New I-T Bill: India's Direct Tax Overhaul Moves Ahead As Parliamentary Panel Submits Key Report

In a significant step toward overhauling India’s 60-year-old tax framework, the Select Committee of the Lok Sabha has submitted its report on the draft Income-Tax Bill, 2025 — a move which could push for a modern, equitable, and streamlined tax regime.

The committee, chaired by BJP MP Baijayant Panda, has made over 30 critical recommendations aimed at replacing the Income Tax Act of 1961. Key proposals include modernised definitions for terms like "capital asset" and "infrastructure capital company", enhanced clarity on property-related deductions, and strengthened provisions around the "actual payment" rule for business expenses.

Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen LLP, called the report “a major step toward reforming India’s direct tax framework.” He added: “The recommendations clearly reflect a legislative intent to establish a more cohesive, administratively efficient, and jurisprudentially robust direct tax regime.”

Among the most impactful suggestions are taxpayer-friendly procedural changes — including making penalties for failure to maintain books of accounts discretionary and allowing refund claims even when returns are filed late.

The report also addresses long-standing concerns of charitable and not-for-profit entities. It proposes replacing the term “receipts” with “income” for tax purposes and reviving the concept of “deemed application”, both of which aim to reduce ambiguity and compliance risk in the sector.

Further recommendations include: extending electronic payment obligations to professionals, setting qualifications for registered valuers, and fairer application of General Anti-Avoidance Rules.

On the transition front, the committee has advised a full removal of residual references to the old 1961 law to ensure the new code stands independently and is resistant to interpretative litigation.

While the Ministry of Finance has yet to issue a formal response, tax experts suggest close monitoring of the final legislation. "Tax professionals would be well advised to track the evolution of the final Bill," Jhunjhunwala noted, “especially around definitional clarity, procedural leniencies, and transition mechanics — all of which carry significant implications for future tax compliance and litigation.”

The draft Bill and the committee’s report now await further parliamentary deliberation, with a final version expected later this year.

"The Parliamentary Committee has stayed true to its intent of the Income Tax Bill being a textual simplification exercise as against a policy rewrite. Key stakeholder recommendations that seem to have made their way through relate to correction in drafting errors, removal of ambiguities arising from language changes to the extant act, and coherent presentation of tax provisions," said Gouri Puri, partner, Shardul Amarchand Mangaldas & Co.

In a major relief, the committee has noted that the benefit of tax deduction relevant to inter corporate dividends in multi-tiered structures must also be extended to companies that elect the 22% tax rate (as is currently the case), he added. While the market had expected this to be an oversight, corporates had begun factoring in the cascading impact of dividend taxes in tiered structure in the absence of any clarification, Puri said.

"This is indeed a welcome change. On the other hand, several stakeholders had urged the Parliamentary Committee to reconsider the extent of search and seizure powers in relation to virtual digital space in light of safeguarding privacy and third-party rights, risk of overboard searches, etc. However, at first blush, no key changes seem to have been recommended," Puri noted.

The report also calls for definitions of "micro" and "small" enterprises be redrafted to align with the definitions notified in the Micro, Small and Medium Enterprises Development Act, 2006 to bring uniformity. It also has moved for the definition of "parent company" to be examined and clearly defined by the ministry for the sake of clarity and to eliminate any scope of misinterpretation.

The committee also recommended the ministry to rephrase the mention of gross total income to adjusted gross total income so as to rectify an omission causing an unintended higher tax liability, with respect to deduction in respect of donations to certain funds, charitable institutions.

The committee said it also recognised "significant confusion" among non-profit organisations, especially those with mixed charitable and religious objectives, regarding the interpretation of "wholly for charitable or religious purposes" in Clause 332. "This ambiguity could lead to uncertainty for existing trusts and those established after 1961, increasing litigation risks. The Committee recommended to redraft Clause 332 suitably to resolve this issue," it said.