Modernizing Taxation: Core Reforms in the Income-Tax Bill, 2025

Modernizing Taxation: Core Reforms in the Income-Tax Bill, 2025

Policy Update
Urvashi Singhal

Background

The Income-Tax Bill, 2025 is a comprehensive redesign of India’s direct taxation regime, based on the decades-old Income-Tax Act, 1961, which by 2025 had become cumbersome from having a large number of amendments and mounting litigation.

The Finance Minister, Nirmala Sitharaman, first brought the bill on 13 February 2025 in the Lok Sabha. It was referred to a Select Committee headed by MP Baijayant Panda, which produced 285 suggestions by July 2025. The government pulled back the bill on 8 August and brought a re-drafted version of the Income-Tax (No. 2) Bill, 2025 on 11 August. 

This amended form was approved by both chambers of Parliament by 12 August 2025, subject to Presidential assent. This new legislative architecture seeks to update the administration of taxation, lower uncertainties, make it more transparent, and ease compliance, evidencing more than six decades of policy development and legislative reform.

Functioning

The Income-Tax Bill, 2025 introduces a series of significant structural and procedural reforms that aim to modernize and simplify India’s taxation framework. 

  1. The structure of the legislation itself has been streamlined. This restructuring is designed to improve navigability and minimize the interpretive difficulties that had plagued the older statute. 
  2. The bill eliminates the dualism of ‘Assessment Year’ and ‘Previous Year.’  Instead, it introduces a single unified ‘Tax Year’ concept, thereby making tax filing timelines and conceptual clarity much simpler for taxpayers. 
  3. Middle-income taxpayers receive notable relief. The basic exemption of ₹12 lakh per year has been retained, and tax slabs have been revised in ways that aim to reduce the financial burden on the middle class, a group that often feels the heaviest strain of direct taxation. 
  4. The bill adopts a digital-first approach by mandating faceless administration. Processes such as scrutiny, reassessment, and appeals will now be carried out through faceless assessments, with e-notices replacing physical interactions. This shift is expected to curb discretionary power, reduce opportunities for harassment, and increase fairness and efficiency in tax administration. 
  5. The legislation strengthens procedural fairness while expediting refunds. It mandates that taxpayers must receive advance notice before tax authorities take any action, and that they must also be given a right to respond. 

Performance and Impact

While the law has not yet entered into effect, preliminary analysis reveals promising trends:

  • Simplification & Compliance: Taxpayers and practitioners gain from increased clarity and simplicity in dealing with tax rules
  • Middle Class Tax Relief: With eligibility for zero tax up to ₹12 lakh and increased deductions, the legislation gives substantial succour to the middle class
  • Lesser Human Interface: Faceless procedures will help contain corruption, and simpler e-governance is also likely to enhance the level of confidence in the system

Emerging Issues

Several emerging issues require attention:

  • Privacy Threats from Digital Spying Powers: The initial draft suggested that the powers of surveillance should be used to access taxpayers’ emails, trading accounts, and social media. Critics have warned against such powers as being tools for overreach and harassment.
  • Democratic Process Issues: Opposition members sounded the alarm that the bill was approved “without discussion,” and such a vital reform requires vigorous parliamentary debate even though the government claimed it was subjected to thorough committee scrutiny.
  • Implementation Burden: Going completely to faceless systems could put pressure on infrastructure and necessitate extensive taxpayer and official training, particularly in broadband and tech-constrained regions.
  • Transitional Confusion: Taxpayers and practitioners dealing with legacy versus new provisions could experience confusion during the transition period particularly in terms of mapping old sections, pension calculations, and refunds.

Comparison of Old vs. New Income Tax Law

FeatureIncome-Tax Act, 1961 (Old Law)Income-Tax Bill, 2025 (New Law)
Number of SectionsOver 800 provisions, many with frequent amendments, causing complexity.Reduced to 536 sections, with simplified and reorganized structure.
Assessment Year ConceptDistinction between “Assessment Year” (when tax is assessed) and “Previous Year” (when income is earned).Unified “Tax Year” concept for clarity and ease of compliance.
TDS RefundsRefund claims were often delayed; procedural hurdles existed.Faster refunds and ability to claim TDS refunds after return deadlines without penalties.
Undisclosed IncomeNarrower definition, mostly cash/real assets.Broader definition including virtual digital assets (VDAs/crypto).
Anonymous DonationsWider leeway for trusts/charities.Restricted for certain religious trusts, tightening compliance.
Procedural FairnessTax authorities had wide discretionary powers; advance notice was not always mandated.Mandates advance notice and opportunity to respond before action.

Way Forward

In order to make the Income-Tax Bill, 2025, a success, some forward-looking steps need to be taken. First and foremost is the setting up of sound privacy protections. This means legislating concrete rule-based or legislative protections that clearly demarcate the field of allowed access to taxpayers’ digital data, delineate control measures, and spell out severe punishments for any abuse or overreach. In the absence of such brakes, citizens’ confidence in a completely digital and faceless tax regime can erode.

Second, gradual implementation along with capacity development is crucial. Faceless mechanisms should not be launched uniformly at a single time, but in phases, starting with pilot tests in major metropolitan cities where infrastructure and digital skills are comparatively more robust. Concurrently, intense training sessions for tax administrators and taxpayer awareness campaigns need to be implemented to minimize confusion and resistance, ensuring easier adoption.

Third, continuous monitoring and auditing of system performance will establish if reforms are achieving their goals. All of these metrics – such as the processing time for returns, the speed of turnaround for refunds, the size of appeals backlogs, and overall litigation rates – should be tracked regularly. They will be used as feedback loops, enabling policymakers to streamline processes and remove bottlenecks on the fly.

Fourth, stakeholder outreach needs to be ongoing and institutionalized. The government ought to keep the communication lines open through formalized consultations with tax experts, civil society organizations, and state tax authorities. Such interaction would facilitate early detection of issues arising and ensure improvements are geared towards diverse stakeholder experiences across the nation.

Lastly, there is a need for open reporting of results in order to enhance accountability. By releasing regular public reports and dashboards that point out performance indicators, levels of taxpayer satisfaction, and efficiency of the system, the government can enhance trust as well as facilitate independent, third-party analysis. Together, these steps can build a climate where the new income-tax system is not only efficient and transparent but also inclusive, resilient, and trusted by the public.

References 

About the contributor

Urvashi Singhal is a master’s student at DTU, simultaneously pursuing actuarial science. She is currently working as a research intern on an ICSSR project focused on menstrual leave policy. 

Acknowledgment: The author sincerely thanks the IMPRI team for their valuable support.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organization.

Read more at IMPRI:

Distinguished Biotechnology Research Professorship Award Scheme 2008-09

Pan-India Incredible India Tourist Facilitator (IITF) certification Programme (2019)

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