India’s New Income Tax Bill: A Digital Privacy Nightmare?

*Aryan Sharma and Tania Bagwe

Introduction

India’s proposed amendment to the Income-Tax Act, 1961 (“the Act”) has drawn massive criticism from privacy campaigners, lawyers, and most importantly, the tax-paying general public. The Income-Tax Bill (“the Bill”), set to take effect from April 1, 2026, represents a tremendous expansion of the powers of tax authorities, particularly with regards to the access to digital information. This expansion raises fundamental questions regarding the equilibrium between the powers of tax enforcement authorities and citizens’ basic right to privacy in a rapidly digitalized world. As India continues to advance its technological revolution, with more aspects of citizens’ lives becoming digital, the implications of such a Bill extend far beyond mere tax collection. Such an expansion of powers has the potential to reshape the relationship between the state and the people in the digital space.

The Powers Under Section 132

Section 132 of the Act gives substantial powers to tax authorities to search and seize physical assets and papers when they have reason to believe that a person is concealing income or escaping taxes. Such powers have long been limited to physical premises and tangible documents. Tax officials can force open doors and lockers in the absence of keys, if they have reasonable belief that there is tax evasion. The ambit of these powers, though large, has been limited to the physical world.

The proposed amendments, however, extend these powers considerably, to further encompass what the Bill terms “virtual digital space” - a very broad term that fundamentally alters the reach of tax authorities. This digital realm is defined in remarkably broad terms as “an environment, area, or realm that is constructed and experienced through computer technology rather than the physical, tangible world.” It includes any digital space that allows users to interact, communicate, or conduct activities using computer systems, networks, communication devices, cyberspace, the internet, the World Wide Web, and emerging technologies.

In practical terms, the proposed expansion would grant tax authorities unprecedented access to email accounts, social media profiles, bank accounts, cloud storage services, digital payment platforms, and virtually any other digital service or platform. The scope is so broad that it could potentially include everything from personal WhatsApp conversations to professional communications, from health records stored on phones to financial transactions conducted online. This represents a quantum leap from the power to seize physical documents to the ability to access an individual’s entire digital life.

What makes this expansion concerning is the absence of clear boundaries between what is relevant and necessary information and what is not. Unlike paper records, where individuals might maintain benami khatas, i.e., improper accounts, separate from their personal records, digital devices like our smartphones contain crucial information about every aspect of contemporary life. This information could be ranging not only from financial data but also personal chats, family photos, health records, location track, and much more personal information. The Bill does not set concrete boundaries between what is pertinent to tax enquiries and what is private, non-relevant information. This is a serious issue about potential overreach.

Privacy Concerns in Light of Puttaswamy

The timing of these amendments is truly significant considering India’s evolving jurisprudence on privacy. A landmark moment came with the Aadhaar judgment in Justice K.S. Puttaswamy (Retd.) v. Union of India, where the Hon’ble Supreme Court reaffirmed that the right to privacy is a constitutionally guaranteed fundamental right that flows from Article 21’s protection of life and personal liberty.

The judgment stated that any state action violating privacy must meet a four-pronged test: “(1) legality—the presence of a law; (2) legitimacy—the requirement that the violation serves a legitimate state purpose; (3) proportionality—that the means employed to achieve the purpose do not exceed what is necessary; and balancing—the measure must be the least restrictive alternative, and the extent of interference must not outweigh the benefit sought.” The ruling also referred to data protection and informational privacy as significant aspects of this basic right.

In this constitutional context, the Bill appears to move in the wrong direction. While it meets the legality test by virtue of it being a law, it fails the tests of necessity and proportionality. The Bill does not establish clear limits on what may be accessed. Moreover, it fails to mandate the communication of specific reasons before seizing digital devices. It also lacks safeguards for non-relevant personal information and could enable the seizure of entire households’ devices, including those belonging to individuals not under scrutiny.

The Bill’s approach appears to apply the same principles to digital information as they would to hard documents, not taking into consideration the essentially different nature of digital information. If an income tax official enters a person’s residence and confiscates all devices, such as children’s tablets and personal phones, demanding all access codes, they are provided with a scope of information proportionally far beyond what would have tax significance. This stands in stark contrast to the emphasis on proportionality and the requirement of focused, circumscribed intrusions into privacy laid out in the Puttaswamy judgment.

Furthermore, the Bill also does not seem to include procedural safeguards that ought to be necessary against such wide-ranging powers. There is no mechanism for judicial pre-approval, no definite restriction on the utilization of seized data, and no independent body to ensure the powers are not abused. These are grave factors to be considered while keeping in mind the intrusive nature of data in the digital world and how it is prone to misuse.

Weaponization Concerns and Precedent

One of the most concerning aspects of the new powers is the potential for their selective use and enforcement as a weapon. The Bill comes amid reports of increased raids on media organizations and the wholesale seizure of journalists’ devices. This has raised concerns, as the new powers may be deployed to target journalists, opposition political parties, and civil society organizations that are seen as being critical of the government.

The danger of weaponization is exacerbated by judicial precedents regarding the use of evidence obtained in tax investigations. Courts have often made evidence procured through procedurally flawed methods admissible. The legal situation is such that the enlarged powers can not only be exercised for legitimate enforcement of taxes but also as an instrument of surveillance and intimidation.

The “Nothing to Hide” Fallacy

The advocates of expanded powers typically argue that law-abiding citizens who have “nothing to hide” do not have anything to worry about with greater government surveillance of their information. The argument misunderstands the nature of privacy rights and is deployed as a rhetorical device to dismiss legitimate concerns over government intrusiveness.

