The Income-tax Bill, 2025: A Broad Overview

Introduction

The Income-tax Bill, 2025 (the "Bill"), to be introduced in the Lok Sabha, marks a significant overhaul of India’s tax regime, replacing the Income-tax Act, 1961. This proposed legislation seeks to streamline tax administration, incorporate global best practices, and enhance compliance mechanisms. For businesses, investors, and high-net-worth individuals, the Bill introduces new obligations and risks that demand careful legal navigation. This article provides a overview of key provisions, their implications, and what businesses need to prepare for in the evolving tax landscape.

Chargeability, Tax Year, and Scope of Total Income

The Bill defines the basis of charge under Section 4 and introduces the concept of a 'tax year' under Section 3, which replaces the financial year system used under the previous regime. The Bill formalizes the term 'tax year' under Section 3, defining it as the twelve-month period of the financial year commencing on April 1. Additionally, for businesses or professions newly set up, or for newly established sources of income, the tax year shall begin from the date of setup or inception and end on March 31 of that financial year. This ensures uniformity in tax periods while accommodating new business ventures within a structured tax framework., which remains aligned with the existing financial year, running from April 1 to March 31. While this does not change the period of assessment, it codifies terminology to enhance consistency in tax administration and legal interpretation. This clarification aims to eliminate ambiguity and align domestic tax practices with global regulatory frameworks., stating that income tax shall be levied for each tax year on total income. Section 5 expands the scope of total income, covering income received, accrued, or deemed to accrue in India, which is particularly relevant for global businesses with Indian operations. Section 6 provides new criteria for determining residency, affecting Indian expatriates and foreign entities with substantial presence in India.

Incomes Exempt from Tax

The Bill outlines specific exemptions under Section 11, including agricultural income, income of political parties (Section 12), and prescribed incomes of charitable institutions. Notably, Sections 92-95 define income from other sources and specify deductions that businesses must be aware of.

Taxation of Salaries and Business Income

The Bill retains taxation under defined heads. Sections 15-19 provide for salary taxation, detailing perquisites and allowable deductions. Sections 26-66 govern profits and gains from business or profession, with significant focus on deduction limitations under Sections 35-37. Special provisions for taxation of non-residents on fees for technical services and royalties appear in Sections 59-61.

Capital Gains and Transfer Provisions

A key revision in the Bill concerns capital gains taxation under Sections 67-91. The methodology for computing capital gains on slump sales is outlined in Section 77, and provisions regarding cost of acquisition for depreciable assets appear in Section 75. Section 85 extends exemptions for gains reinvested in specified bonds.

Anti-Avoidance Measures and Transfer Pricing

To counter tax avoidance, Sections 161-177 introduce robust anti-avoidance provisions. The Bill strengthens General Anti-Avoidance Rules (GAAR) in Sections 178-184, enabling authorities to disregard transactions lacking commercial substance. Transfer pricing provisions under Sections 161-171 require detailed documentation and arm’s length pricing compliance.

Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT)

MAT applicability under Section 206 has been revised, impacting companies with book profits. AMT under Section 203 applies to specified cooperative societies and businesses. Notably, Section 205 offers conditional exemptions for new manufacturing companies opting for the reduced corporate tax rate.

Dispute Resolution and Tax Litigation

The Bill introduces a new three-tier dispute resolution system. Sections 356-389 detail appeals before the Joint Commissioner (Appeals), the Appellate Tribunal, and higher courts. Section 379 establishes the Dispute Resolution Committee for small taxpayers. Provisions for advance rulings and safe harbor rules under Sections 380-389 aim to provide certainty to taxpayers.

International Taxation and Cross-border Transactions

The Bill revises tax treatment for multinational corporations under Sections 207-220. Changes to Permanent Establishment (PE) definitions impact taxation of digital transactions. Section 214 modifies withholding tax provisions on foreign-sourced investment income, while Section 215 provides limited exemptions for capital gains on foreign exchange asset transfers.

Compliance, Penalties, and Prosecution

Non-compliance carries severe consequences under Sections 439-487, including penalties for misreporting income, failure to deduct tax at source (Section 448), and prosecution for wilful evasion (Sections 478-485). Corporate tax professionals must carefully assess Section 441, which mandates stringent record-keeping requirements.

Conclusion

The Income-tax Bill, 2025 introduces fundamental shifts in tax compliance, reporting obligations, and anti-avoidance mechanisms that businesses must carefully navigate. With enhanced scrutiny on corporate transactions, digital businesses, and cross-border transactions, companies need to adopt a proactive approach to compliance. The restructured MAT and AMT provisions impact tax planning for both domestic and multinational corporations, while GAAR provisions demand a robust risk assessment of existing business structures.

For businesses, the focus should be on streamlining tax compliance processes, leveraging dispute resolution mechanisms, and ensuring robust documentation to mitigate risks. Strategic tax planning, coupled with efficient corporate structuring and timely legal interventions, will be key to optimizing tax exposure under the new regime.