Proposed Changes in Income Tax Law
The Lok Sabha’s select committee has recommended significant changes to the draft Income Tax Bill, 2025, which could have extensive impacts on the corporate sector.
Transfer Pricing Provisions
- The proposed law could scrutinize inter-corporate transactions under transfer pricing even when shareholding or board control thresholds are not met, if one firm has substantive influence over another.
- Transfer pricing involves tax rules for transactions between related enterprises, ensuring fair market value and preventing profit shifting.
- The new bill recommends treating companies with substantial influence over another as associated enterprises (AEs), raising compliance obligations, especially in cross-border transactions.
- The Income Tax Act of 1961 is likely to be replaced, with the new bill combining general and specific tests for defining AEs, leading to independent provisions that widen the ambit of AEs.
- Concerns exist that this could lead to increased litigation due to vague definitions of participation in management, capital, and control.
Business Losses and Beneficial Ownership
- The committee recommends expanding conditions for carrying forward business losses to include beneficial ownership, not just legal shareholding.
- The current law allows loss carry forward if 51% of shareholders remain unchanged. The new test focuses on who directly or indirectly benefits from shares.
- This change could complicate compliance for companies with private equity or venture capital backing, as tracing ultimate beneficiaries is difficult.
House Property Income Taxation
- The committee proposes that the 30% standard deduction on house property income be applied after subtracting municipal taxes, reducing taxable income.
- Pre-construction interest deductions are suggested for both self-occupied and let-out properties, extending current benefits only available to self-occupied homes.
Additional Relief for Taxpayers
- Recommendations include allowing smaller taxpayers flexibility by removing the requirement of filing returns solely for claiming refunds.