The Income Tax (No 2) Bill, which aims to overhaul a 60 year old income tax law and simplify S.I.M.P.L.E. laws to make them easier to comprehend, passed the Lok Sabha without the intricacies of opposition debate Monday afternoon but to the acclamation of INDIA block MPs who were objecting to the voter list revision in an upcoming poll Bihar.
February Finance Minister Sitharaman, who originally tabled a first draft of the bill, used that acronym to describe what it was meant to be guided by. Such principles entail: Streamlined structure and language; Integrated and concise; Minimised litigation; Practical and transparent, Learn and adapt, and Efficient tax reforms.
That original draft was then sent to a narrow committee chaired by BJP Party member Baijayant Panda. The committee has put forth 285 suggestions and majority were accepted by the government this afternoon, Ms Sitharaman said.
Mr Panda said the revised bill goes beyond that mission. According to him, the new draft also simplifies the several decades old tax structure, and assists individual taxpayers and MSMEs to avoid unwarranted litigation.
The 1961 Income Tax Act itself has suffered more than 4,000 amendments and uses more than five lakh words. It has grown so complicated. What the new bill simplifies by almost 50 per cent as…” he said.
Besides streamlining language, the No 2 Bill clarifies deductions and streamlines cross referencing to other provisions as well as clarifies ambiguities during income based on house property including the standard deductions and pre-construction interest on house loans.
It also presents more definite terms like capital asset, micro and small enterprises, the beneficial owner and equalizing treatment with pipeline contribution and expenditures of scientific research. It will take effect on or after April 1 2026.
A Few Changes Suggested in New Draft of Income Tax Bill:
Tax relief on refunds – In relieve on tax, one is allowed to claim refunds in impending instances even when returns are not filed timely.
Imposition of no penalty in case of late filing of TDS – There will be no penalty on tax deducted not deposited in case of late filing of TDS.
Nil-TDS certificate – Any taxpayer who does not incur any tax liability i.e., pays no income tax, can claim in advance of the nil certificates. Both the Indian and the non-resident taxpayers can apply this.
Commuted pensions – It has explicitly deducted (in the later revised version of draft it was an arbitrary mention) tax deduction to commuted pension, lump sum pension payability, in particular to the taxpayers. This is applicable to the recipients of pensions on certain funds like LIC Pension Fund.
Inter-corporate dividends- Dotation to inter-corporate dividends, i.e. dividends received on the shares a company owns in another company, has been revived as under Section 80M.
This provision had been left out in the first draft of the new Income Tax Act especially in the case of companies which choose the 22 per cent rate of corporate tax that is, like the individual a different rate of tax was offered to a company that chose to waive certain exemptions.
The exclusion caused concerns about the dangers of multi level company structure that was prone to double taxation.
Property tax interpretations- In order to compute the tax on rental income of house properties, the standard deduction amounts to 30 per cent, which is computed as per the Section 21. There will also be deductions in the interest payable on borrowed capital to purchase, construct, repair, etc. a property.
With the old law, when rental property was left vacant, all through the year or some part of it, the annual value of house (which the tax will be levied on) is calculated on the basis of the reasonable expected rent or the actual rental, in the portion where it does not surpass the rate of the reasonable rent.
On the new statute, the 2 greater of two sums will be the foundation of such valuation as follows: (l) reasonable expected rent in case the property or any portion thereof is leased.
Standardisation of MSME Definitions
The committee suggested that there should be a harmonisation of definition of micro and small enterprises.
The MSME Act as per the last revised on July 2020 classifies the micro and small enteprises according to investment in the machinery and yearly turnover. A micro enterprise will be one with investment of less than Rs 1 crore and turnover of less than Rs 5 crore. In case of a small enterprise that would be ten and fifty crore.
What Else Is New Tax Bill?
One of the changes and amendments proposed is the idea of a tax year, and it will be replacing the practice of using financial year or FY, and accounting year or AY concurrently. That is, in the existing income tax regime, tax due on the 2023/24 income, say, is paid in 2024/25.
Under the proposed change, a tax year will be added, thus tax on the income earned within a year will be paid within the year. It has also skipped overlapping passages, such as the ones devoted to the topic of fringe benefit tax.
Provisions with regard to TDS, or tax deducted at source, presumptive taxation, salaries, and bad debts deduction has been provided in tables.
What Does Not Change?
The largest provision of the new income tax bill is that no alterations of prevailing tax slabs are implemented.
Key words and phrases that have been defined by court rulings (will) also remain, said the Finance Ministry.
In the same breath, Taxation Laws (Amendment) Bill, 2025 that offers direct-tax surcease to the sovereign wealth fund and its subsidiaries of Saudi Arabia operating in India, was also cleared Monday.
A simplified Act–and at what a cost?
The government says the new act radically slims the Income Tax Act, and decreases its size and level of complexity by almost half of its existing sections and an equal number of chapters, and also removes such archaic terms as assessment year and by replacing it with the easier to understand tax year.
It repeals the repealed provisions in the 1961 Act (such as the provisions which denies tax payers to claim the TDS refund at the cost by late filing of returns after stipulated time), so essentially restores the provisions and also reintroduces the deductions of the certain inter corporate dividends. It also brings the definition of micro and small enterprises at par with other related laws.
The Government has accepted virtually everything that the Select Committee recommends. Also, the stakeholders have provided recommendations regarding alterations that would reflect the proposed definition of the meaning of the law better,” it is stated in the Statement of Objects and Reasons.
Nangia Andersen LLP tax consultant Sandeep Jhunjhunwala discussed the Bill as being well balanced, pragmatic and taxpayer focussed in many ways, but the most controversial point has essentially gone unchanged.
The privacy issue the government is unwilling to fix
The initial draft that was placed in February had Clause 247 which is a bone-chilling escalation in search and seizure of tax authorities. It would have also permitted officers to unlock and raid rooms, lockers, and offices in addition to overcoming passwords and allowing direct access to the virtual digital spaces such as personal email accounts, social media, and the other online sites in case a taxpayer did not comply.
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