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India’s new tax bill may hit non-residents hard, experts warn
With the bill still under review, experts are urging the government to address these concerns to prevent unintended tax implications and ensure clarity in the new tax regime.
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India’s proposed Income-tax Bill, 2025, aimed at replacing the existing Income-tax Act, 1961, contains drafting inconsistencies that could lead to unintended tax consequences, particularly for non-residents, tax experts said.
One key concern is the treatment of brought forward long-term capital losses (LTCL). Under current law, LTCL can only be offset against long-term capital gains (LTCG). However, the savings clause in the new bill appears to permit LTCL to be set off against all future capital gains, including short-term capital gains (STCG), starting from the 2026-27 tax year.
“This could allow taxpayers to offset LTCL, which is taxed at a lower rate, against STCG, which is taxed at a higher rate, leading to a potential revenue loss for the government,” tax experts at Nishith Desai Associates said.
LTCL typically arises from the sale of assets like stocks and real estate, while STCG is often generated from shorter-term holdings such as bonds and mutual funds. Allowing LTCL to offset STCG would, in effect, reduce the effective tax rate on STCG, impacting government revenue, the experts said.
The bill also proposes changes to the definition of associated enterprises (AEs) in transfer pricing provisions. The revised wording in Section 162(2) could broaden the AE definition beyond its original intent, potentially classifying enterprises with minimal shareholding in each other as related entities, tax experts said.
"The change could give tax authorities greater scrutiny over transactions between entities that may not have a significant connection, increasing compliance burdens and potentially leading to disputes," said Parul Jain, Ipsita Agarwalla, and Morvi Chaturvedi in a detailed analysis.
The AE classification is crucial for transfer pricing, which regulates transactions between related parties to ensure they reflect market prices. A wider AE definition could lead to increased tax scrutiny, even where there is little risk of tax avoidance, they added.
Experts also noted that the bill does not explicitly clarify whether circulars issued under the 1961 Act will remain valid. Circulars issued by the Central Board of Direct Taxes (CBDT) provide critical guidance on tax interpretation and compliance.
"Without an express provision ensuring continuity, uncertainty could arise, increasing the risk of litigation," they said.
The bill also introduces a new presumptive tax regime for non-residents, which could expose them to taxation in India even if they do not have a permanent establishment in the country. This could lead to double taxation in some cases, experts warned.
Additionally, the consolidation of withholding tax provisions could make it more challenging for taxpayers to determine their obligations, they said.
With the bill still under review, experts are urging the government to address these concerns to prevent unintended tax implications and ensure clarity in the new tax regime.
Lok Sabha speaker Om Birla has formed a 31-member Select Committee of the lower house to examine the Income Tax Bill. The panel is headed by BJP's Baijayant Panda and is mandated to submit its report by the first day of the next session.
The Income-tax Bill, 2025, tabled in Parliament in February, marks a significant step toward simplifying the language and structure of the Income-tax Act, 1961. The bill has proposed no major tax policy changes and no modifications of tax rates. Simplifying the existing law, the new bill has 23 chapters instead of 47, and there will be 536 clauses in place of 819 sections.
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