Clause 261: The Privacy Paradox in the Income Tax Bill, 2025

The author is Dipanshu Raj, a Third Year Student from Maharashtra National Law University, Aurangabad.

INTRODUCTION

Imagine a situation where a tax authority accesses your social media account, cloud server, email ID, online investment portfolio, etc., on the mere suspicion that you are concealing income or evading taxes without your explicit consent. This isn’t a dystopian novel. This is going to be a real possibility from 1st April 2026, with the introduction of “Virtual digital space” in Clause 261(i) (“the Clause”) of the Income Tax Bill, 2025 (“the Bill”), in the Lok Sabha in February 2025. 

In India, direct tax is imposed on individuals and organizations based on their income and is governed primarily by the Income Tax Act,1961(“the Act”). The Act has managed and guided the country's tax system from 1961 to today. However, with the rapid digitization of economies and an increase in digital payments, the Act shows its limitations in addressing and managing the modern ways of tax evasion. Significantly, the digital transactions have experienced a rapid expansion from 220 crore in FY 2013-14 to 18,592 crore in FY 2023-24. In  response to the  unprecedented pace, the Bill was introduced to keep pace with modern advancements and address the gap in existing tax laws and modern digital means. Yet it stated to align the taxation laws with technological advancement, but it raises a crucial question to what extent will tax authorities extend their power in the name of compliance? The blog will explore  how expanding power can raise constitutional concerns.

AMENDMENTS IN SEARCH AND SEIZURE 

The Bill introduces a new term, “Virtual Digital Space,” in search and seizure law. The term is defined as “any digital realm that allows users to interact, communicate, and perform activities” through a computer. It includes daily use platforms like WhatsApp, Facebook, Instagram, Emails, Twitter, or even a user investment portfolio and banking account as well. In short, the Bill’s definition covers almost every personal data is stored on an online platform or in cloud-based data storage. For example, if a taxpayer uses an online platform to keep records of the transactions or facilitate transactions through the platform, the tax officer can break into online accounts on the suspicion that they are trying to evade taxes.

The Clause of the Bill confers a significant power on tax authorities in search operations. The clause empowers the authorities to “break open” digital platforms. The authorities can compel the taxpayer to provide access to digital platforms or can gain access without their consent by lawfully penetrating the password of a digital platform on merely having reason to believe that it’s necessary for the investigation. The contention of the government is to address the “grey area” around digital evidence. The government has referred to the role of WhatsApp and Google Maps in their recent successful tax probes of INR 200 crore. The bill continues to uphold the basic foundation of the existing legal framework of search and seizure as given in Section 132 of the Act. The bill has taken a pivotal step by recognizing the digital platform as a “place subject to search”.  Under the original Section 132, authorized officers were empowered to search and seize the physical evidence, such as tangible assets and unreported assets, including the book of accounts, if there was a credible notion of tax evasion. The officers were also allowed to break open the physical lockers in the belief of undisclosed assets during the search operation. The bill extended the provision of Section 132 into a digital domain with the realities of a technology-driven world. 

CONSTITUTIONAL VALIDITY OF CLAUSE 261(1)

The Bill grants authorised officers the power to override digital access codes and enter virtual spaces based merely on a “reason to believe” that undisclosed income exists. In the landmark K.S. Puttaswamy Judgment (“the Judgement”), the Supreme Court held that any intrusion into privacy by the state must satisfy the tests of legality, necessity, and proportionality. 

Legality: The clause is enacted by legislation and satisfies the “by law” requirement. The definition of “virtual digital space” is exceptionally broad, encompassing nearly all online activity and storage. According to the Judgement, privacy-infringing laws must be clearly defined and narrowly tailored. Thus, while the aim—preventing tax evasion—is legitimate, too much room for interpretation or arbitrary action may ultimately fail the test. 

Necessity: The fight against undisclosed income is an important public objective. However, necessity requires that the state adopt the least intrusive means possible. The Clause permits sweeping digital access based merely on suspicion, rather than evidence or oversight. More targeted measures, such as specific warrants or limited digital access, could potentially meet the objective without encroaching so deeply into personal data.

