OPINION | Union Budget 2026 can complete India’s income-tax simplification agenda

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The complexity of the Income-tax Act, 1961 (ITA 1961) has often been cited as a contributing factor to the high compliance burden on taxpayers and persistent tax litigation in India. Over time, multiple amendments have transformed the law into a labyrinth of provisions that are difficult to navigate. This complexity not only challenges taxpayers in meeting their compliance obligations but also creates scope for varied interpretations, frequently resulting in disputes and prolonged litigation.

Government’s push for simplification and certainty

Recognising these challenges, the Hon’ble Finance Minister, in the Budget Speech for the financial year 2024–25 on 23 July 2024, announced a comprehensive review of the ITA 1961. The objective was to make the law concise, lucid, and easy to read and understand, while reducing disputes and litigation. This, in turn, would provide greater tax certainty and lower the volume of tax demands locked in litigation.

In line with this initiative, the Government identified four key pillars for seeking public suggestions to guide the reform process:

(a) simplification of language,

(b) reduction of litigation,

(c) reduction of compliance burden, and

(d) removal of redundant provisions.

Building on these efforts, the Income-tax Act, 2025 (ITA 2025) was introduced and enacted on 21 August 2025. It will replace the longstanding ITA 1961 and come into force from 1 April 2026. Key changes in the ITA 2025 include reducing the number of sections from 819 to 536; breaking long sentences into shorter, clearer provisions; introducing tables to present information succinctly (such as TDS/TCS rates and thresholds); simplifying compliance in certain areas (including broader eligibility for lower TDS/TCS certificates compared with select payments or receipts); and removing redundant provisions such as the fringe benefit tax, which was no longer relevant.

What remains complex under the new law

While India’s tax landscape is on the brink of one of its most significant overhauls in decades, certain elements of structural complexity remain. Several provisions of the new law continue to allow subjective interpretation. For instance, the multiplicity of TDS/TCS rates and thresholds continues to create complexity and confusion for taxpayers, increases the compliance burden, and gives rise to disputes over interpretation and application.

In the upcoming Union Budget 2026, there is a strong need to address interpretational ambiguities and structural complexities, rationalise compliance-intensive provisions, and ease compliance without introducing additional uncertainty.

Various stakeholders, particularly corporates, are urging policy-level reforms aimed at enhancing clarity and strengthening provisions relating to corporate restructurings. A key area requiring clarity is whether a fast-track demerger under Section 233 of the Companies Act, 2013 will be regarded as tax-neutral or result in tax implications for the resulting or demerged companies and their shareholders.

Other suggestions include reducing the holding period for a business “undertaking” under slump sale provisions from 36 months to 24 months, as this appears to have been unintentionally omitted from the amendments introduced by the Finance (No. 2) Act, 2024, which reduced the holding period for capital assets to 12 or 24 months to qualify as long-term. Similarly, stakeholders have recommended reducing the holding period for unlisted shares sold under an Offer for Sale (OFS) by existing promoters or private equity investors in an IPO from two years to one year, and removing sectoral restrictions on the carry-forward and set-off of accumulated losses and unabsorbed depreciation in cases of amalgamation or demerger.

Strengthening dispute resolution

Additionally, there is a need to strengthen existing alternative dispute resolution mechanisms, such as the Dispute Resolution Committee, Dispute Resolution Panel, and Board for Advance Rulings, and to introduce a time-bound mediation mechanism covering both domestic and international tax disputes. It is also recommended to rationalise the requirement to pay 20 per cent of disputed demand where favourable decisions already exist at the Income Tax Appellate Tribunal, High Court, or Supreme Court in the taxpayer’s own case. The practice of adjusting refunds against stayed demands should be discontinued.

Further, in line with international best practices, Indian tax authorities should adopt a risk-based assessment strategy to enhance the effectiveness of the tax system while supporting the broader objective of improving ease of doing business in India.

Overall, while the enactment of the ITA 2025 is a commendable effort to overhaul India’s tax legislation, persistent interpretational ambiguities and compliance complexities may continue to burden taxpayers and create scope for litigation. The Union Budget 2026 presents a golden opportunity to further refine the law, ensure a smoother transition, and fulfil the reform agenda by simplifying language and reducing litigation and compliance burdens for taxpayers.

(Jayesh Sanghvi, Tax Partner, EY India.)

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