Aditi and Vishal are 2nd year students at Faculty of Law, Delhi University
Direct Tax Code (DTC), was first released in 2009, it sought to substitute the existing Income Tax Act, 1961 and Wealth Tax Act, 1957, through a single effective legislation, aiming towards consolidating the direct tax legislations into one manuscript and enable voluntary tax compliance on part of taxpayers.
The existing direct tax law, which deals with personal income tax, corporate tax and other levies such as the capital gains tax, has undergone numerous changes over the years. In September 2017, Prime Minister Narendra Modi told tax officials that old requires certain stringent changes. The idea is to rewrite it in line with the economic needs of the country and to keep pace with evolving global best practices. One key consideration behind such noble move is to ensure that the economy becomes more tax- compliant to generate enough revenue.
With a vision to bring tax rates to an equilibrium without squandering the recent gains in revenue growth and tax base, the proposed tax rate cuts will be incremental over a period of time as compliance and revenue collections grow. In this way, it shall try to bring more assesses into the tax net, make the system more equitable and beneficial for different classes of taxpayers, make businesses more competitive by lowering the corporate tax rate and phase out the remaining tax exemptions that lead to piling cases of litigation. It will also redefine key concepts such as income and scope of taxation. Globally, governments are racing to woo investments and boost job creation by offering lower corporate tax rates. Following the traditions of US and UK, India is also trying to improve its rankings in terms of doing business and making herself a better place for investments, hence improving trade, product and service quality.
Direct Tax Code Bill
The first draft bill of DTC was released by GOI (Government of India) for public comments along with a discussion paper on 12 August 2009 (DTC 2009) and based on the feedback from various stakeholders, a Revised Discussion Paper (RDP) was released in 2010. DTC 2010 was introduced in the Indian Parliament in August 2010 and a Standing Committee on Finance (SCF) was expressly formed for the purpose which, after having a broad- based consultation with various stakeholders, submitted its report to the Indian Parliament on 9 March 2012.
As a follow-up on this initiative and as stated by the Finance Minister (FM) in his Interim Budget Speech in February 2014, after taking into account the recommendations of the SCF, a “revised” version of DTC (DTC 2013) was released on 31 March 2014.
The DTC 2013 proposes to introduce:
• General Anti Avoidance Rules (GAAR),
• Taxation of Controlled Foreign Companies (CFC),
• Place of Effective Management (POEM) rule as a test to determine residency and tax indirect transfer of Indian assets.
• Also contains expanded source rules for taxation of royalty, fees for technical services (FTS) and interest.
Further certain novel provisions are also included such as additional tax levy on certain persons having high net worth, example: dividend tax levy on dividend income earned by resident shareholders in excess of INR 10 million. It also proposes a tax rate of 35% for individuals/ Hindu Undivided Family’ where the total income exceeds INR 100 million. The new direct tax code will seek to further reduce tax evasion and improve compliance so that the ratio of direct tax to GDP goes up from the present level- 5.9% in fiscal 2018 and a projected 6.1% in the current fiscal year- to at least 9% over the next three to four years. There could be room for further improvement on this count eventually as the tax-to- GDP ratio of comparable economies (including state taxes) is about 24%, roughly half of which should be from direct taxes.
The two structural changes in recent years- demonetisation in November 2016 and the rollout of the goods and service tax (GST) in July 2017 have helped the government increase the number of direct tax payers. With increased cross-references between the tax return filings of both GST and corporate taxes, understating revenue is set to become more difficult for businesses. Taxation of digital economy, reducing frivolous litigation and making the corporate tax rate more competitive are expected to be the focus areas of the new code.
Direct Tax Code draft bill had 319 sections and 22 schedules at the inception. Whereas the existing Income Tax Act (IT Act) has 298 sections and 14 schedules. Once the DTC bill is passed in the parliament, it will embark the ending of IT Act. The New code will completely modernize and simplify the existing tax proposals for not only individual tax payers, but also corporate houses and foreign residents. The language is very simple. In order to reduce the complexity, the Direct Tax Code has been drafted in a unique manner. Litigant bulwarks are expected to decrease as the code has been drafted in a simple and lucid manner. It shall also introduce the idea of tax calculators. The tax code aims at widening the base of taxation through discontinuation of incentives, reducing threshold limit for companies under transfer pricing, etc., while reducing the taxation rates. In transfer pricing, the law is new for Indians and needs more clarifications. The new code will also recast the powers of the Central Board of Direct Taxes, and induce more transparency in decision making processes. The new code will induce more transparency in decision making and tune it with tax boards of other countries like the US, Canada and Britain.