The quest for a ‘simple’ income tax law

New Delhi: The hardest thing in the world to understand is the income tax,” eminent scientist Albert Einstein reportedly remarked during a conversation with his accountant Leo Mattersdorf. During the launch of the Goods and Services Tax (GST) in 2017, PM Modi referred to Einstein’s quote to support his argument on the need for a simple and unified indirect tax system. 

“Today, there are 500 different taxes. Once Albert Einstein, an eminent scientist, had said that the most complex thing to understand in this world is income tax. I was wondering if he was present here then how he would have reacted looking at the plethora of taxes,” Modi remarked during a speech at the midnight launch of the GST regime. 

GST was launched on June 30, at a function inside the Parliament’s Central Hall. This unified tax system replaced multiple indirect taxes levied by the central and state governments. 

While the introduction of GST was touted as the biggest tax reform in independent India, with Prime Minister Modi calling it a “good and simple tax”, it has faced criticism from different quarters, with many terming it even more complex than the previous system. 

Leader of the Opposition in the Lok Sabha Rahul Gandhi has criticised the GST system multiple times, saying it has broken the back of the middle class and benefitted big corporations.

On February 13 this year, with a stated objective to simplify the direct tax system, the Modi government tabled a Bill in the Parliament to replace the Income Tax Act, 1961. The Bill is currently under review before a Select Committee of the Lok Sabha, headed by Bharatiya Janata Party MP Baijayant Panda. 

In the ‘statement of objects and reasons’ of the new Bill, Finance Minister Nirmala Sitharaman states that it would make income tax regulations “concise, lucid, easy to read and understand.”    

According to the Finance Ministry, the new tax system will be built on five core principles, which make it ‘S.I.M.P.L.E’ for people to follow and to enforce. These five core principles are: “Streamlined structure and language, Integrated and concise, Minimised litigation, Practical and transparent, Learn and adapt, and Efficient tax reforms”.

Like GST, the new tax Bill is also touted as a major step forward in making the tax system simpler and more user-friendly. 

However, there are risks of uncertainties and increased compliance costs. “Businesses and taxpayers will need time to adapt to the new provisions which could lead to initial uncertainty and increased compliance costs,” said Rajendra Nayak, national leader, International Corporate Tax Advisory, EY India.

Reduced chapters, word counts

A substantial reduction has been proposed in the Act’s volume. The number of words in the Bill has been proposed to be nearly halved to 2.6 lakh from 5.12 lakh in the existing Income Tax Act. The number of chapters is proposed to be cut to 23 from 47. 

“Tables have been substituted with detailed verbiage on deductions and formulae have been replaced by descriptive words to make the new Bill reader friendly,” said Alok Agrawal, partner at Deloitte India.

“This may also help in mitigating inadvertent non-compliance by some taxpayers with less complex situations, who calculate their tax liability themselves and file their own tax returns,” Agrawal added. 

According to sources in the Finance Ministry, the drafting style of the new Bill is straightforward and clear, making the provisions easier to understand by incorporating more than 57 tables, compared to 18 tables in the existing Act.

Sub-sections and clauses have been used, instead of relying on provisos and explanations for exceptions and carve-outs. This minimises cross-references and conflict by aggregating all applicable provisions related to a single scenario in one place. All provisos (about 1,200) and explanations (about 900), which are part of the existing Act, are proposed to be removed.

“The new Bill has less jargon. The focus is on the use of simpler English, which can be understood by common people,” said Anil Singh, a partner at Singh and Partners, a tax advisory law firm. 

The Central Board of Direct Taxes (CBDT) has introduced an online self-help tool to assist taxpayers in understanding the proposed changes in the regulations. 

Tax year

As per the existing Act, there is a concept of financial year (FY) and assessment year (AY). Assessment year is the year followed by the financial year in which income is earned. For example, for the financial year 2024-25, the assessment year would be 2025-26. Taxpayers often get confused with these two terms, because of which many file taxes for the wrong assessment year. This leads to delays in refunds and other hassles. Under the new law, the concept of assessment year will be removed. Now, it will be called ‘tax year’. It will be defined as the 12-month period of the financial year commencing on April 1.

Tax residency rules

As per the Income Tax Act 1961, a person is treated as a tax resident of India if he or she i) stays for 182 days or more in India during a financial year; ii) has stayed for 365 days or more in India in the last four years and are present in India for at least 60 days in the current financial year. 

This condition of 60 days or more in the current year does not apply to a citizen of India who leaves India “for the purpose of employment outside India”. The new Bill proposes to replace this expression with “for employment outside India”. In the 60-days rules too, exceptions have been introduced. 

Indian citizens working abroad or crew members of Indian ships will not be subject to the 60-days rule. Non-resident Indians (NRIs) and Persons of Indian Origin (PIOs) visiting India will also be exempt from this rule, if their Indian income is below Rs 15 lakh.

However, as per the new Bill, an NRI or PIO earning over Rs 15 lakh in a year in India will be classified as Resident but Not Ordinary Resident (RNOR) if they: i) stay in India for 120 days or more in a tax year or; ii) have stayed in India for over 365 days in the past four years.

“The definitions of resident, non-resident and not ordinary resident continue to remain the same. There are only minor changes in verbiage, and we believe those are not intended to change the implications related to taxation of people employed outside India,” Agrawal explained. 

Data privacy

The new Bill seeks to grant tax authorities access to taxpayers’ digital records, including emails, social media accounts, trading platforms and cloud storage. Under the new Bill, taxpayers on whom a search is being conducted by the tax authorities would have to provide access to their electronic records and “virtual digital space”.

The definition of virtual digital space, as per the new Bill, includes email servers, online trading and investment accounts, banking accounts, social media platforms, cloud storage and digital applications.

If a taxpayer refuses to provide access, authorities will have the power to override system restrictions and access the necessary records.

While under the present law, tax authorities seek access to taxpayers’ laptops, hard disks and emails as part of investigations, it has been subject to legal challenges. The new Bill seeks to make it explicit and give tax authorities sweeping powers to access the virtual digital space of a taxpayer. Giving power to tax authorities to override access restrictions brings up questions about how taxpayer rights will be safeguarded and raises concerns over violations of data privacy. 

“The expansion in the powers of the tax authorities aims to align tax enforcement with the digitalisation of financial activities and business transactions to enable authorities to effectively address tax evasion challenges in the digital age,” Nayak said.

“There is, however, a need for safeguards to balance legitimate concerns of tax authorities relating to tax evasion
with protection of taxpayers’ rights and potential misuse of such powers,” Nayak added. 

International experience

The tax system has been complex by nature globally. Several countries have made efforts to simplify it over the years. 

For example, the United Kingdom replaced its Income and Corporation Tax Act, 1988, with five separate Acts. This ‘simplification’ exercise undertaken in the United Kingdom during the period between 1994 and 2010 has resulted in a more segmented, but overall larger body of tax law. 

Similarly, Australia underwent a similar process between 1994 and 1997, where simplification of language also resulted in a longer tax code.

According to sources in the Finance Ministry, the international level consultations for the Income Tax Bill, 2025, included consultations with the Australian Tax Office and Treasury and the UK’s Office of Tax Simplification.

The experience of the UK and Australia is a case in point that mere linguistic simplification and a change in the Act will not necessarily result in simpler processes for common people. The Indian policymakers and tax authorities must strive for structural rationalisation to demystify the tax regulations and processes.