Lok Sabha Approves New Income-Tax Bill, 2025

On 14 August 2025, the Lok Sabha passed the Income-Tax (No. 2) Bill, 2025, despite sustained protests from opposition benches. The Bill, which replaces the Income-tax Act, 1961, seeks to comprehensively overhaul India’s direct taxation regime for the first time in over six decades. Finance Minister Nirmala Sitharaman described it as a statute designed to “simplify, rationalise, and modernise” the administration of direct taxes, while retaining the “stable architecture” of rates, exemptions, and procedural norms familiar to taxpayers. 

The legislation will come into force on 1 April 2026, providing a transition window of one year for taxpayers, corporates, and professionals. Importantly, the government accepted nearly 285 recommendations of the Select Committee of Parliament, signalling that despite the political acrimony, the reform has benefited from cross-party policy input. 

A Consolidation of Statutes and Judicial Learning 

The Income Tax Act, 1961—India’s foundational direct tax statute—has withstood innumerable amendments since its enactment. Over 4,000 sections, sub-sections, provisos, explanations, and circulars have, over time, made it technically dense and often inaccessible even to seasoned practitioners. Courts, too, from the Supreme Court down to tribunals, have had to interpret its meaning and application repeatedly. 

The 2025 Bill does not discard this judicially enriched framework. Rather, it consolidates and reorganises substantive and procedural provisions, removing obsolete sections while codifying several judicial and administrative clarifications. Taxation of digital assets, dispute resolution by faceless authorities, and streamlined compliance procedures for small businesses mark notable innovations. 

The Finance Ministry’s official note underscores this intent: 

“The Bill retains the principles that have guided tax law since 1961, while removing complexity resulting from piecemeal amendments. It seeks predictability and ease of understanding for taxpayers and tax authorities alike.” 

From Piecemeal Amendments to a Coherent Code 

The Indian tax regime has long been criticised for legislative clutter. In CIT v. B.C. Srinivasa Setty (1981) and later in Vodafone International Holdings v. Union of India (2012), the Supreme Court highlighted interpretive difficulties arising from gaps or ambiguities in statutory drafting. The 1961 Act often became a patchwork of stopgap amendments reacting to judicial pronouncements, leading to instability and litigation. 

The Bill of 2025 aims to reverse this trend, structurally resembling the consolidation approach taken in corporate law, such as the repeal of the Companies Act, 1956, by the Companies Act, 2013. By regrouping provisions thematically and discarding duplications, the legislature signals its intent to establish a durable code adaptable to the digital economy. 

Key Legislative Innovations 

Several provisions of the new Bill merit closer analysis, particularly for practitioners advising corporates and high-net-worth individuals: 

• Digital and Virtual Asset Taxation:  The Bill codifies the treatment of cryptocurrencies, NFTs, and other digital assets. These provisions, which previously existed as notifications and Finance Act amendments, now find permanent statutory expression. Cross-border digital income attribution rules are aligned with the OECD’s BEPS framework. 

• Faceless and Technology-Enabled Assessments:  Building on faceless assessment schemes introduced during the COVID era, the Bill embeds digital hearings and AI-assisted scrutiny into the core statute. This codification addresses concerns raised in Lakshya Digital v. Principal CIT (2023), where the Delhi High Court emphasised statutory certainty in faceless processes. 

• Advance Dispute Resolution Mechanism: A new National Tax Mediation Authority is created on a statutory footing to facilitate pre-litigation dispute resolution, reminiscent of international arbitration-style settlements. This responds to concerns over mounting pendency in appellate tribunals, where pending appeals currently exceed 5 lakh cases nationwide. 

• Compliance Relief for MSMEs and Startups: Audit thresholds have been rationalised, and TDS/TCS compliance procedures have been significantly streamlined for businesses below the prescribed turnover limits. This is intended to reduce litigation arising from technical defaults rather than substantive tax evasion. 

