Daily Mains Question - GS 3 - 3rd September 2025

TPP
Sep 4
3 min read

Welcome to your Daily UPSC Mains Answer Writing Practice – GS Paper 3 (Indian Economy & Taxation).

Today’s question focuses on the Income-Tax Bill, 2025, which seeks to replace the six-decade-old Income-Tax Act, 1961 and is expected to come into effect from April 1, 2026. The Bill introduces a leaner, simplified tax framework by reducing the number of sections from 819 to 536 and chapters from 47 to 23, while also correcting anomalies related to corporate taxation, refunds, and exemptions.

At the same time, it incorporates crucial taxpayer protection measures such as restoring refund eligibility for belated returns, clarifying rules on Tax Collected at Source (TCS) under the Liberalised Remittance Scheme (LRS), and allowing nil-TDS certificates where there is no tax liability. The Bill also redefines the concept of the “tax year”, modernises digital enforcement by covering virtual digital spaces, and extends tax benefits to retirement schemes like the Guaranteed Unified Pension Scheme (UPS).

This makes the topic highly relevant for UPSC GS-III, covering issues of tax reforms, ease of doing business, taxpayer rights, and fiscal policy—all of which are central to India’s pursuit of a transparent, predictable, and citizen-friendly taxation system.

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QUESTION

How the Income-Tax Bill, 2025 balances tax simplification with taxpayer protection?

Answer: India’s Income-Tax Bill, 2025 seeks to replace the six-decade-old Income-tax Act, 1961, with effect from 1 April 2026. After Select Committee scrutiny, the Income-Tax (No. 2) Bill, 2025 incorporates key corrections while pruning archaic text. The design aim is twin: simplify law and procedures while strengthening taxpayer rights and certainty.

What changes on simplification

Structural clean-up: Sections reduced from 819 → 536 and chapters from 47 → 23, with plain-language drafting and removal of redundancies.
“Tax year” defined: A uniform 12-month period from 1 April, easing interpretation across provisions, rules and compliances.
Return & collection procedures clarified:
- Refunds: The earlier draft’s limitation (refund only if return filed by due date) is dropped—aligning with long-standing practice that belated returns can still claim refunds.
- LRS education transfers: Nil TCS where remittances are financed by any financial institution, closing a gap in the first draft and lowering friction for students.
Corporate/LLP rationalisation:
- Drafting fixes for inter-corporate dividend deductions under concessional corporate tax regimes—reduces litigation.
- AMT for LLPs aligned to existing framework by removing expanded scope; avoids unintended 18.5% exposure for LLPs not availing specified incentives, preserving the preferential 12.5% context.
- Nil-TDS certificate permitted when no tax liability exists—prevents cash-flow blockage and refund pile-ups.
Non-profit organisations (NPOs): Exemption aligned to 5% of total donations (not merely anonymous contributions), correcting anomaly and improving operational clarity.

Where taxpayer protection is reinforced

Substantive rights: Restored refund eligibility for belated returns protects equity and the principle of taxation by law, not procedure; nil-TDS certificates operationalise ease of compliance for low-income/no-tax cases.
Certainty & predictability: Fewer sections, consistent definitions (e.g., “tax year”), and corrected corporate provisions reduce interpretive ambiguity, a major source of disputes.
Proportionality in enforcement—new digital canvas:
- The Bill retains a wide definition of “virtual digital space” for information calls during surveys/searches/seizures (email servers, social media, online trading/banking, cloud platforms, apps).
- This modernises enforcement against digital evasion but demands due-process guardrails: reasoned authorisations, data-minimisation, hash-based imaging, time-bound retention/deletion, auditable logs, and graded intrusiveness to balance revenue interests with privacy.

Complementary amendments that signal policy intent

The Taxation Laws (Amendment) Bill, 2025:
- Clarifies clause 23FE treatment for specified sovereign investments (e.g., Public Investment Fund of Saudi Arabia and its wholly-owned subsidiaries) to bolster long-term capital flows.
- Extends NPS-like tax benefits to UPS (Guaranteed Unified Pension Scheme): up to 60% lump-sum at retirement tax-free, nudging formal retirement savings.

Way forward

Issue timely rules/FAQs, strengthen grievance redress timelines (refunds, rectifications), adopt risk-differentiated scrutiny, and institute independent oversight/SOPs for digital searches to embed proportionality and accountability.

The Bill’s architecture—leaner code, clearer procedures, corrected anomalies, and rights-affirming refunds/nil-TDS—advances simplification without diluting taxpayer protection. Its success will hinge on implementation discipline in digital enforcement and predictable administration from FY 2026-27 onward.