Simplifying India’s Income Tax Act
In July 2024, the Indian government announced a significant review of the Income Tax Act of 1961. This initiative aims to transform the existing tax framework into a more straightforward and comprehensive document. The goal is to minimize disputes and provide taxpayers with greater clarity and certainty regarding their tax obligations. To gauge industry perspectives on this simplification effort, KPMG in India conducted a survey in January 2025. The survey gathered insights from over 200 executives across various sectors, including manufacturing, automotive, financial services, and healthcare. The findings reveal key priorities and concerns that will shape the future of the Income Tax Act.
Key Findings from the KPMG Survey
The KPMG survey highlighted several critical areas that respondents believe require immediate attention. One of the most pressing issues is the simplification of dispute and litigation processes. A staggering 84% of executives prioritized this area, indicating a strong desire for a more efficient resolution mechanism. Additionally, 64% of respondents called for a simplification of Tax Deducted at Source (TDS) provisions, which currently encompass over 30 transaction categories. Other significant areas of concern included transfer pricing, capital gains taxation, and the calculation of business income, with 50%, 43%, and 38% of respondents, respectively, identifying these as priorities.
Another notable finding was the overwhelming support for enhancing interpretation and tax law certainty. An impressive 96% of respondents endorsed the creation of a government-published income tax commentary, similar to the model used by the OECD. Furthermore, 93% supported the direct incorporation of beneficial clarifications from tax circulars and notifications into the Act. These insights underscore the need for a more transparent and accessible tax framework that can help reduce confusion and disputes among taxpayers.
Addressing Dispute Resolution and Compliance
The survey also shed light on the current state of dispute resolution and compliance within the tax system. As of now, there are over 600,000 pending tax cases, with approximately 550,000 at the Commissioner of Income Tax (Appeals) level. To address this backlog, 69% of respondents supported the introduction of mediation and arbitration schemes. Additionally, 62% favored allowing tax authorities to appeal decisions made by the Dispute Resolution Panel (DRP). A staggering 98% of executives requested mandatory timelines for the disposal of appeals at the CIT(A) level, emphasizing the urgent need for a more efficient dispute resolution process.
In terms of compliance enhancement, the survey revealed a preference for a hybrid model for interactions with tax officials. While 61% of respondents supported this approach, only 35% advocated for a complete transition to faceless assessments. A significant 87% of executives expressed support for eliminating the mandatory issuance of TDS certificates, while 64% favored a TDS credit allocation based on Form 26AS. These findings indicate a clear demand for a more streamlined and user-friendly compliance process that can reduce the burden on taxpayers.
The Future of Corporate Tax Structure
The survey also explored opinions on the corporate tax structure in India. A majority, 58%, expressed support for reducing corporate tax rates, while 34% were satisfied with the current rates. Only 7% sought reductions specifically for non-resident companies. Furthermore, 43% acknowledged the benefits of a simplified tax regime, indicating a general consensus on the need for reform in this area.
In terms of timeline improvements, 82% of respondents requested extended deadlines for belated and revised returns. Additionally, 94% suggested revising transfer pricing safe harbor rules to provide more clarity and certainty for businesses. However, the survey also revealed challenges with the faceless assessment system, with 41% of respondents reporting no reduction in aggressive assessments under this model. Furthermore, 60% suggested removing CIT(A) appeals from the faceless mode, highlighting the need for a more balanced approach to tax assessments.
The Cabinet has approved the New Income Tax Bill, which will replace the Income Tax Act of 1961. This bill will be introduced in Parliament and subsequently forwarded to the Finance Standing Committee for thorough examination. The Finance Minister has confirmed that the New Income Tax Bill will be tabled during the current parliamentary session, marking a significant step toward a more efficient and taxpayer-friendly tax system in India.
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