Opposition Concerns and Parliamentary Dynamics

 

Despite adopting 285 recommendations of the Select Committee, opposition parties staged protests, alleging inadequate debate and rushed passage. A recurring criticism is the broad rule-making power delegated to the Central Board of Direct Taxes (CBDT). For example, provisions enabling the CBDT to notify classes of digital assets or prescribe compliance procedures could be challenged as excessive delegation, an argument reminiscent of Delhi Laws Act Case (1951) jurisprudence and subsequent constitutional doctrine limiting Parliament’s ability to efface essential legislative function. 

Some MPs also objected to the absence of major rate rationalisation, particularly for middle-income salaried taxpayers. However, the government insists that structural simplification, not fiscal redistribution, is the Bill’s immediate goal. 

The Constitutional Dimension: Delegation and Certainty

 

From a constitutional law perspective, the Bill operates at the intersection of two doctrinal imperatives—legislative delegation and tax certainty under Article 265 (“no tax shall be levied or collected without authority of law”). If rule-making by CBDT leaves critical definitions (such as “digital goods”) unsettled, this may invite challenges that taxation is delegated beyond legislative competence. 

Indian courts have historically been cautious but not hostile to such delegation. For instance, in Ajoy Kumar Banerjee v. Union of India (1984), the Supreme Court upheld wide delegation in fiscal matters, stressing that economic flexibility requires administrative authority. Yet, courts have also cautioned that taxation must remain anchored in parliamentary intent. The new Bill may thus generate early constitutional litigation, particularly if implementing rules appear excessively discretionary. 

Lessons from Comparative Tax Codification 

India’s initiative echoes similar legislative overhauls globally. 

• The United Kingdom undertook large-scale tax law rewrites in the 2000s to simplify dense statutes, seeking clarity rather than substantive change. 

• Australia’s Income Tax Assessment Act underwent staged rewriting from 1997 onwards, but practitioners criticised the coexistence of old and new provisions, creating dual regimes. 

• OECD guidelines increasingly shape cross-border taxation, particularly in the digital economy. India’s explicit alignment signals commitment to international tax cooperation, though preserving source-based taxation under Article 245 asserts policy sovereignty. 

For practitioners, the key takeaway is that India is neither experimenting in isolation nor fully harmonising with global models—it is selectively adopting clarity-enhancing reforms while retaining national fiscal prerogatives. 

Implications for Corporate and Tax Litigation Practice 

The practical and professional significance of the new statute cannot be overstated: 

1. Re-Learning the Code:  Corporate tax teams and in-house counsel will need to re-familiarise themselves with a restructured statute whose numbering, sequencing, and explanatory notes differ significantly from the 1961 framework. 

2. Contractual Drafting and Due Diligence:  Existing agreements (e.g., M&A contracts, transfer pricing policies, digital licensing arrangements) reference provisions of the 1961 Act. Legal teams will need to amend templates and renegotiate clauses to ensure continued compliance post-April 2026. 

3. Litigation and Transitional Jurisprudence:  Courts and tribunals will face questions of continuity: whether precedents under the 1961 Act carry over to identically worded provisions in the 2025 Act. Based on experience (e.g., transition from 1922 to 1961), prior jurisprudence remains persuasive, but interpretive disputes are inevitable. 

4. Increased Emphasis on Pre-Litigation Settlement:  With statutory mediation mechanisms, tax counsel must hone skills in negotiation and settlement strategy, balancing client risk appetites against expedited resolutions. 

Conclusion: A Statute for the Next Tax Generation

 

The Income-tax (No. 2) Bill, 2025, marks a watershed in India’s fiscal governance, mirroring the corporatisation of commercial law under the Companies Act, 2013. For lawyers, it presents a challenge of transitional expertise but also an opportunity to influence jurisprudence during its formative years. 

Like the Companies Act, its ultimate success will depend not on statutory drafting alone but on the implementation ecosystem—CBDT circulars, judicial interpretation, taxpayer compliance culture, and technology infrastructure. Whether it delivers on the promise of simplicity and predictability will determine if this is truly a reform of substance, not just form. 

As the tax profession prepares for April 2026, one truth from decades of fiscal litigation remains clear: certainty is as valuable to taxpayers as the tax rates themselves. The new Code’s promise rests on whether it can finally deliver that elusive predictability.