The DTC, which aims to replace the existing Income Tax Act, covers all types of taxes, including corporate and personal income taxes. “While the new regime simplifies taxation by offering lower rates without exemptions, it doesn't fully address the systemic complexities and inefficiencies present in the current tax framework,” the expert says.
Taxpayers are eagerly awaiting the Union Budget of 2024 which is scheduled to be presented in July. In the Union Budget 2020, the Modi government introduced a new tax regime with lower slabs but without traditional deductions. However, when the new regime fell short of anticipated adoption, the government made some subsequent adjustments such as introducing a standard deduction and rebates of up to Rs 700,000 to incentivise taxpayers.
Will the government turn its eye toward clearing the long-delayed reforms such as the implementation of the Direct Tax Code (DTC)? A report by the Financial Express in April stated that discussions regarding DTC were underway in the finance ministry.
The DTC, which aims to replace the existing Income Tax Act, covers all types of taxes, including corporate and personal income taxes.
It was proposed in 2009 but after several revisions, it ultimately lapsed in 2014. Thereafter, in 2017, a task force was constituted by the Modi Government for drafting a new direct tax legislation which submitted its report on direct tax reforms in 2019. However, the Government had not taken any step in that direction. Currently, media reports are suggesting that Modi 3.0 may be revisiting the proposal to bring in the DTC.
Says Mihir Gandhi, Partner, Corporate Tax, Tax and Regulatory Services, BDO India, “Today, there is a need to simplify the Income-tax Act, 1961 (‘IT Act’) particularly the capital gains tax regime and tax deducted at source (TDS) provisions. The complexity around the multiple tax rates based on the holding period and the complexity in TDS rates for different nature of payments ranging from 0.10 per cent to 40 per cent needs to be rationalised.”
“Apart from this, wide-spread deductions and exemptions, special provisions for taxpayers, cascading effects of taxes, and the multitude of judgments at different levels are making the IT Act very complex for taxpayers,” he adds.
The Task Force formed by the Modi Government submitted its report in 2019 proposing significant changes to the tax structure such as rationalization of tax rates, elimination of exemptions, simplified procedures, ease in dispute resolution, and removal of redundant sections. Despite the submission of the task force report, the DTC has not yet been enacted.
Says Preeti Sharma, Partner, Corporate Tax, Tax and Regulatory Services, BDO India, “The Government has taken steps towards implementing some of the recommendations of the Task Force through amendments to the existing Income Tax Act, 1961 with Budget 2020. The Government introduced a new tax regime in 2020, which simplified the tax system by providing individual taxpayers with the option to pay taxes at lower rates, provided they forego certain exemptions and deductions. The new tax regime was a step towards implementing the various recommendations given by the task force relating to individual taxes.”
While the new regime simplifies taxation by offering lower rates without exemptions, “it doesn't fully address the systemic complexities and inefficiencies present in the current tax framework,” Sharma states.
A few of the important recommendations of the Task Force relevant for Individual tax-payers are still to be implemented such as:
1. A 30 per cent tax rate to be triggered at the income level of Rs 20 lakhs and to be specified in DTC itself. Any changes in tax rates should be done after public discussion
2. Do away with the concept of surcharge applicable to high-income group
3. Simplify capital gain taxable framework
The DTC aims to overhaul the tax system comprehensively by providing a more transparent, equitable, and sustainable tax structure. Its implementation would not only streamline tax laws but also align them with international best practices, promoting long-term economic growth and stability. “The new tax regime may have addressed some of the aspects recommended in DTC but cannot replace it in its entirety,” Sharma notes.
The new income tax regime simplifies compliance by reducing the need for documentation related to exemptions and deductions, making it easier for taxpayers to file returns.
“However, the DTC proposes a more extensive simplification, aiming to eliminate ambiguities,” Sharma highlights which includes clearer definitions and streamlined processes that could reduce litigation and enhance taxpayer confidence. “In essence, while the new regime offers immediate relief, the DTC's comprehensive approach promises a more user-friendly and efficient tax environment in the long run,” She says.
Mihir Gandhi, Partner, Corporate Tax, Tax and Regulatory Services, BDO India says that the government would have to first develop a draft DTC legislation for inviting comments from various stakeholders. Thereafter, it will have to incorporate the valid suggestions in the draft legislation before it is placed before the parliament.
One of the toughest challenges in DTC implementation would be a smooth transition period that can help taxpayers adjust to the new system.
The chances of DTC seeing any foreseeable movement in Budget 2024-25 are difficult. “Modi 3.0 being a coalition government could face challenges in getting the new legislation passed in the parliament,” Gandhi states
Transition management from the existing Income-tax Act to the DTC would require meticulous planning to avoid disruptions.
“A simplified direct tax law in the form of DTC could be one of the top agenda of Modi 3.0,” Gandhi comments.
“If implemented, the DTC would certainly help taxpayers reduce complexity and make the law easier to comprehend. A simplified tax regime would help in reducing litigation, increase the tax collection, and boost investments from both domestic and foreign investors,” he says.