Experts hope new I-T bill will end India’s tax dispute drama

One of the key reasons for the spike in tax notices has seemingly been digitisation of data

As the government prepares to table the much-anticipated new Income Tax Bill in Parliament this week, industry players are hopeful that the legislation will help lower, if not end, disputes owing to the frequent instances of notices slapped on companies and individuals under the current regime.

The new bill, set to replace the Income Tax Act, 1961, is expected to introduce a simplified and predictable tax framework, addressing contentious provisions that have led to widespread litigation and uncertainty over the years.

Take for instance, a probe by the I-T department on multiple insurance companies for allegedly paying higher commissions followed by deductions, which has reportedly led to demand notices worth a whopping Rs 25,000 crore for a period before April 1, 2023.

In fact, back in 2023, several startups, including some leading unicorns too reportedly received income tax notices over unaccounted investments made between financial years 2019 and 2021. The authorities had sought an explanation on the nature and source of their funds.

Former BharatPe CEO Ashneer Grover in 2023 had even questioned the notices being issued to startups for documents related to three-year ITR details of their investors and shareholders.

The hope, therefore, is that a simpler direct tax law may reduce such instances.

The proposed bill, announced by Finance Minister Nirmala Sitharaman during the Union Budget 2025-26, aims to reduce the compliance burden on taxpayers, eliminate redundant provisions, and provide greater clarity on tax liabilities and exemptions.

Sandeep Bhalla, Partner at Dhruva Advisors, highlighted the importance of a concise and transparent tax code. "Ambiguities in tax laws often result in disputes. The new law must ensure timely clarifications to prevent confusion and reduce litigation. The tax administration should adopt a more business-like approach to interpretation," he said. He added that predictability in tax provisions will foster trust and ease the burden on honest taxpayers.

Reducing litigation

The Parliamentary Standing Committee on Finance, on December 17, 2024, noted that out of the Central Board of Direct Taxes' (CBDT) total tax demand of approximately Rs 42.3 trillion in 2023-24, about 74 percent, or Rs 31.4 trillion, was under dispute.

The report underscored the significant challenges in India's tax administration, particularly the high volume of disputed tax demands, necessitating reforms to reduce litigation and improve compliance.

Therefore, a major focus of the new tax bill is likely to be on lowering the number of such disputes by clearly defining provisions and minimising room for aggressive interpretation.

“It is expected that disputes under the new bill will significantly reduce. Though the primary objective of the comprehensive review of the Act is simplification of language to make it concise, lucid, easy to read and understand, this journey is expected to lead to reducing the compliance burden on taxpayers,” according to Akhil Chandna, Partner, Global People Solutions Leader, Grant Thornton Bharat.

Tax experts believe that integrating technology and issuing timely clarifications can further reduce litigation and improve compliance.

Sandeep Chaufla, Partner at Price Waterhouse & Co. LLP, said, "The ongoing review of the Income Tax Act is an opportunity to modernise India’s tax system in line with global standards. The new law must be clear, concise, and supplemented with examples to help taxpayers understand their obligations better. This will foster a more transparent and predictable tax environment."

Simplification is key

Industry leaders are also optimistic that the new bill will reduce the volume of forms taxpayers are subject to while filing returns.

The consolidation of multiple tax information requirements into fewer forms is expected to make compliance easier and more cost-effective.

This is significant given that tax disputes have seen a sharp rise to the tune of Rs 12.21 lakh crore as on FY23 compared to Rs 5.03 lakh crore in FY14.

Direct tax accounts for the lion’s share with Rs 6 lakh crore worth litigation in corporate tax matters and another Rs 4.5 lakh crore in litigation under the "taxes on income other than corporate tax" head.

Individuals too have recently taken to various social media platforms to complain of income tax evasion notices from the authorities.

One of the key reasons for the spike in tax notices has seemingly been digitisation of data, including the use of tools such as Artificial Intelligence to catch evasions.

Finance Minister Nirmala Sitharaman has time and again asked the income tax department to be fair and friendly and to ensure that notices are temperate, simple and easy to understand for the taxpayer.

Harsh Bhuta, Partner at Bhuta Shah & Co., emphasised that simplification must be an ongoing process. "The new tax code should aim for long-term clarity and reduced compliance hassles. We need to move towards a taxpayer-friendly regime with streamlined procedures, minimal paperwork, and predictable outcomes," he said.

Bhalla further remarked, "The new Income Tax Bill will bring predictability and transparency to India’s tax regime, helping businesses plan their finances more effectively."