Privacy is not about concealing wrongdoings; it is about maintaining personal autonomy and dignity. While most people lead perfectly legal lives, they understandably do not want tax authorities reading their private WhatsApp messages, viewing their medical history, or accessing their personal photos. Privacy is about having control over one’s information and the right to decide what to reveal and to whom. It enables individuals to have confidential discussions, protect professional secrets, and keep personal matters private.

In addition, the “nothing to hide” thesis presupposes flawless government and incorruptible administrators. This presupposition does not align with reality. When officials have at their disposal vast amounts of personal information, the risk of abuse - by corruption, personal grudge, or political coercion - grows large.

The argument also incorrectly disregards the chance of misinterpretation of information. Data taken out of context can appear suspicious or incriminating even if it is innocent. When tax authorities get access to entire online lives, the chance of such misinterpretation becomes exponentially larger. An innocent transaction or discussion could be interpreted as proof of criminal activity, and individuals would have to prove themselves innocent of charges based on misinterpreted information.

Finally, the “nothing to hide” position ignores the chilling effect that surveillance can have on free speech and democratic engagement. Legal precedents, like Shreya Singhal v. Union of India, have acknowledged that ambiguous legal provisions can cause self-censorship, which would violate the rights protected by Article 19(1)(a). Similarly, the Supreme Court recognised that surveillance violates the right to privacy and can discourage people from exercising their freedom of expression in Justice K.S. Puttaswamy (Retd.) v. Union of India. Moreover, recent judicial decisions, such as the reversal of a content takedown order against the Wikimedia Foundation, have recognized that disproportionate censorship can hinder freedom of expression. These judgments highlight how legitimate political activism can be stifled and the democratic fabric weakened when people are aware that they may be being watched.

Judicial Recourse

What legal remedies can citizens turn to against these enhanced powers? The judiciary, especially the superior courts, will most likely have a significant role to play in declaring the constitutional legitimacy of these provisions and possibly laying down guidelines for their enforcement.

If courts remain committed to the narrative that “only a small section of Indians honestly pay taxes,” these enlarged powers could be sustained as a requirement for successful tax enforcement. But if abuses create enough public pressure and media attention, courts may impose limits in accordance with Puttaswamy’s privacy doctrine. Such unpredictability in the outcome of judicial actions makes citizens skeptical about the reliance on the courts as a reliable check on executive power.

Ideally, the judiciary could create guidelines necessitating judicial authorization for electronic searches, like warrant requirements in most jurisdictions. These guidelines could necessitate narrowly defined search parameters, restrictions on what information may be accessed, and safeguarding non-relevant private information. Courts could also ensure tax authorities prove that less intrusive methods of accessing information - like bank records or GST information - are not enough before reaching for the seizure of electronic devices.

However, the judiciary’s ability to create such guidelines depends on relevant cases being brought before it and judges’ willingness thereafter to impose real constraints on executive authority. Given the current state of the law, there is no assurance that such constraints will be formulated or applied uniformly.

To complement judicial safeguards, legislative reforms are also essential to ensure privacy and due process in electronic searches. Recent legislative developments in India, such as the Bharatiya Nagarik Suraksha Sanhita and the Bharatiya Sakshya Adhiniyam, have introduced significant changes in this regard. For instance, Sections 105 and 185 of the BNSS mandate audio-video recording of all search and seizure operations, which enhances transparency in investigations. Additionally, the BSA recognizes electronic records as primary evidence, provided they are obtained from proper custody, which further strengthens the legal framework for handling digital evidence.

Despite these advancements, further legislative measures could increase protections against potential overreach. For example, enacting laws that require law enforcement agencies to obtain judicial authorization before accessing digital devices, except in exigent circumstances, would align with best practices. Moreover, establishing clear protocols for handling and preserving electronic evidence, including chain-of-custody requirements would ensure the integrity of digital data throughout the investigative process.

Furthermore, the Digital Personal Data Protection Act, 2023 grants broad exemptions to government agencies, which raises concerns about potential overreach. To address this, the Act should be amended to include stringent safeguards, such as mandatory judicial oversight for data access requests and clear limitations on government exemptions. An independent regulatory body should be put in place to oversee data protection compliance.

Conclusion

India’s proposed tax reforms are a big move towards more state access to people’s digital existence. It is undisputed that effective taxation is a desirable goal; but it must be ensured that these proposed powers are weighed against core privacy rights of citizens as established in the Puttaswamy judgment. The Bill’s current drafting appears to place excessive weight on tax collection even if it comes at the expense of privacy to the extent that may be constitutionally objectionable.

Considering the Bill is not final and as it moves forward, it should include stronger protection, clearer bounds, and more stringent oversight measures. Certain suggested reforms could also include requiring judicial sanction to carry out electronic searches, establishing clearly demarcated limits on the kind of information that can be sought, instituting independent checks and balances, and putting in place strong sanctions against any misuse of these powers.

Without such safeguards, we are more likely to end up with a taxation legal system that not only violates privacy but may also target selected individuals and institutions, thus resulting in the unfortunate erosion of India’s democratic foundations. The right to privacy is not a mere legal formality but a fundamental aspect of human dignity and autonomy. Any law affecting this right should be framed with maximum caution, to ensure that legitimate state interests are advanced through means which are considerate of constitutional rights and democratic ideals.

Aryan Sharma and Tania Bagwe are undergraduate law students at Maharashtra National Law University, Mumbai.

The views expressed above are the author's alone and do not represent the beliefs of Pith & Substance: The CCAL Blog