Income-tax (No. 2) Bill 2025

Income-tax (No. 2) Bill, 2025: Comprehensive Guide to Major Reforms in Direct Taxation

Introduction

On 11 August 2025, the Union Government tabled the Income-tax (No. 2) Bill, 2025 in the Lok Sabha.
The bill is part of a series of reforms aimed at making India’s direct tax regime simpler, fairer, and more aligned with global practices.

India’s taxation framework has often been criticised for being complex and litigation-heavy. This bill seeks to address those concerns by:

• Reducing unnecessary compliance.
• Introducing predictable tax rates.
• Making better use of digital governance in tax administration.

For exam aspirants, this bill is significant because it touches Economy, Polity, and Current Affairs — three key areas in competitive exams like UPSC, SSC, IBPS, RBI, and state PSCs.

Why Was the Bill Needed?

The Income-tax Act, 1961 has served India for over six decades, but multiple amendments over the years have made it complicated for ordinary taxpayers.
Challenges that prompted reform include:

Complexity in Filing Returns

• Multiple exemptions and deductions make the filing process tedious.
• Even salaried individuals often need professional help to file returns.

Litigation Overload

• India has one of the world’s largest pending tax dispute backlogs.
• Ambiguities in law lead to frequent disagreements between taxpayers and the tax department.

Global Competitiveness

• Countries like Singapore, UAE, and the UK offer simpler tax structures.
• To attract foreign investment, India needs to match that ease of doing business.

Digital Economy Growth

• The rise of start-ups, gig workers, and digital enterprises requires updated tax norms.

Key Objectives of the Income-tax (No. 2) Bill, 2025

Simplification of the Tax Structure

• Aim: Reduce dependence on exemptions and deductions that complicate tax laws.
• Benefit: Taxpayers can easily calculate liabilities without consulting experts.

Encouraging Voluntary Compliance

• Clear provisions leave less room for misinterpretation.
• Faster processing of returns motivates timely and honest filing.

Improving Business Climate

• Predictable tax rules attract domestic and foreign investors.
• Special incentives for priority sectors encourage job creation.

Digital Transformation of Tax Administration

• Use of AI and Big Data to detect discrepancies automatically.
• End-to-end online systems to reduce human interaction and corruption.

Major Provisions Explained in Detail

Revised Personal Income Tax Slabs

• The bill proposes a rationalised new regime with fewer slabs and lower rates.
• Example: Middle-income earners could see reduced liability if they opt for the new system.

Corporate Tax Adjustments

• Special incentives for green manufacturing, export-driven units, and research-based industries.
• Lower effective tax rates for start-ups during their early years.

Gradual Phasing Out of Exemptions

• Outdated provisions (like some investment-linked deductions) will be removed.
• This aligns with global best practices where the base rate is low, but exemptions are minimal.

Faceless Assessment 2.0

• Improved algorithms for case selection.
• Faster resolution of scrutiny cases with minimal personal interaction.

Dispute Resolution Mechanism

• Expanded Vivad se Vishwas-type schemes for quicker settlement of disputes.
• Encourages taxpayers to resolve cases without prolonged litigation.

Integration with GST & MCA Data

• Cross-checking of income declarations with GST filings and corporate returns to reduce tax evasion.

Expected Impact on Stakeholders

For Individual Taxpayers

• Easier compliance and potentially lower tax liability.
• Faster refunds due to automated processing.

For Businesses

• Increased certainty in tax planning.
• Reduced compliance costs, especially for SMEs.

For Government

• A broader tax base from improved compliance.
• More efficient tax collection without increasing rates.

Relevance for Competitive Exams

This bill is a hot topic for multiple reasons:

• Economy Section: Impact on GDP growth, fiscal deficit, and investment.
• Polity Section: Understanding how bills are introduced, debated, and passed in Parliament.
• Current Affairs: This is a brand-new development in August 2025.

Sample MCQ for Exams:
Which of the following is NOT a provision of the Income-tax (No. 2) Bill, 2025?

• Phasing out of outdated exemptions.
• Introduction of Goods and Services Tax (GST).
• AI-driven faceless assessment.
• Dispute resolution schemes for pending cases.
  • Correct Answer: 2

Conclusion

The Income-tax (No. 2) Bill, 2025 is not just another amendment — it is a systemic reform aimed at making India’s direct tax regime simpler, transparent, and future-ready.
If passed and implemented effectively, it could reduce compliance burdens, boost investor confidence, and improve revenue without overburdening taxpayers.

For aspirants, this is a must-study topic — understanding its provisions, context, and expected impact will help in both objective and descriptive parts of exams.