India: Direct Tax Code – Revamping The Age-Old Income Tax Act, 1961

Last Updated: 27 August 2019
Article by SKP  

Background

It has been over 58 years since the Income-tax Act 1961 was drafted. Though the Indian economy has witnessed many ups and downs, nevertheless, it has survived the tough times. However, the Income Tax Act did not change vis-à-vis the changes in the Indian economy. The time has come that the Income Tax Act needs to be redrafted according to the economic needs of the country. It is felt that the present Income Tax Act has outlived its utility and needed a complete revamp.

The earlier government had made attempts to bring the new direct tax code replacing the age-old Income Tax Act but it could not see the light of the day. In view of this, the ruling government appointed a task force to redraft the age-old income tax law and remove any kind of ambiguity from it. The task force was required to take into consideration the norms prevalent in other countries, incorporating international best practices while keeping in mind the economic needs of the country.

After a long wait, the task force submitted their report and the new Income Tax Act to the Finance Minister, Ms. Nirmala Sitharaman on 19 August 2019. Through this alert, we have brought out the key takeaways from the task force report that now lies with the government.

Key takeaways from the Task Force Report on Direct Tax Code

  • The task force has not only provided their personalized inputs and/ or recommendations but has also drafted a new income tax law. The endeavor is to keep the law simple and unambiguous and in that process, it has made an attempt to reduce the number of sections drastically.
  • The new income tax law is understood to be shorter, crispier and easy to understand. It attempts to minimize the use of contents of the current regulation. We believe that this will make it simple for the common man's understanding.
  • It is learned that the new income tax law would bring about a big relief to individual taxpayers in the form of revising tax brackets especially for the lower and middle-class income ranging from INR 45 to 55 lakhs per year.
  • It is believed that the corporate tax rates for domestic as well as foreign companies is recommended at 25%. A significant cut from the present 40% tax rate for foreign companies. However, taxation at the time of repatriation of profits by foreign companies is also on the cards. This would benefit the economy with more disposable funds in the country. Further, the introduction of the branch profit tax would discourage foreign companies to repatriate the funds outside of India.
  • The task force has codified e-assessments while making big bang changes in the way the income-tax department functions. The concept of 'assessing officers' is proposed to be substituted by 'assessment units'. Further, it is proposed that functional units would be set up consisting of IRS officers having industry expertise and each functional unit would have their own knowledge and solutions team to assist them in assessments. It is also proposed that the allotment of scrutiny cases would be done centrally and randomly by the system. The possibility of interaction with department authorities over video conferencing is also being looked at.
  • The task force has recommended a separate litigation management unit which would manage the entire litigation process starting from filing appeals to defending the same in the court of law. In effect, this team would be different from the assessment team. This will bring in specialization in the tax department.
  • Another significant recommendation is resolving tax disputes with the tax department through the process of mediation. Under this system, the taxpayers can opt for a negotiated settlement before a team of Commissioners. Both the parties would be assisted by mediators. This would not only help in quick resolution but would significantly reduce the tax litigations across the country.
  • They have proposed to introduce an option of 'public ruling' wherein taxpayers can approach the CBDT for clarification on any principle in law provided the same is not case/fact specific. This is a good move provided the timelines for disposal are provided and adhered to.
  • On the transfer pricing front, it is recommended that the transfer pricing assessments would not be linked with the regular assessments. It is proposed that the TP assessments would be carried out by a separate functional unit for a block of four years. This is a progressive approach and again a move to reduce unnecessary litigation. This would make the assessments under TP more qualitative and intense.
  • It is recommended that the dividend distribution tax be done away with and instead tax the same in the hands of the shareholders.
  • It is also believed that the new law would incentivize the start-up space to boost investments, ease the compliance burden for small taxpayers and to everyone's respite. It appears that the much-feared 'inheritance tax' does not find a place in the new law.

SKP's Comments

The government has received the draft of the new income-tax law along with the recommendations of the task force. However, the same has not yet been made available to the public. The above content has been drafted basis the newspapers reports and the other professional publication. Basis the information available from such sources,it is indeed a very good move towards simplifying the age-old Income tax act. The new law should help bridge the gap between the taxpayers and the tax authorities due to simplification and ease of compliance. It would be interesting to see the approach of the tax authorities in implementing and administering this new code whenever it is made into law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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