India’s income tax framework, central to funding public services and infrastructure, is undergoing a significant overhaul. A Select Committee of the Lok Sabha has submitted sweeping recommendations to the draft Income Tax Bill, 2025. The new proposals will replace the Income Tax Act of 1961 and, in doing so, recast several provisions, particularly in the areas of transfer pricing, loss carry forward, and taxation of house property income. If enacted, these reforms could materially alter the tax regime for corporations, investors, and property owners.
One of the most consequential proposals relates to transfer pricing. The Committee recommends expanding the definition of associated enterprises to include entities that exercise “substantive influence” over each other — even where traditional thresholds such as shareholding or board control are not met.
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Transfer pricing norms set for overhaul
Under the current regime, transfer pricing provisions apply to transactions between associated enterprises, which are defined in two parts. The general test looks at whether an enterprise participates in the management, control, or capital of another. The specific test sets numerical thresholds — such as owning at least 26% of voting power or appointing a majority of board members.
Historically, Indian courts have often interpreted these two limbs as conjunctive, requiring both to be satisfied before invoking transfer pricing rules. The Committee now proposes to merge them into a single, disjunctive test, where satisfying any one condition would be sufficient. This effectively lowers the threshold for classification as an associated enterprise, potentially sweeping many more inter-company transactions into the ambit of scrutiny.
This change could have far-reaching implications, particularly for firms with minority equity stakes but significant operational control. For instance, a parent company that exerts influence through shared senior management or joint ventures might now fall within the scope of transfer pricing regulations, even without meeting existing ownership thresholds.
Risk of overreach and litigation
While the intent is to prevent base erosion and profit shifting, analysts caution that the proposed language is too broad. Without precise thresholds for what constitutes “substantive influence,” tax authorities may exercise wide discretion. This opens the door to protracted litigation, especially where influence is informal or indirect.
Several recent court rulings on this issue have been divided, with some favouring taxpayers and others backing the tax authorities. By consolidating the two tests, the new provision attempts to end this ambiguity — but in doing so, it may tilt the balance in favour of greater enforcement without sufficient clarity. Experts suggest that detailed guidance on what level of participation qualifies as influence will be critical to avoid interpretational disputes.
Reworking loss carry forward rules
Another major recommendation is the revision of rules governing the carry forward of business losses. At present, these losses can be carried forward only if 51% of the shareholding remains unchanged. The Committee now recommends that the test be extended to beneficial ownership — including persons or entities who “directly or indirectly derive benefits” from the shares.
This proposal introduces a new layer of complexity. Many companies, particularly start-ups and those backed by private equity or venture capital, operate through layered structures involving investment vehicles and pooled funds. In such cases, identifying the ultimate beneficial owners can be difficult, if not impractical.
The proposed rule may make it harder for companies to claim loss carry forward, especially if shareholding changes hands in form but not in substance. Without clear definitions, companies could face uncertainty over whether they meet the test, leading to possible disputes during assessments.
A start-up that has undergone multiple funding rounds might fail the new test if even one investor’s beneficial ownership changes. The result could be the denial of loss carry forward, disrupting financial planning and disincentivising capital infusions.
Relief for property owners
On a more taxpayer-friendly note, the Committee has proposed clarifications to the taxation of house property income. Two changes are especially noteworthy. First, the standard 30% deduction currently allowed on property income has been a matter of confusion — should it apply before or after deducting municipal taxes? The Committee has clarified that it should be applied post-deduction of municipal taxes, thereby lowering taxable income for property owners.
Second, the current restriction on claiming deductions for pre-construction interest — limited to self-occupied properties — is proposed to be relaxed. The Committee has recommended extending this benefit to let-out properties as well, offering relief to landlords who were previously ineligible.
These amendments are designed to streamline compliance and remove longstanding ambiguities in the law. They could offer meaningful relief to genuine taxpayers, particularly small landlords and individuals with one or two rental properties.
Income Tax Bill: Reform with caution
Taken together, the Select Committee’s recommendations mark an ambitious attempt to tighten compliance and plug loopholes, while also addressing specific taxpayer concerns. However, the reforms on transfer pricing and beneficial ownership may have unintended side effects unless backed by precise definitions and procedural safeguards.
As the draft Income Tax Bill, 2025 moves toward further deliberation, stakeholders — from multinational corporations to domestic start-ups — will be watching closely. For large companies with cross-border operations or complex group structures, the expanded compliance burden could be significant. At the same time, property owners stand to benefit from greater clarity and relief measures.
To ensure that the reformed tax code serves its intended goals, the government must strike a careful balance. Loopholes that enable tax avoidance must be closed, but not at the cost of introducing sweeping ambiguity. Definitions of key terms like “substantive influence” and “beneficial ownership” must be clearly articulated. The tax administration will also need to invest in training and technology to fairly implement the expanded compliance regime.
Ultimately, reforming India’s income tax system is a welcome and long-overdue initiative. But the success of the new law will depend on its ability to reduce litigation, enhance predictability, and uphold the principle of tax certainty — a hallmark of any robust tax framework.