Proportionality: Even if legal and necessary, the Clause must be proportionate to the aim. The Clause permits access to the entire digital realm of a taxpayer without any judicial oversight. Unlike search warrants issued by courts, there are no procedural checks, no requirement of prior approval from a magistrate, no post-facto and no scope for redress. The absence of safeguards transforms what might be a targeted investigation into a potential fishing expedition.

The Clause provides a broad scope and lacks clear procedural safeguards and is therefore likely to fail the test of legality, necessity, and proportionality. Unless the Clause is narrowed down with a procedure such as a prior warrant or judicial approval, the provision risks violating the right to privacy. 

COMPARATIVE PRACTICES IN FOREIGN COUNTRIES

In the United States, tax authorities have auditing power but are restricted by strict constitutional and statutory privacy protections. The Fourth Amendment requires that all access to private communications, including media or email, can be done by subpoena or warrant. While taxing authorities have a right to issue “John Doe” summonses in a small number of special circumstances, for instance, cryptocurrency transactions, they may not access private digital accounts without authorization.

In the United Kingdom, HM Revenue & Customs (HMRC) employs sophisticated analytics by virtue of its “Connect” platform for examining taxable income, financial data, property data, as well as social media in order to identify inconsistencies. Private communications, including chats and emails, however, need statutory approval by law as stated in the Investigatory Powers Act. HMRC agents are not authorized to hack or tap encrypted information without due warrant from a judicial body.

Within the European Union, tax inquiries are regulated by Directive (EU) 2016/680, which authorizes the processing of data by enforcement authorities only when it is necessary and proportionate. The General Data Protection Regulation and Article 8 of the European Convention on Human Rights restrict indiscriminate surveillance on taxpayers. Accesssing  private digital communications or digital platforms requires the consent of the user.

While the Australian Taxation Office (ATO) enjoys extensive legislative power for information collection in the Taxation Administration Act, computer searches remain subject to criminal law procedures. Section 228A of Australia's Proceeds of Crime Act, 2002 empowers an executing officer to seize computer material and utilize any computer or network to copy material on a relevant subject. However, this authority is only received through a warrant from a lawful authority, and it has stringent conditions, i.e., the evidence must be material.

From the global practices discussed above, it shows that stringent privacy safeguards as provided in the US and EU create public trust, while in Australia, boarder power is given to authorities but with procedural checks. For India, a balanced approach combining both constitutional safeguards with procedural checks can ensure effective enforcement of the law. 

BALANCING TAX ENFORCEMENT WITH JUDICIAL OVERSIGHT

While the Bill seeks to combat tax evasion in the digital age, its extraordinary power gives rise to concerns about taxpayers’ privacy. The Bill allows the officers to access any “virtual digital space,” including personal chats, emails, and social media, without requiring prior judicial approval or a consent form from the user.  It’s troubling because officers can get access to taxpayers' virtual lives based on their “reason to believe.”

The Bill must include judicial oversight to remain constitutionally valid. A warrant from a judicial body must be issued before accessing private digital content. Officers must justify the judicial body of such access based on material evidence, not mere suspicion, and the warrant must specify which platform is to be investigated.

The definition of “virtual digital space” must not include personal chat within its ambit unless there’s a clear link to misconduct. Regulations should implement rules for retention, use, and deletion procedures for accessed data, ensuring it is used solely for the stated investigative purpose. If proper judicial oversight is not implemented, the Clause can become a surveillance tool for a ruling party to settle scores with opposition members, and it could lead to breaking the trust of the taxpayer. 

CONCLUSION

Global jurisprudence shows a perfect balance between tax search and seizure while maintaining the taxpayer's privacy. While in the countries discussed above access to taxpayer personal life requires judicial permission, the Clause doesn’t have such safeguards. Permitting access to a taxpayer's virtual platform on mere  suspicion of the authorities without a warrant is a violation of Fundamental Rights and breaks the trust in government. For the Clause to remain constitutionally valid, it must adopt judicial oversight, clearly define the Virtual Digital Space, and be established with well-defined rules and procedures. With the implementation of transparency and accountability, India can improve its laws on search and seizure without compromising the taxpayers’ privacy and also upholding the principles of the Constitution.