New Tax Bill expands surveillance & central control

Expanded tax powers raise privacy concerns

The stated objective of the New Income Tax Bill, currently before the Parliament, is to modernise India's tax system, however, its sweeping changes have sparked concerns over privacy, state revenue autonomy, and potential government overreach. With expanded powers for tax authorities and increased surcharges, the bill raises critical questions about balancing tax enforcement with individual rights and federal financial stability.

The Indian government’s introduction of the Income Tax Bill, marks a significant overhaul of the nation’s tax framework, that is said to simplify and modernise tax laws. However, embedded within its 622 pages are provisions that have sparked concerns about taxpayer privacy and the potential for government overreach.

Union Finance Minister Nirmala Sitharaman tabled the Income Tax Bill, in the Lok Sabha on February 13, seeking to replace the 64-year-old Income Tax Act, 1961. The bill, set to come into effect on April 1, 2026, is currently under review by a 31-member Select Committee of Lok Sabha MPs. The government says the bill aims to introduce simpler language, modern definitions, and clear guidelines on tax matters affecting individuals, businesses, and non-profit organisations.

Expanded powers for tax authorities

Although the New Income Tax Bill 2025 does not make any new adjustments to tax slabs or rates compared to those presented in the Union Budget 2025, any changes in tax income could impact state revenues. This approach may appear politically appealing, but it reduces the overall direct tax base, ultimately lowering the funds available for Finance Commission-mandated devolution under Article 270. Since states receive 41 pc of net income tax collections (as per the Fifteenth Finance Commission’s recommendations), a decrease in net taxable income will lead to direct revenue losses for states.

One of the most contentious aspects of the new bill is the enhanced authority granted to tax officials over digital domains. Clause 247(b)(iii) permits officials to “break open the lock of any door, box, locker, safe, almirah, or other receptacle… or gain access by overriding the access code to any said computer system, or virtual digital space, where the access code thereof is not available.” This effectively allows tax authorities to bypass passwords and security measures to access taxpayers’ digital information.

The new bill increases surcharges on high-income individuals and corporations, ensuring that a greater portion of direct tax revenue remains with the central government rather than being allocated to the states. The Supreme Court, in the case of Krishnan Kakkanth versus Government of Kerala (1997), observed that cesses and surcharges should be allocated for specific uses; however, their increasing use as a revenue-shielding mechanism by the Centre raises constitutional concerns.

The bill defines ‘virtual digital space’ broadly, encompassing email servers, social media accounts, online investment and trading platforms, banking accounts, cloud servers, and digital application platforms. This expansive definition raises alarms about the extent of surveillance and intrusion into personal digital lives.

In contrast to the United States, where each state has substantial taxing autonomy, Indian states can only impose taxes on agricultural income (Entry 46, List II), professional income (Entry 60, List II), and specific goods and services. The Income Tax Bill 2025 would further hamper state taxation powers through its definition of taxable income and deductions. States that attempt to impose new direct taxes tend to meet broad constitutional barriers, as shown in the decision of State of West Bengal versus Kesoram Industries Limited (2004), where the Supreme Court held that states cannot impose taxes that are in the deemed subjects of the Union List.

Legal professionals are apprehensive about the potential misuse of these extensive powers. Sanjay Sanghvi, a partner at Khaitan & Co, highlighted that while tax authorities previously sought access to digital devices, the absence of explicit legal provisions made such demands contentious.

“Earlier, tax authorities’ access to digital devices was contentious due to a lack of clear legal provisions. Now, with explicit authorisation in the new bill, the risk of privacy invasions has significantly increased. Without proper safeguards, these extensive powers could easily be misused, leading to unnecessary scrutiny and harassment,” Sanghvi tells Media India Group.

Experts say that while the government’s intent to curb tax evasion is understandable, the methods proposed have ignited debates about balancing effective tax enforcement with individual privacy rights. The lack of explicit safeguards and oversight mechanisms in the bill raises the spectre of potential abuses of power.

“The new bill complicates tax compliance for businesses while increasing surcharges that heavily strain high-income taxpayers and corporations. Additionally, it restricts states’ revenue autonomy, making it harder for them to sustain economic growth at the local level,” Sonu Bidhuri, a Delhi-based businessman, tells Media India Group.

A brief history of India’s Income Tax System

India’s income tax system has undergone several transformations since the introduction of the Income Tax Act, 1860, by James Wilson during British rule. The Income Tax Act of 1922 further structured tax administration by introducing the concept of separate taxation for individuals and businesses. Post-independence, the Income Tax Act of 1961 laid the foundation for modern taxation, establishing clear guidelines for tax assessment, collection and enforcement.

Over the decades, various amendments have been introduced to adapt to changing economic needs. The implementation of Tax Deducted at Source (TDS) streamlined tax collection, while reforms in the 1990s, including lower tax rates and the removal of wealth tax, encouraged economic growth. The introduction of the Goods and Services Tax (GST) in 2017 was one of the most significant tax reforms, replacing multiple indirect taxes with a unified structure. However, despite these reforms, India’s tax-to-GDP ratio remains low compared to global standards, and compliance burdens continue to persist.

The New Income Tax Bill marks an unmistakable shift toward fiscal centralisation. While it is framed as a necessary reform for modernising India’s tax system, the bill systematically erodes state revenues and undermines their financial autonomy.