The Income Tax Bill 2025: A New Era of Corporate Taxation

INTRODUCTION

India's fast-changing economy, characterized by faster growth and greater integration into the global economy, necessitates a tax system that is modern, efficient, and responsive. The Income Tax Act, 1961, despite having been heavily amended, has grown more convoluted—most frequently creating uncertainty and extended litigation. The government realized that the tax law needed root overhaul and therefore came out with the New Income Tax Bill, 2025 in the Lok Sabha on 13th February, 2025, with implementation from April 1, 2026.

It is more than an updating of the procedure and this Bill—otherwise known as the Direct Tax Code (DTC) 2025—is a major policy change to bring India's tax system in line with best international practices. Its major goals are to simplify compliances, reduce disputes, increase transparency, and use digital means for efficient administration.

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The DTC 2025 is designed to enhance predictability and efficiency in tax administration, thus facilitating a better investment climate overall. By coming into harmony with international taxation practices and emphasizing ease of doing business, the Bill reinforces a strategic imperative: making India a more inviting and dependable destination for international capital and enterprise.

KEY CHANGES BROUGHT IN BY THE BILL

The new Income Tax Bill, 2025 is a major makeover of Indian direct tax law, which will replace cumbersome Income Tax Act of 1961 and Wealth Tax Act of 1957. While the former law had more than 800 pages in 52 chapters, the new Bill has 23 chapters with 536 sections that remove about 1,200 provisos and 900 explanations in an effort to simplify it and end interpretative ambiguity.

One of the major innovations is the implementation of a single 'Tax Year' from April 1 to March 31 in place of the previous dual 'Financial Year' and 'Assessment Year'. This makes compliance easier, especially for new enterprises, whose tax cycle will now commence from the beginning of their operation or income generation.

The Bill also gives high importance to digitization, automating core processes such as return filing, assessments, and documentation on connected digital platforms. This change is anticipated to promote transparency and reduce human judgment in tax administration. Yet, the greater deployment of technology raises issues about enhanced powers conferred to tax administrations, such as access to electronic communications and digital documentation—raising serious privacy issues, particularly without proper judicial supervision.

Although its professed aim is one of simplification, certain tax professionals protest that the reforms are more structural than substantive, perhaps generating new ambiguities and litigation through rewritten provisions and use of outdated interpretative precedents. Implementation of this new system will therefore need to be cautiously executed, guided by law, and supported by strong taxpayer education in order to minimize confusion and maximize effectiveness.

IMPACT ON CORPORATE TAXATION

The New Income Tax Bill, 2025 ushers in profound reforms in India's corporate tax regime, aimed at ushering in transparency, ease of compliance, and increasing investment. For domestic businesses, the effective rate continues to hover at 25.17%, with an optional concessional rate of 22% under Sections 115BAA and 115BAB. The Minimum Alternate Tax (MAT) remains at 15%, with the exception of IFSC units, which get a lower rate of 9%, and concessional regime companies, who are exempt. Foreign companies have their general corporate tax rate reduced from 40% to 35% applicable from April 1, 2025. MAT is not applicable to foreign companies without a permanent establishment in India, however.

Capital gains tax also undergoes improvement. Gains from traded securities for up to 12 months are subject to tax at 15%, while long-term gains over ₹1 lakh are subject to tax at 12.5% with no indexation. Such a rate is now extended to the specified funds and Foreign Institutional Investors (FIIs). Furthermore, the maturity proceeds of high-premium Unit-Linked Insurance Plans (ULIPs) are now subject to tax as capital gains.

To simplify compliance, TDS and TCS provisions have been streamlined. Rent, commission, and remittance thresholds have been raised, and Section 206C(1H), which had mandated TCS for sales exceeding ₹50 lakh, will be repealed. TDS rates for most transactions have been reduced (e.g., 2% on general payments and 0.1% on e-commerce), benefiting digital enterprises. More stringent enforcement actions involve a 1% monthly interest for non-compliance.

Another significant change is the elimination of the equalization levy—both 2% on e-commerce and 6% on digital advertising—to ease digital tax and lure foreign tech investment. At the same time, Virtual Digital Assets (VDAs) like cryptocurrencies and NFTs are now officially recognized as taxable assets. These will be handled in the same way as capital assets such as shares and property, with compulsory reporting obligations to increase oversight.

A new presumptive taxation regime for non-residents providing technology services to India's electronics manufacturing industry has been implemented. In this case, 25% of earnings is considered taxable profit, which equates to an effective rate of 8.75%, a calculated effort in the 'Make in India' drive to attract international tech players into semiconductor and electronics production.

