Lok Sabha Passes Income Tax (No. 2) and Taxation Laws (Amendment) Bills

General Studies Paper-2

Context

• The Lok Sabha has passed the Taxation Laws (Amendment) Bill, 2025 and the Income-Tax (No.2) Bill, 2025.

About The Income-Tax (No.2) Bill, 2025

• The Bill seeks to replace the Income-tax Act, 1961. It simplifies tax language, clarifies deductions, and strengthens cross-referencing across provisions.
• Tax rates and regimes for individuals and corporations remain unchanged. There are no changes in offences and penalties.
• Power to Frame Schemes: The Act provided specific provisions for a faceless mechanism in areas such as inquiries, valuations, revision of orders, and tax recovery.
• New Change: The Bill grants general powers to the central government to frame schemes for; Eliminating interface with taxpayers via technology and Optimising resource use through economies of scale and functional specialisation.
• Virtual digital space: The Act allows income tax authorities to enter and search buildings and break open locks. The Act also empowers the authorities to inspect electronic documents.
• New Change: Authorities can now also gain access to virtual digital spaces, including by overriding access codes, during search and seizure operations.
  • The Bill defines virtual digital space as an environment, area, or realm that is constructed and experienced through computer technology. It includes email servers, social media accounts, online investment and trading accounts, and websites for storing details of asset ownership.
• Interpretation of tax treaties: The Act allows the central government to enter into agreements with other countries to provide relief in cases of double taxation.
  • The Bill retains these provisions and adds that if a term is not defined in the treaty, the Act, or a notification by the central government, its meaning will be as assigned in any other central law.
• Dispute resolution panel: The Act allows certain eligible assessees to refer draft orders passed by assessing officers to a dispute resolution panel.
  • The Bill retains these provisions and adds that the panel must issue directions along with the points of determination and the reasons for arriving at the decision.

The Taxation Laws (Amendment) Bill, 2025

• The Bill seeks to amend the Income-Tax Act, 1961 and the Finance Act, 2025. The 1961 Act provides for the framework to levy income tax on individuals and companies.
• Exemptions for the Unified Pension Scheme: The 1961 Act specifies income categories which are exempt from income tax. The Bill adds exemptions for;
• payments under the Unified Pension Scheme (UPS) upon superannuation, voluntary retirement, or retirement (up to 60% of the pension corpus), and
• lump sum amounts received under UPS.
• The transfers from individual corpus to pool corpus will not be treated as income and will not be taxed.
• Saudi Arabia Public Investment Fund (PIF) Exemption: Tax exemption extended to PIF of Saudi Arabia and its wholly owned subsidiaries investing funds of the Saudi government in India.
• Block assessment in search cases: The 1961 Act specifies a procedure for the assessment of total undisclosed income as a result of a search. It provides for assessment for a block period.
• The Bill adds that if a notice for such an assessment is issued after a search has begun but before the search is completed, that assessment will stop on the date of the notice.