Introduction
Recent contemplations surrounding the introduction of a Direct Tax Code (Code) in India have been making the headlines since the past few months. This air of suspicion was confirmed by Nirmala Sitharaman, the Finance Minister(FM), in her budget speech delivered on 1st February, 2025, wherein she explicitly stated that the new bill will be introduced and tabled in Parliament in the subsequent week. This marks a significant development in the direct tax jurisprudence in India which currently comprises the Income Tax Act, 1961 (Act), being one of the most difficult legislations to navigate due to its density and length. This Code is expected to foster a more detailed understanding by facilitating comprehension of tax laws even by laymen, through simplification of provisions and systematic structuring of the Act. In this backdrop, this article seeks to explore the contents of the Code, which will be finalised in the coming weeks. Additionally, it aims to conduct a comprehensive analysis, exploring the need and importance of this Code and evaluating the practical implications for stakeholders.
Exploration of the Contents of the Code
The current Act presents an intricate juxtaposition of fourteen schedules and two hundred and ninety-eight sections, sub-divided into a plethora of sub-sections. This schematic framework runs into a total of eight hundred and eighty pages, a count that is extraordinarily lengthy for a tax statute. Although, a global comparative analysis reveals that tax laws around the world are equally lengthy, such as the United Kingdom Income Tax Act of 2007, which runs into a total of almost eight hundred pages and the United States Internal Revenue Code, which crosses three-thousand, eight hundred pages, this characteristic complicates the navigation not only for common people but even for experienced lawyers. To resolve this problem, the FM has assured to reduce the size of the new code by around sixty percent (The draft however merely reduces the length by around thirty percent, being around six hundred and twenty-two pages long, thus raising questions on the materialisation of the proposed objectives at the preliminary stage itself). Although the content is expected to remain largely the same, there are a few key changes that are expected to be implemented, especially those that were only recently announced during the presentation of the budget. For example, the FM has altered the income tax slabs, effectively making individual income up to twelve lakhs an annum tax-free (through a corresponding rebate), which will increase disposable savings.
Additionally, other announcements such as permitting 100% Foreign Direct Investment (FDI) in Indian insurers and levying a 60% tax and a penalty of 50% if Virtual Digital Assets (VDAs) such as cryptocurrencies are classified as undisclosed income, have been made. These amendments are most likely to be introduced in the final code. Furthermore, there are also a few crucial areas in which the existing Act is expected to be revamped. The draft has done away with the categorisation of assessees into Resident and Ordinarily Resident and Resident but Not Ordinarily Resident. It instead restricts itself to only two categories: Resident and Non-Resident, based on the nexus theory, which requires a legitimate connection with India to be classified as a resident.Additionally, the distinction between the financial year andthe assessment year has faded away, with the focus being solely directed towards the financial year (defined as “tax year” under Section 3 of the Bill). Due to increased digitalisation, the compliance procedures have been simplified through the introduction of enhanced digital compliance processes, thus replacing the traditional paper-based mechanism. The scope of the audit conducted has also beenexpanded with the definition of an “auditor” extended to not only cover chartered accountants but also company secretaries and cost management accountants within its purview. Lastly, updated tax rates such as 5% on income from LIC policies, standardised 15% on dividend income, 35% direct tax on high-income earners, instead of the existing variable surcharge imposed in addition to the 30% rate, and an updated capital gains tax without differentiation in asset classes has been incorporated, thus eliminating the confusion of electing to choose between the old and new tax regime. It is important to note that these are provisions that have been included in the draft bill pursuant on budgetary discussions and the actual changes will have to be analysed post the intimation of thefinalised Bill as an Act, which is yet uncertain.
Analysis and Practical Implications
Article 13 of the Constitution of India posits an inclusive definition of the meaning of “law” and a Code squarely falls within it. Article 246(1), expounding the doctrine of fiscal federalism, gives explicit competence to the Parliament to make laws with respect to entries falling under the Union List (List-I of the seventh schedule). This has to be read with Entry 82 of List-I which expressly gives Parliament the power to make laws governing the income of individuals. The Hari Krishna Bhargav v. Union of India and the K.R. Palanisamy v. Union of India case uphold this reading together of constitutional provisions. Therefore, the revamping of the Act with the Code falls well within the Union’s jurisdiction.
Having established this, it is essential to scrutinise the merits of this move, particularly in light of the increased costs, time, and efforts associated with drafting. Additionally, the sudden overhaul of an enactment six decades old, is bound to result in confusion among professionals and tax-payers, which necessitates a strong justification for this unprecedented move. There have been situations in the past when a similar revamping has been conducted with the outcome not being very favourable. The epitome of this is the recently enacted new criminal laws in India, which went through the entire legislative process of drafting and approval but did not produce the results, as expected.
However, this Code is expected to bring about benefits that greatly outweigh its minor drawbacks. A primary advantage is the resultant standardisation, simplification and accessibility, not only for lawyers and chartered accountants, but general public as a whole. This is evident from the scheme of the draft bill itself which improves navigation by systematically structuring provisions such as the components under the various heads of income into different sections rather than clubbing them as sub-sections as was done previously. The merits of this argument have been clearly upheld by the Supreme Court (SC) in the South Indian Bank v. Commissioner of Income Tax judgment wherein the SC held that the tax regime has to be kept simple to benefit the taxpayers and improve compliance.
