The Finance Minister’s recent announcement of a comprehensive review of the provisions of the Indian Income-tax Act, 1961, has generated much anticipation. The proposed changes, which are likely to be introduced in the 2025-26 Union Budget, are expected to simplify the provisions, remove some of the obsolete sections, and make the language of the Act easier to follow.
While the simplification of the law is indeed a welcome step, it addresses only one part of the issue. The real challenge lies in addressing some of the deeper structural issues within the law and its administration.
Key areas for reform
Creating a framework for litigation mitigation: The rising volume of tax litigation is a major challenge. While the government has raised the monetary threshold for revenue appeals, this only partially addresses the issue. A stronger framework for tax settlements is needed, as many disputes reach the Supreme Court, delaying resolutions for years.
Establishing a permanent dispute resolution mechanism could expedite cases, reduce judicial burden, and provide faster relief to taxpayers. The government’s Vivaad Se Vishwas scheme is a positive step, but a long-term solution is essential. The Committee on DTC had made certain suggestions which seem practicable. The UK framework on settlements also provides a useful guide.
Taxpayers (particularly non-residents) previously had the option to seek Advance Rulings on interpretation of income tax issues, which worked well for several years. This needs to be revived.
Ensuring uniform interpretation of the law: Today, the same provisions of the Income-tax Act and various tax treaties are often interpreted differently by different officers. While the faceless assessment scheme has helped mitigate some of these issues, inconsistencies remain.
A critical issue here is Section 119 of the Income-tax Act, which allows the CBDT to issue instructions only for a class of taxpayers and prevents intervention in individual cases. There is a need for the CBDT to quickly issue position papers on significant matters, ensuring uniformity in the interpretation of the law across all officers. This will benefit both taxpayers and the tax authorities.
Ensuring finality of SC judgments: A new trend has emerged wherein both taxpayers and the government are increasingly seeking reviews of Supreme Court judgments. This practice of requesting reviews is causing uncertainty and eroding confidence in the judicial system. This trend must be curbed.
Addressing long-standing issues in mergers, demergers, and amalgamations: Despite repeated representations, key issues remain unresolved. For example, the rules around the grandfathering of share prices for computing capital gains create confusion, especially in situations involving bonus shares or company mergers.
In such cases, the grandfathering benefit can be lost, leading to unfair tax outcomes. Simplifying these provisions would bring much-needed clarity.
The proposed review of the Income-tax Act should entail creating a system that minimizes litigation, ensures uniform interpretation of the law, and resolves long-standing issues in tax provisions related to mergers and share transactions. This will not only enhance compliance but also restore taxpayer confidence, improving the overall ease of doing business in India.
The writer is CEO, Dhruva Advisors LLP