Only 2.24 crore people paid income tax, just 1.6% of the total population. In comparison, about 10% of people in China and 43% in the US pay income tax, making it clear that India’s taxpayer base is still very narrow.
The Indian economy stands at a critical juncture, requiring extensive structural reforms to inject fresh momentum into its growth trajectory. Upon examining the economic policies over the past quarter-century, it becomes evident that following the Economic Reforms of 1991, pivotal measures such as the FRBM Act, GST, and the Insolvency and Bankruptcy Code have surfaced as key developments. Nonetheless, over time, the nature of reforms has evolved as well. Similarly, the current landscape of the Indian economy now calls for deregulation as a vital reform measure. Today, every economic stakeholder wants to be liberated from excessive complexities and stringent regulations. This is why advocacy for deregulation is constantly on the rise in India. This year’s Economic Survey also clearly mentions that the pace of the Indian economy will now pass through the path of deregulation.
While analysing this year’s budget, it is evident that the Modi government is also committed to deregulation. The decision to alleviate the tax burden on citizens by exempting income up to Rs 12.75 lakh is a significant step. Additionally, a new committee has been announced to enhance the effectiveness of regulatory reforms, thereby creating a more favourable investment environment at the state level. Moving ahead, the finance minister announced the Jan Vishwas Bill 2.0, which aims to eliminate criminal penalties from 100 laws, thereby streamlining business operations. Furthermore, the budget has also introduced eight tariff rates, streamlining the customs duty framework to enhance business operations. In addition, the cap on foreign investment in the insurance sector has been raised from 74% to 100%, which is expected to enhance the influx of foreign capital and bolster this sector. All these steps tell one story: the government also believes that giving maximum freedom to the economy is essential, and that’s why PM Modi always stresses ‘Minimum Government and Maximum Governance.’
In the wake of the budget announcement, the Modi government has now introduced the new ‘Income Tax Bill, 2025’, sent to the Standing Committee for review. Before it becomes law, a preliminary examination of the bill’s draft reveals that its primary aim is to streamline income tax regulations, ensuring they are simple and easily understood. The necessity for a new income tax law has been recognised in the country for an extended period, as the Income Tax Act of 1961 has not only become outdated but has also undergone numerous amendments, resulting in a complex framework. More than 4,000 amendments over the years have infused it with complex legal terminology, complicating comprehension and adherence for the ordinary taxpayer. The new bill has been drafted on three fundamental pillars: Eliminating intricate language to enhance readability, removing redundant and repetitive provisions for better navigation, and Reorganizing sections logically to facilitate ease of reference.
How is the new Income Tax Bill 2025 different?
If we compare the new Income Tax Bill with the old Income Tax Act of 1961, the first noticeable thing is that the new bill has successfully simplified the taxation process. While the old Act comprised 1,647 pages, 298 sections and 52 chapters, the latest Income Tax Bill 2025 has only 622 pages, 536 sections and 23 chapters. Thus, the law has been made more transparent and more understandable, with a reduction of about 25-30% in the number of sections. Apart from this, the time limit for filing updated returns has also been revised. In the previous law, this was 2 years, which has now been increased to 4 years. This will give taxpayers more time to rectify their errors and file updated returns correctly.
In the new bill, special care has also been given to the selection of terminology so that the taxation system can be made more transparent, straightforward, and logical. For example, the concept of “tax year” has been introduced, which will replace the confusing terms “financial year” and “assessment year” used in the previous law. Till now, it has been difficult for a taxpayer to understand the difference between ‘financial year’, which refers to the period in which income is earned, and ‘assessment year’, the period in which that income is assessed and taxed. This often leads to confusion. The adoption of the term “tax year” will bring clarity to the tax that will be applicable in the year in which the income is earned. This will make the process seamless for taxpayers and make compliance more accessible and transparent.
Further, an essential and timely reform has been inculcated in the bill related to tax provisions on digital assets. The new Bill defines “virtual digital assets” (such as cryptocurrencies) in Clauses 67 to 91. In the current economic scenario, digital currencies have expanded rapidly in different forms. Investors are now investing large amounts of capital in digital currencies like Bitcoin and earning profits on price rises. It was necessary to bring it duly under the tax law to ensure transparency in such a situation.
Will the new bill be able to strengthen the economy?
This is an important question because even though the Indian economy has become the fifth largest economy in the world today, its tax-to-GDP ratio and the number of taxpayers have still not reached the level of developed economies. India has a total population of about 142 crores, but only 7.4 crore people filed income tax returns in 2022-23, of which 5.16 crore had zero tax liability. This means that only 2.24 crore people paid income tax, just 1.6% of the total population. In comparison, about 10% of people in China and 43% in the US pay income tax, making it clear that India’s taxpayer base is still very narrow.
Moreover, even though India’s direct tax-to-GDP ratio has reached a historic high of 6.64% in the financial year 2023-24, it is still relatively low in proportion to the size of the economy. If India aims to become a prosperous nation, the number of taxpayers must be increased. Today, the direct taxation system solely relies on the salaried class. Therefore, the biggest challenge before the new bill will be whether it can encourage taxpayers to come forward. Even today, many taxpayers consider income tax rules complex and cumbersome. Apart from this, another critical aspect of the success of this bill will be whether it will be able to increase tax collection. As the central government decided to give up approx. Rs. 1 lakh crore tax revenue by exempting income up to 12.75 lakh from tax, it is the real taste of this bill that how simplification, minimum provision and less regulation can encourage more people to come forward to pay taxes or file returns without any insecurities. But yes, it can be synthesised that once the citizens find out that the taxation system no longer looks like policing; eventually, their faith and trust will rise, and it results positively. If this bill proves successful on both parameters—increasing the number of taxpayers and increasing tax collection—then it will significantly improve the Indian economy.
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