Comprehensive Review of Income-Tax Act Proposed
“One of the most significant announcements made by the Final Budget 2024 is the proposal for a comprehensive review of the Income-tax Act, 1961 with an expected completion timeline of 6 months. The purpose is to make the Act concise, lucid, easy to read and understand which will reduce disputes and litigation, thereby providing tax certainty to the taxpayers. The 1st phase of this process has already been done in this Budget by simplifying the tax regime for charities, TDS rate structure, provisions for reassessment and search provisions and capital gains taxation. It may be noted that the changes are proposed to be made in the existing Income-tax Act, 1961 and not by bringing a completely new law such as the Direct Tax Code. This is a welcome approach as a new law would have resulted in new interpretational challenges and a fresh wave of litigation which would have taken years to resolve. The existing law is now well settled on most aspects due to judicial verdicts, administrative circulars and practices followed. It is notable that the last effort to overhaul the Income-tax Act was done in 2010, wherein the Direct Tax Code was proposed and had to be shelved because of the complexity and the apprehensions outlined above.
One of the far-reaching changes in the reduction in time limit for re-opening of the assessments. It is proposed that an assessment cannot be reopened beyond 3 years from the end of the assessment year except in cases where the escaped income is Rs.50 lakhs or more (in such cases the maximum period for re-opening would be 5 years from the end of the assessment year). Even in search cases, a time limit of 6 years before the year of search, as against the existing time limit of 10 years, is proposed. This will reduce tax-uncertainty and disputes.
As regards capital gains, while there are measures which would result in simplification, there is an increase in tax rate for short term gains on certain financial assets which shall henceforth attract a tax rate of 20 per cent (earlier 15%), while that on all other financial assets and all non-financial assets shall continue to attract the applicable tax rate. Long term gains on all financial and non-financial assets, on the other hand, will attract a tax rate of 12.5 per cent. Listed financial assets held for more than a year will be classified as long term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term. Unlisted bonds and debentures, debt mutual funds and market linked debentures, irrespective of holding period, however, will attract tax on capital gains at applicable rates.
For resolution of certain income tax disputes pending in appeal, Vivad Se Vishwas Scheme, 2024 is proposed. Further, the monetary limits for filing appeals related to direct taxes, excise and service tax in the Tax Tribunals, High Courts and Supreme Court have been increased to Rs. 60 lakh, Rs. 2 crore and Rs. 5 crore respectively. With a view to reduce litigation and provide certainty in international taxation, the scope of safe harbour rules is being expanded and made more attractive.
The above changes are far reaching in terms of tax administration and will greatly reduce litigation, increase compliance and infuse certainty and are welcome.
Vivad Se Vishwas Scheme 2024 to be notified
One of the major proposals in Budget 2024 towards settling the pending litigation is announcement of the Vivad Se Vishwas Scheme 2024, which is expected to be notified in due course. It is notable that the earlier version, Vivad Se Vishwas Scheme 2020 received a good response wherein it was reported that 146,701 disputes were addressed, and 132,353 cases were settled. Further, under the erstwhile scheme, the government received Rs. 53,684 crore in payments related to disputed taxes resulting in settlement of Rs. 99,756 crore of disputed tax as per the Income-tax records.
Despite the success of the earlier scheme, the number of pending litigation cases at various levels has been increasing due to more cases being appealed than resolved. Considering the success of the previous Vivaad Se Vishwas Act, 2020, and the growing backlog of appeals at the CIT(A) level, the introduction of the Direct Tax Vivad se Vishwas Scheme, 2024, is proposed. This scheme aims to provide a mechanism for settling disputed issues, thereby reducing litigation at minimal cost to the exchequer. It is proposed that this scheme will come into effect from a date to be announced by the Central Government. The end date for the scheme will also be specified in the notification.
The Scheme needs to be viewed in the context of another major announcements made by the Final Budget 2024 viz. the proposal for a comprehensive review of the Income-tax Act, 1961 with an expected completion timeline of 6 months. The purpose is to make the Act concise, lucid, easy to read and understand which will reduce disputes and litigation, thereby providing tax certainty to the taxpayers. The 1st phase of this process has already been done in this Budget by simplifying the tax regime for charities, TDS rate structure, provisions for reassessment and search provisions and capital gains taxation.
This is a welcome move and it would be helpful in clearing the backlog of pending cases with the CIT(A) level and is expected to reduce the pending litigations of the businesses.
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