In India, direct taxes are levies imposed directly on individuals and entities, based on their income, wealth, or property. Currently, the primary legislation governing direct taxes in India is the Income Tax Act, 1961. This Act has served as the cornerstone of the country's direct taxation system for over six decades. However, with the advent of digital economies and evolving financial landscapes, there has arisen a need to modernize and streamline the tax framework to address contemporary challenges.

In view of the same, the Income Tax Bill, 2025 was introduced by the Hon’ble Finance Minister on February 13, 2025. It was revealed that the government's intention was to scrutinize and rephrase the Income Tax Act, 1961, in totality. Through this scrutiny, the Act was intended to be made more concise so that the taxpayers could easily read and understand it.

The Income Tax Bill, 2025, overhauls the earlier legislation without substantially changing the basic tenets of levy, administration, collection and recovery of direct taxes in India. The Bill is scheduled to come into effect on April 1, 2026.

The Income Tax Bill, 2025, as one of its primary objectives, has introduced a significant expansion in the powers of income tax authorities by allowing them to access various digital platforms of the taxpayers viz email, social media handles, cloud servers etc. reflecting the government's resolve to keep pace with the rapid digitization and modernization of the Indian economy. As financial activities increasingly shift online - ranging from digital banking, cryptocurrency transactions, e-commerce operations, cloud-based accounting and data storage, the conventional tools of tax enforcement may prove to be insufficient to track, verify, and assess taxable income effectively. The digital economy, while driving efficiency and inclusivity, may have also opened new avenues for tax evasion and concealment through anonymized transactions, encrypted platforms, and offshore digital holdings. Recognizing these evolving dynamics, the Income Tax Bill, 2025. has sought to increase the scope of the investigative powers of the tax authorities. The same may be in an effort to align India’s direct tax regulatory system with international best practices, where tax agencies are increasingly integrating technological surveillance with regulatory frameworks to maintain fiscal integrity in a digital-first world. This move, therefore, may be both a necessity and a strategic progression in India's tax administration reforms.

Currently, Section 132 of the Income Tax Act, 1961 has conferred certain powers upon the tax authorities during search and seizure operations. These powers include inter alia the authority to enter and search the taxpayers’ premises, break open doors, lockers etc., take inventory of money, bullion etc., inspect books of accounts and other documents in physical or electronic form and seize the said books or documents.

Be that as it may, a significant addition in the Income Tax Bill, 2025, is the inclusion of "virtual digital space" in the provisions of search and seizure.

Firstly, Clause 261(i) of the Bill defines virtual digital space as:

“'virtual digital space' means an environment, area or realm, that is constructed and experienced through computer technology and not the physical, tangible world which encompasses any digital realm that allows users to interact, communicate and perform activities using computer systems, computer networks, computer resources, communication devices, cyberspace, internet, worldwide web and emerging technologies, using data and information in the electronic form for creation or storage or exchange and includes ––

(i)    email servers;

(ii)   social media account;

(iii)  online investment account, trading account, banking account, etc.;

(iv)  any website used for storing details of ownership of any asset;

(v)   remote server or cloud servers;

(vi)  digital application platforms; and

(vii) any other space of similar nature.

Further, the search and seizure provisions have been enshrined under Clause 247 of the Bill, as per which, in addition to the aforesaid existing powers conferred by Section 132 of the Income Tax Act, 1961, the authorities have now been empowered to gain access to the virtual digital space of taxpayers during search and seizure operations. If a taxpayer refuses to provide access, the authorities shall have the power to override access codes and gain access to the said virtual digital space. The authorities have also been empowered to make presumptions that such a virtual digital space may belong to and pertain to the taxpayers and that the contents in the said space are true. Thus, the authorities can gain access to any private social media account, investment or trading accounts, bank accounts, etc., to check for non-compliance on the part of the taxpayers.

