On 13 February, finance minister Nirmala Sitharaman introduced the much-awaited bill to replace the existing Income-Tax Act, 1961. Among the changes proposed in the Income-Tax Bill, 2025, a significant one that cannot be overlooked is the extensive power granted to tax authorities to carry out searches of tax evaders.
The bill has introduced the term ‘virtual digital space’ in the provisions related to search and seizure actions. The definition of virtual digital space is rather broad and expressly includes email servers, social media accounts, online investment accounts, trading accounts, banking accounts, websites used to store details of ownership of assets, remote servers or cloud servers, and digital application platforms.
Digital India is the flagship programme of the present government. As such, digital platforms assure secure and seamless communication and storage of financial data and are the need of the day. However, these very platforms are also used as conduits for non-reporting of income or laundering of money. The definition of virtual digital space has therefore been introduced, with wide powers granted to the authorities to access these digital spaces while investigating tax evasion.
Although the government intercepts money laundering through search actions under laws such as the Income-Tax Act and the Prevention of Money Laundering Act, the authorities face legal challenges in the absence of clear legislation with respect to access to digital platforms and gadgets such as laptops, emails, and hard disks.
The new bill defines the special powers granted to investigative authorities to access the digital data and accounts of taxpayers. If taxpayers deny them access, the authorities can override the system, potentially compromising digital security.
Apprehensions
Granting access to digital platforms and resources without proper safeguards could turn out to be a red flag for citizens and taxpayers because there is potential for harassment unless appropriately implemented. Far more concerning is the possibility of misuse by those in control of access codes.
First of all, while data assimilators such as the Annual Information Return, Form 26AS, and the Statement of Financial Transactions are in place to synchronise all the information related to the transactions of a taxpayer, it is not known to what extent such extended powers granting access to digital resources and platforms was necessary to be given to the tax authorities.
Further, the definition of virtual digital space and associated provisions do not reflect sufficient safeguards for the data and information of taxpayers. No guidelines seem to have been provided with respect to the mechanism for use of the access codes granted.
Without any procedural limitations, taxpayers could be subjected to investigation and interrogation on matters that may also stretch beyond the provisions of the bill. Even the personal data of taxpayers, which may have nothing to do with financial matters, will be accessible to the authorities.
Taxpayers are already under surveillance due to multiple reporting systems under various laws and the synchronisation of financial information. The proposed new law seems to only widen the ambit for government scrutiny of personal data.
With these provisions, we don’t know whether, with the existing laws already intruding on taxpayer information and data, the modicum of privacy left with them will also be at stake.
Above all, issues could also arise in statutorily recognising the information found in these digital spaces as ‘evidence’ for the purposes of any proceedings under the Income Tax Act.
That’s because they are ‘electronic records’ that are required to be proved through a statutory protocol provided under the Bharatiya Sakshya Adhiniyam, 2023, which consolidates and provides for general rules and principles of evidence for fair trials. To what extent these safeguards will be followed is also a matter of concern.
Suggestions
The government may have to introduce safeguards to ensure the manner and extent of usage of access codes provided to tax officers during searches does not lead to data leakage through the misuse of technology such as hacking, spoofing or possible cyberattacks. There is also a need to specify how the information derived from virtual digital spaces by the tax authorities may be used for tax proceedings as well as for any purpose other than tax evasion.
As the parliamentary select committee reviews the bill, the hope is that it will consider the challenges of implementing the access mechanism and provide guidelines on how the data and information may be used by the authorities.
Dharmesh Shah practises as a counsel before the Income Tax Appellate Tribunal and the high court for income tax matters.
