic changes. Major updates came in 1918, 1922, and 1961, with the current Act taking effect in 1962.
The new bill, announced after the Union Budget 2024, aims to simplify tax laws, making them more concise, clear and accessible. The government intends to reduce disputes and litigation, ensure tax certainty, and modernize the system to align with contemporary economic needs.
Tax experts note that penalty provisions in the current law are ambiguous and inconsistently enforced, causing taxpayer discomfort. While recent reforms standardized penalties at 50% or 200% of evaded tax, gaps remain in addressing undisclosed foreign assets. Experts also criticize the inconsistent prosecution, where minor defaults face strict action while major defaulters go unpunished, adding to taxpayer concerns.
Patnaik of Cyril Amarchand suggests that the new bill should integrate technology-driven solutions, including pre-filled tax returns and standardized forms, to reduce compliance burdens, minimize errors, and prevent unnecessary litigation.
Dipesh Jain from Economic Laws Practice emphasized that the current tax framework fails to adequately address the complexities of international taxation.
“Given the ever-evolving nature of businesses and the blurring of international borders in cross-border trade, many countries are vying for a larger share of tax revenue from such transactions. It is imperative that the new Act considers these complexities, especially when India is focusing on ‘Ease of Doing Business,’” he explained.
For instance, Jain pointed out that the Significant Economic Presence (SEP) provisions—introduced under Section 9 of the Indian Income Tax Act to tax online transactions—have resulted in onerous compliance requirements, leading to unintended consequences.
Despite optimism about the new tax law, some experts warn that implementing it will be a lengthy and complex process.
Ankit Jain, partner at Ved Jain & Associates, noted that courts have spent decades clarifying the existing Act, providing a stable framework for dispute resolution.
“A new law could reopen resolved issues, burdening the judiciary and taxpayers alike. Additionally, implementing a new Act would require restructuring compliance systems, rewriting rules, and retraining professionals, leading to confusion and inefficiencies,” he said.
Historically, similar transitions have taken years. The UK spent a decade (1997-2007) redrafting its tax laws, while New Zealand took 14 years (1993-2007) to overhaul its tax system.
Future outlook
Finance minister Nirmala Sitharaman, in her Budget 2025 speech, emphasized that the new bill follows the spirit of legislative reforms citing the Bharatiya Nyaya Sanhita, which replaced the Indian Penal Code.
“The new income tax bill will be clear and direct, reducing the current law by nearly half in terms of chapters and word count. This will simplify compliance for taxpayers and tax authorities alike, ensuring certainty and reducing litigation,” she said.
Reportedly, approximately 544,000 appeals are currently pending before the Commissioner of Income Tax (Appeals) alone, with the disputed amount standing at ₹10.6 trillion.
To address the backlog of tax disputes, the government has introduced the Direct Tax Vivad Se Vishwas Scheme 2024, which came into effect from 1 October, 2024. The scheme aims to reduce ongoing income tax litigations by offering a simplified appeals process for taxpayers and the income tax department.
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Business NewsNewsThe income tax gambit to ramp up India’s growth
First Published:9 Feb 2025, 04:34 PM IST
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