These reforms showcase an industry-specific strategy for tax incentives, targeting areas such as IFSCs, e-commerce services, and electronics production. While the abolition of some cess  and streamlining of TDS/TCS regulations lightens the load on enterprises, the levy of VDA taxation and severe interest penalties illustrate an accompanying effort to promote compliance and fiscal responsibility. The Bill thus combines growth promotion with revenue integrity, marking a mature tax policy framework.

STRATEGIC INCENTIVES BROUGHT BY THE BILL

The Income Tax Bill, 2025 provides for a future-oriented fiscal architecture that enhances India's vision to be a global investment and innovation destination. Specifically, the sunset clause applicable to tax benefits for IFSCs has been extended to March 31, 2030, and fresh exemptions to non-resident income arising from life insurance, ship-leasing, and derivative transactions. The action is designed to place the IFSCs in the position of being prime financial hubs of cross-border investments.

To enable start-ups, the timeframe to avail 100% tax deductions on gains for three years (in their first decade) is also being extended to 2030, providing long-term fiscal stability. A ₹10,000 crore Fund of Funds has been rolled out to ramp up innovation on the back of previous government-driven investment momentum.

In a historic step, FDI cap in the insurance industry is increased from 74% to 100%, subject to reinvestment of all premiums within India. This dispenses with the necessity for Indian partners, makes market entry easier, and is likely to boost competition and capital inflow.

The Bill also proposes a simplified regime of transfer pricing under which the arm's length price (ALP) determined once shall be applicable for three years for assessment, avoiding audit duplication and bringing India at par with global practices.

Further the bill, acknowledges the employment and GDP growth role of MSMEs, threshold levels for classification have been raised, e.g., raising micro-enterprise ceilings to ₹2.5 crore of investment and ₹10 crore of turnover, so that businesses can continue being eligible for policy support as they grow.

CHALLENGES AND FUTURE CONSIDERATIONS

While the Bill aims to simplify the tax regime, some have criticized it as only bringing structural and textual reforms but not substantive changes. Among the main criticisms is that rewriting provisions could remake settled matters under the existing 1961 Income Tax Act, thereby opening up new legal controversies and ambiguities. Second, critics view the drafting of intricate legal language and small terminological changes as shallow, without really providing any simplification.

The Bill also increases the powers of search and seizure of tax officials, including giving them formal powers to enter "electronic media or computer systems," including individual data like emails and social media handles. While India has moved ahead on adoption of some of the OECD's Pillar One, such as the removal of the equalization levy, its position on accession to the OECD's global minimum tax system (Pillar Two) is pending. This framework, which puts a 15% minimum tax on global companies, will be reconsidered by India in 2025. If implemented, it would increase the tax burden for foreign firms that have businesses in India, and this may necessitate significant alterations in worldwide profit allocation and transfer pricing plans.

The Bill will take effect from April 1, 2026, giving companies time to study its effects and prepare accordingly. Nevertheless, the shift from the current system to the new one, particularly with the abolition of the 1961 Act yet keeping some of its provisions, may lead to confusion and overlaps. Companies will therefore be required to modify their accounting systems, internal procedures, and compliance practices to fit within the new tax framework and section numbers. In addition, the absence of broad-based taxpayer education may smoothen the implementation process.

The Income Tax Bill 2025 is a big step towards transforming India's direct tax regime. Intended to enhance clarity, efficiency, and ease of compliance, it proposes measures such as a single tax year, greater digitization, and sector-specific incentives for industries such as electronics manufacturing and IFSCs. All these measures cumulatively support India's vision to emerge as a stronger destination for foreign investment.

For domestic and international trade alike, the Bill offers a combination of opportunity and complication. While simplifications—like the abolition of the equalization levy and some TCS provisions—reduce the compliance cost, apprehensions linger. Revamping settled provisions can again open up legal controversies, and more powers to taxmen raise privacy and procedural concerns. Additionally, uncertainty regarding India's stance on worldwide tax norms such as OECD's Pillar Two necessitates prudent planning. Firms need to re-examine their tax strategies to remain in sync with the new regime.

Finally, the Bill is a manifestation of India's general economic vision of emerging as a developed economy. Its success would be contingent upon sustained political will, administrative readiness, and continued engagement with stakeholders to implement fairly and effectively.

Author:  Saptadip Nandi Chowdhury, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  

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