Firstly, the intention of the government may be to combat modern day tax evasion and empower tax authorities with sufficient powers to access virtual digital spaces, since, with the advent of new technologies, most of the data is now stored in electronic form and in cloud servers. The government’s efforts to bring to tax unaccounted income in the parallel economy may be supported with the added ability to track digital footprint and bring equity in taxation and address tax avoidance effectively. Accordingly, the following may be the benefits of unrestricted access to virtual digital space:

- Enhanced Monitoring of Digital Transactions - Tax authorities can track and analyze digital financial activities, such as crypto transactions, online marketplaces, and fintech operations.

- Curbing Tax Evasion and Black Money - Access to virtual digital spaces can help uncover undeclared income and assets, especially from digital wallets and peer-to-peer platforms.

- Data-Driven Enforcement and Risk Profiling - With access to digital records, authorities can use advanced analytics and AI to build risk profiles of taxpayers, prioritize audits, and target high-risk entities more effectively.

- Greater Transparency and Accountability - Businesses and individuals operating in virtual digital domains would be compelled to maintain accurate digital records, thereby increasing financial transparency.

However, in addition to the increased compliance burden on the taxpayers, the aforesaid powers conferred upon the tax authorities may raise significant concerns regarding the data privacy of the taxpayers, including:

- Potential for Overreach: The broad definition of virtual digital space could lead to unwarranted surveillance of personal data, infringing on a taxpayer’s right to privacy.

- Risk of Data Misuse: Without stringent safeguards, there may be a possibility that accessed data could be used for purposes beyond tax investigations, leading to potential misuse.

- Lack of Judicial Oversight: The Bill does not mandate prior judicial approval before accessing digital spaces, which could lead to arbitrary actions by tax authorities.

- Cybersecurity Concerns: Centralized storage of sensitive digital data increases the risk of cyberattacks, potentially compromising taxpayer information.

- Inadequate Consent Mechanisms - Taxpayers may not even be notified or consulted before their data is accessed, violating the principle of informed consent.

The above privacy threats may be viewed in light of the Digital Personal Data Protection Act, 2023 (DPDP Act). The consequences of such unprecedented access to the virtual digital space of taxpayers may be violative of the various fundamental principles of the said Act, which include, inter alia:

- Purpose Limitation - That personal data should only be processed for the specific, lawful purpose for which it was collected. 

- Data minimization – That only the personal data that is strictly necessary for a specific, transparent purpose must be collected. 

- Informed consent - That individuals and entities are fully aware of how their data will be used before granting consent.

However, Section 17 read with Section 7(d) of the DPDP Act, 2023 provides certain exemptions whereunder personal data may be processed without consent or notice, specifically in cases involving investigations by statutory or regulatory authorities. Therefore, it would be prudent to incorporate adequate safeguards in the Income Tax Bill, 2025, to ensure that the fundamental right to privacy under Article 21 of the Indian Constitution is well protected.

To balance effective tax enforcement with the protection of individual privacy, the following measures/ safeguards may be needed:

- Judicial Oversight: Mandate prior approval from judicial authorities before accessing taxpayers’ digital space, ensuring checks and balances.

- Clear Guidelines: Establish clear protocols outlining the scope and duration of access to digital spaces, limiting it to what is necessary for the investigation.

- Data Minimization: Ensure that only data pertinent to the investigation is accessed, avoiding unnecessary intrusion into unrelated personal information.

- Transparency and Accountability: Maintain logs of all access to digital spaces, with regular audits to ensure compliance with legal standards.

- Cybersecurity Measures: Implement robust security protocols to protect accessed data from unauthorized access or cyber threats.

The Income Tax Bill, 2025, represents a significant step towards modernizing India's direct taxation system in line with the digital age. While the provisions related to virtual digital space aim to enhance the effectiveness of tax enforcement, they also pose potential risks to the data privacy of taxpayers. It is imperative that the implementation of these provisions is accompanied by appropriate safeguards to protect taxpayer rights. A balanced approach, ensuring both effective tax administration and the protection of privacy, will be crucial as the Bill progresses through the legislative process.

About the author: Rishab J is an Associate Partner with Shivadass & Shivadass (Law Chambers).

The author would like to acknowledge the contributions of Madhav P, a law graduate from BMS College of Law, Bangalore.

The contents and comments of this document do not necessarily reflect the views/position of Shivadass and Shivadass (Law Chambers) but remain solely of the author(s).

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