This revamp will also lead to easy compliance processes due to the reduction in the length and complexity of one of the most intricate legislations in the country. This is especially in light of the introduction of digital compliance mechanisms which will reduce bureaucratic inefficiencies, decrease paperwork, and bolster accountability and transparency. Such increased digitalisation aligns the Indian tax landscape with global enactments such as the OECD Model Tax Convention and UK’s Tax Simplification Plan. The robust, secured database will preserve confidential information of taxpayers, thus aligning with the fundamental right to privacy, as recognised in the landmark K.S. Puttaswamy ruling. Additionally, tax evasion will be minimised by ensuring greater transparency and traceability of transactions, furthering the objectives of the General Anti-Avoidance Rules (GAAR). This is especially if there are clear guidelines emphasising the substance over form principle, which will ensure that taxpayers cannot exploit legal loopholes by structuring transactions to appear as non-taxable, while reaching the same economic outcome. Additionally, the streamlining of provisions will further improve efficiency in tax administration, reducing the burden on tax authorities, facilitating effective dispute resolution, enabling faster assessments, and fostering effortless compliance monitoring.
Furthermore, the introduction of this modernised code is expected to eliminate ambiguities and redundancies that have gradually accumulated due to decades of amendments. This is because, the provisions will be updated, doing away with outdated sections and bringing in clarity and legal certainty, which would consequently reduce litigation. This change will also align India with global standards, wherein countries such as the United States and Australia have undertaken codification efforts to consolidate their tax laws and bring in ease, convenience and certainty. Additionally, the updation of tax slabs and streamlining of audit procedures serves as a move towards the Ease of Doing Business Initiative introduced in 2014 in India, which is bound to foster economic growth and attract higher foreign investment. This is because of changes such as the increase in the FDI limit in the insurance sector to 100%, flexibility in filing income tax returns by increasing the time limit from two years to four years, relief to middle-class taxpayers and an emphasis on exports (terming it is the “fourth engine of growth”) through setting up a digital public infrastructure called “BharatTradeNet” (BTN) for international trade, and providing support to develop domestic manufacturing capacities.
Just like every coin has two sides, this Code is not without its disadvantages. A complete overhaul of a legislation six decades old necessitates intense discussion among professionals, taxpayers and tax authorities in order to navigate the changes skillfully. It will consume excessive time to get accustomed to the new provisions and significant changes will require substantial retraining and adaption. Additionally, legal challenges pertaining to retrospective applicability of provisions and interpretative differences are an inevitable corollary and might result in increased litigation in the initial years of implementation. Such a legislative change also creates significant uncertainty for individuals and businesses, particularly multinational corporations operating in India. This is because substantial modifications in tax planning strategies and financial reporting requirements may be required. The intention of simplification might also result in oversimplification, possibly omitting certain crucial provisions and overlooking nuances required for addressing complex business structures and transactions. Digitalisationalso increases the risk of unauthorised intrusions, phishing attacks, and other risks associated with digital systems, which might vitiate the very intention of the Legislature and lead to a negative overhaul of the income tax system in India.
In spite of these drawbacks, the silver lining is that the concerns highlighted above are expected to be temporary in nature and from a long term perspective, the Code is a welcome move. This will materialise especially if sufficient transition mechanisms, stakeholder consultations, capacity-building measures, and a strong implementation strategy are in place to prevent disruptions and avoid unintended consequences. The introduction of the Code should be accompanied with clear guidelines to allow taxpayers and businesses to adapt without undue financial or administrative burdens. Additionally, the method of advance rulings or court clarifications can be utilised to correctly interpret certain provisions and consequently reduce disputes. Furthermore, to resolve ambiguity, the principle of literal interpretation can be applied, which emphasises the natural meaning of the provision and is the general norm in interpreting tax statutes, as held in the Commissioner of Income Tax v. Calcutta Knitwears judgment.
Conclusion
With the introduction of this Code, India has taken a step in the correct direction. This is because the objectives of becoming a five trillion-dollar economy and a global economic powerhouse by 2025 cannot be fulfilled without a streamlined direct tax framework. The Indirect Tax regime had been simplified in 2017 by the introduction of a consolidated Goods and Services Tax (GST), which helped in preventing the cascading effect of multiplicity of taxes. This Direct Tax Code serves a similar purpose and aims to achieveidentical goals of consolidation. The complexity of the existing Act has troubled interpreters for generations, necessitating a much-required simplification. However, the effectiveness and successful implementation of this Code cannot be guaranteed, especially considering the length of the draft bill which is longer than expected. Multiple attempts have been made in this direction over the last one decade, all of which have consequently failed – The Direct Taxes Code Bill of 2009 and 2010, followed by a subsequent Code in 2013 have all lapsed. The actual outcome and implementation strategy can only be adjudged once the proposed Bill is passed as an Act. The 2025 Budget positively alters the direct tax landscape of India and it is hoped that the plethora of proposed initiatives will successfully materialise in the future.
Author Bio
