India's Income Tax Bill Sets the Stage for Major Reforms

The Income Tax Act of 1961 has undergone innumerable amendments since its inception (4,000, as stated by the finance minister in Parliament).

- DINESH KANABAR

The Income Tax Act of 1961 has undergone innumerable amendments since its inception (4,000, as stated by the finance minister in Parliament). Historically, successive governments have used tax as an instrument to incentivize specific industries, promote investments in certain regions, or to encourage foreign exchange earnings. As a result, numerous provisions were added over the years to provide sectoral, regional, or specific activity-related benefits. Additionally, various explanations, provisos, and exceptions were introduced to clarify or nullify the impact of judicial pronouncements. Over time, this made the Act unwieldy, increasingly complex and difficult to navigate, even for practicing accountants and lawyers. Interpreting the law today requires sifting through an overwhelming number of sections, schedules, and amendments before arriving at a clear understanding. While the Act has 298 sections, it has multiple alphanumeric sections too, taking the total to more than 800. In short, it's mind-boggling.

Recognizing this complexity, the government in recent years has sought to simplify the tax structure while lowering tax rates. The introduction of a new corporate tax regime, offering companies the option of a lower 25% tax rate (plus surcharge) without making deduction claims or a 30% rate (plus surcharge) with the ability to claim deductions, was a major step in this direction. Since deduction claims often led to prolonged litigation, a significant number of corporations have gradually migrated to the no-deduction lower-rate regime.