Simplifying Taxes: Is the Income-tax Act 2025 on the cards?

India's tax system has evolved over centuries, from ancient texts like the Manu Smriti and Arthashastra to colonial-era policies and the landmark Income-tax Act 1961. While this Act has served as the cornerstone of our tax framework, it has become increasingly complex over time due to numerous amendments. This complexity has sparked widespread calls for a comprehensive overhaul.

In the 2024 Union Budget, Finance Minister Nirmala Sitharaman offered a glimmer of hope by announcing a six-month review of the 1961 Act. This move signalled the potential for a new era in India's tax administration, raising speculations about a potential "Income-tax Act, 2025."

While it is likely that a new Income-tax Bill will be introduced during the 2025 Budget session, its actual implementation from FY 2025-26 might take longer. Crafting a new tax framework is a complex undertaking, involving stakeholder consultations, drafting new rules, and updating the e-filing portal. These processes will take time, so a more realistic expectation is that the law will be introduced in the 2025 Budget session, with implementation starting from FY 2026-27.

Implementing this ambitious reform will undoubtedly face challenges. Helping taxpayers and tax professionals understand the changes, ensuring robust IT systems, and simplifying the tax code without affecting government revenue will require strategic planning.

What Can We Expect from the Future Tax Code?

The anticipated Income-tax Act 2025 is likely to feature several transformative changes:

▪ Simplified Tax Structure: The government is expected to focus on reducing exemptions and streamlining tax slabs. With lower rates and fewer deductions, the new tax regime could become the standard, while the old regime and its associated deductions may be phased out. This move will simplify tax calculations and reduce administrative efforts by eliminating the need to track claims of inflated or fake deductions.
▪ Streamlined TDS System: The current TDS (Tax Deducted at Source) system is often complicated, with numerous sections and varying rates. The new Act may consolidate these provisions, reducing errors and minimising legal disputes.
▪ Simplified Capital Gains Tax: A uniform tax rate for short-term and long-term capital gains across asset classes may be introduced. Additionally, the rules for holding periods and exemptions are likely to be simplified.
▪ Adapting to the Digital Economy: The new Act is expected to address the digital age, offering clear taxation guidelines for e-commerce, cryptocurrency, and online transactions, bringing India’s tax system in line with global standards.
▪ Easier Taxation for Charities: A simplified registration process and presumptive taxation for smaller charities could ease the compliance burden while ensuring greater transparency.
▪ User-Friendly Language: One key focus will be making the law readable. Expect more straightforward language, precise definitions, and eliminating outdated provisions, making the law more accessible to everyone.
▪ Reduced Litigation: The new Act may introduce specialised dispute resolution panels and establish fixed timelines for the disposal of appeals, helping to reduce unnecessary delays and disputes.
▪ Simplified Compliance: Fewer changes to tax laws and simpler ITR forms are expected, making it easier for taxpayers and professionals to comply with regulations.

The successful implementation of a modern Income-tax Act could boost compliance, attract foreign investment, and make India’s tax system more efficient. However, its success will depend on thorough stakeholder consultations and a well-planned, gradual rollout.

The author is the Lead - Business Advisory at Coherent Advisors