Q I.1 When was the current Income-tax Act passed?
Ans: The current Income-tax Act was enacted in 1961 and came into existence with effect from 01.04.1962. It has been amended nearly 65 times with more than 4000 amendments, year on year through Finance Acts, based on the evolving requirements of modifications in taxation policy.
Q I.2 What concerns have been raised regarding the Income-tax Act 1961?
Ans: Tax administrators, practitioners and taxpayers have acknowledged the contribution of the Income-tax Act, 1961 in overall tax governance and economy. However, over the time concerns have also been expressed over the accumulation of amendments, the intricate language, detailed provisions, redundancies and the heavy structure of the Income-tax Act.
Q I.3 What are the reasons for regular amendments in the Income Tax Act as against other Acts?
Ans: The Income-tax Act is dynamic legislation requiring regular updating and amendments to reflect the nation's changing economic, social, and political realities. Criminal and other civil laws do not undergo such frequent updating and amendments whereas the Income-tax Act is regularly updated (on annual basis) to reflect the economic changes, fiscal policies, and government priorities. It, therefore, adapts to changes in the economy, business environments, inflation rates, income sources, and global financial trends. The government has introduced tax reforms to encourage specific sectors of the economy while balancing the same with requirements of revenue collection and widening/deepening of the tax base. Given its direct link to taxation and economic conditions, the Act needs to be more adaptable to reflect shifting economic policies, changing incomes, inflation, and emerging industries. The dynamic nature of the Income-tax Act provides it flexibility to accommodate new economic trends.
Examples:
i. To promote exports, specific provisions such as 80HH, 80HHC were brought into the statute. The same having served intended purpose have been since omitted or made inapplicable after sun set date.
ii. To promote infrastructure development, section 80IA was brought into Income-tax Act, 1961.
iii. Sections 80HHE, 10A and 10AA were introduced for facilitating software exports.
iv. Section 80IAC is yet another example of encouraging the start-ups.
Q I.4 Why has the Income-tax Act 1961, become bulky over time?
Ans: The income tax law has become increasingly bulky over time, with its traditional style of drafting and numerous amendments. The complexity of language in the present Act is a product of different factors. To keep pace with certain legal pronouncements, explanations and provisos were often inserted to clarify legislative intent. Changing taxation priorities also led to introduction of additional text to an otherwise simple provision. Further, certain provisions remained in the statute, despite becoming non-operational, in view of pending claims/issues from earlier years.
Q I.5 What simplification efforts have been made in the past?
Ans: Attempts have been made in the past, including those in 2009 and 2019 for simplification of the Income tax Act. The recommendations from these efforts, as regards policy, have been considered in the amendments carried out from time to time.
Q I.6 Has the present simplification exercise considered international experience of other countries who have undertaken similar exercise?
Ans: Simplification of tax laws has received attention globally. Countries have undertaken similar exercises to enhance clarity and compliance in their taxation laws. In the UK, the process was carried out during the period 1994 to 2010 for simplifying the language. Before simplification, the UK Income and Corporation Tax Act, 1988 comprised 960 pages. However, after simplification, it was divided into five separate Acts, with their page counts increased, resulting in a more segmented but overall larger body of tax law. Similarly, Australia underwent a similar process during 1994 to 1997, where simplification of language also resulted in a longer tax code.
These international experiences emphasize the delicate balance between simplification and the need for clear, unambiguous legal language. Drawing from these lessons, effort has been made to focus not just on linguistic simplification but also on structural rationalization.
Q I.7 What is the scope of exercise undertaken for the new Income-tax Bill?
Ans: The Hon'ble Finance Minister in the budget speech in July 2024 stated that the purpose of the comprehensive review of the Income-tax Act, 1961, is to make the Act "concise, lucid, easy to read and understand".
Q I.8 What ground rules are set for making the existing provisions concise, lucid, easy to read and understand?
Ans: Following ground rules have been considered for simplifying the existing provisions:
i. The Bill proposes to eliminate redundant provisions, reducing its length by nearly half.
ii. 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 Income-tax Act, 1961. 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.
iii. All provisos (about 1200) and explanations (about 900) have been removed.
iv. The 1961 Act contains numerous cross-references to sections, sub-sections, clauses, sub-clauses, items, and sub-items, making the provisions challenging to interpret. The new Bill adopts a simplified reference system, allowing provisions to be cited by simply mentioning the section. For instance, section 133 (1)(b)(ii) in the new bill would indicate sub-clause (ii) of clause (b) of sub-section (1) of section 133 in the existing Act. This change makes the Act's language easier to understand.
v. A significant aspect of the Bill is the elimination of the concepts of 'previous year' and 'assessment year'. Prior to 1989, the concept of 'previous year' and 'assessment year' had been brought because the taxpayers could have different twelve-month previous years for each source of income. From 1st April 1989, previous year was aligned to a financial year in all cases. However, 'assessment year' continued to be used for various proceedings under the Act. Thus, a taxpayer was required to track two different periods, i.e., the 'previous year' as well as the 'assessment year'. This presented difficulties in complying to the provisions of the Act especially for a new taxpayer who had to keep track of 'previous year', 'assessment year' as well as 'financial year'.
Q I.9 Whether any consultations have been done with stakeholders, while drafting new bill?
Ans: A comprehensive consultative process was undertaken for the simplification exercise.
A total of 20,976 online suggestions for simplification and removal of redundancies were received, analysed and relevant suggestions were categorized into policy-related, language simplification, removal of redundant or obsolete provisions, etc. Meetings with industry and professional associations were held and field-level brainstorming sessions were held within the Income Tax Department, towards this exercise.
At the international level, consultations were held with some of the taxation authorities that had undertaken similar exercise in the recent past, viz. the Australian Tax Office and Treasury, and the UK's Office of Tax Simplification.
The documents prepared in 2009 and 2019, were also referred, while undertaking the exercise. International and national guidance material such as 'Drafting Guide for Simplification of Laws' issued by Legislative Department, Ministry of Law and Justice, was studied for simplification of legal language.
Q I.10 What processes were followed in conducting the simplification exercise?
Ans: In addition to the stakeholder exercise mentioned in Q I.9, suggestions were sought from taxpayers, industry and professional associations, and field level officers of the Department. A committee of around 150 officers of the Department was actively involved in the entire exercise. The Committee prepared the draft text of various chapters, which was meticulously vetted by the Legislative Department of Ministry of Law and Justice, and consolidated in the form of the final Bill, after necessary approvals.
More than 60,000 man-hours were dedicated by the team for finalising the new Bill.
Q I.11 How has the readability improved in the new Bill?
Ans: The readability of tax law has been improved by using simpler language, as against traditional legal language. Where multiple situations are covered, the sections have been made enumerative. Wherever feasible, extensive use of table formats has been made. TDS provisions have been presented in a tabular form. Certain provisions such as section 10, which contained about 150 clauses has been placed in Schedules and presented in the form of tables. As a result of the comprehensive exercise, the size of the new Bill has reduced by about half
on one hand and one the other, the provisions have been consolidated and presented in a user friendly format.
QI.12 What is the treatment of numerous 'provisos' and 'explanations' and procedural aspects in the existing Act?
Ans: Provisos (more than 1200) and Explanations (more than 900) have been removed, with their simplified content placed as sub-sections or clauses. Wherever feasible, procedural aspects and specific details are proposed to be provided by way of Rules.
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