Income-tax Bill's clause to empower tax authority to access digital space represents evolution, not revolution

The goal is to ensure fair and compliant taxation to ensure all income is brought to tax and promote equity and fairness in our tax law.

By Sonu Iyer 

In the recently tabled Income-tax Bill, 2025, there is a provision which expands the tax department’s reach to digital footprint of taxpayers. The Bill grants tax authorities the power to access “computer systems” and “virtual digital space” under specified circumstances.

Currently, under Section 132 of the Income-tax Act, 1961, an Income-tax officer of a specific rank, duly authorised by specified senior tax officers, has the power to enter and search any building, place, vessel, vehicle or aircraft to gain access to assets, books of accounts or any other relevant document and break open the lock of any door, box, locker, safe almirah, or other receptable where the keys thereof are not available. Such power can only be exercised if the tax officer has the reason to believe, in consequence of information in his possession, that there could be non-compliance of provisions of the Income-tax law.

Effective 1 April 2026, Section 247 of the Bill will extend the above powers, allowing authorised tax officers, to gain access to assets, books of accounts, any other relevant documents and information stored in an electronic media or computer system by overriding any access code to any “computer system”, or “virtual digital space”, where the access code thereof is not available.

What Are the Provisions of the Bill?

The Bill has defined “virtual digital space” extensively to mean an environment, area or realm, that is construed and experienced through computer technology and not physical, tangible world which encompasses any digital realm that allows users to interact, communicate and perform activities using computer systems, computer networks, computer resources, communication devices, cyberspace, internet, worldwide web and emerging technologies, using data and information in the electronic form for creation or storage or exchange. The definition includes email servers, social media account, online investment account, trading account, banking account, etc, any website used for storing details of ownership of any asset, remote server or cloud servers; digital application platforms; and any other space of similar nature.

By adding a detailed definition of “virtual digital space” and by giving powers to the tax officer to override the access to such “virtual digital space”, the tax officer can gain access to any private social media account, investment or trading accounts, bank accounts, etc to check for non-compliance.

New Bill to Aid in Fight Against Tax Evasion

The intention is clearly to combat modern day tax evasion and empower tax authorities with sufficient powers to access virtual digital spaces as with the advent of new technologies, most of the data is now stored in an electronic form and in cloud servers. The Government’s efforts to bring to tax unaccounted “income” in the parallel economy can be supported with the added ability to track digital footprint and bring equity in taxation and address “tax avoidance” effectively. There is enough statistical support that income being under-reported or un-accounted in the parallel economy.

The extension of the scope of tax investigations digging into personal social media profiles, trading accounts etc may create concern over the constitutional ‘right to privacy’. Even under the existing provisions of the Income-tax Act, 1961, sufficient powers have been given to the tax authorities with safeguards to enter taxpayer’s residence in search proceedings. To that extent, the statutory access to taxpayer’s digital data is natural evolution rather than a revolutionary change.

Are Fears of Invasion of Privacy Valid?

Apprehension over invasion of privacy should be seen in light of the fact that such provisions are invoked only in case of search and seizure operations, where the tax officer has the reason to believe, in consequence of information already in his possession, that there could be non-compliance of provisions of the Income-tax law. In any event, even the existing Taxpayers’ Charter issued by the Income-tax Department states that the Department is committed to respect the privacy of the taxpayer by following due process of law and be no more intrusive than necessary in any inquiry, examination, or enforcement action. The Government may consider issuing FAQs to explain the intent of the provision and unambiguous guidelines to safeguard and prevent misuse of the provision. It may be clarified that such intrusive measures will be used only as an exception, not the norm, in the pursuit of tax compliance.

The goal is to ensure fair and compliant taxation to ensure all income is brought to tax and promote equity and fairness in our tax law. Knowing that the tax authorities can access the “virtual digital space” may trigger voluntary tax compliance from taxpayers and deepen the tax base. I hope that happens.

-- With inputs from Siddhartha Deb, Director Tax, EY India. 

(Sonu Iyer, Partner and National Leader, People Advisory Services, EY India.) 

Views are personal, and do not represent the stance of this publication.