It has been over 58 years since the Income-tax Act 1961 was drafted, needs an overhaul, but at the same time it should be in sync with the economic circumstances of the country. The income tax act, 1961 is just like a building (Income Tax Act,1961) which was constructed on a piece of land (Democracy) in the year 1961 and since then many structural changes along with changes in the room size, change in the place of the bathroom, store room, any other facility, sewerage line, automatic water system, boar well, and many other changes according to the need of the time, many changes in the building were done to the comfort of the owner of the property. Now the time has come that it is not possible to further renovate the building thus there is a serious need to demolish the whole building and construct the building with a vision of more than 60 years to survive in the modern and global standard to have a building with all flexibilities and acceptability to all.
The present Government has a clear track record of initiating and achieving difficult reforms. Therefore, the focus by this Government on direct tax reform is a welcome step which should go a long way to achieve the desire, indicated by the Hon’ble Prime Minister, of giving to India a modernised tax system which it deserves. New Income-tax law is a welcome move instead of continuous amendments to the existing Income-tax Act. It should be in line with best international practices and suitable for new dynamic business models. It will help to meet the rising economic needs of the country and will also help to increase the tax base. The new Income-tax law should change the overall approach, e.g., in many countries taxpayer does not even meet the taxman. Simplicity and clarity in the new law will help to reduce litigation. Increase in the tax base is a need of the hour in India where still the number of taxpayers are lesser compared to the overall population. The focus of the new law should be to reduce litigation and bring simplicity in taxation provisions. It should provide stability to local as well as global business. The government has already taken several steps in line with Direct Taxes Code, 2010 (DTC) under the Income-tax Act. However, several progressive provisions under the DTC can also be adopted, for e.g. mergers and acquisitions related amendments, enlarging the scope of presumptive taxation, etc.
Frankly speaking, the IT Act has become very complicated and needs to be simplified. In my opinion, the Direct Tax Code should be made very simple so that it is not a nightmare for the taxpayers and tax professionals should not flourish on account of dual interpretation and litigation.
Direct Tax Code 2.0: What’s in???
1. Recommended a significant increase in the highest income tax slabs,
2. Slashing corporate tax rate to an even rate of 25 per cent for both domestic and foreign companies.
3. Income tax payers earning up to Rs 55 lakh per annum may end up with a major tax relief.
4. Major changes to reassessment rules
5. Corporate tax cut for domestic and foreign companies to 25 per cent from 30 per cent for large companies and 40 per cent for overseas firms.
6. Foreign firms may have to pay branch profit tax
7. Dividend distribution tax may be done away with
8. Slew of incentives for start-ups recommended
9. Assessing units to replace assessment officers
10. Mechanism of mediation between taxpayer and CBDT
11. Proposed DTC to have far fewer sections than over 700 in the Income Tax Act
12. Faceless scrutiny of cases picked through centrally and randomly allotted mechanism.
13. Aimed at reducing tax litigation, the panel recommended the concept of mediation between taxpayer and CBDT.
14. Taxpayers may be allowed to opt for negotiated settlement before a Collegium of Commissioners once they receive the draft order, according to sources.
15. A Litigation Management Unit to manage the entire tax litigation process, right from deciding in which cases the appeals ought to be filed to devising the strategy to defend a case, according to sources.
16. For transfer pricing cases, a separate functional assessments unit may be set up for a block of 4 years, sources said.
17. New terms of reference such as faceless and anonymised scrutiny, mechanism for system-based cross verification of the financial transactions, reduction in litigation and expeditious disposal of appeals.
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.
The new Direct Tax Code that may be implemented by the Modi government over the next few years could be the most important economic reform carried out in India since 1991.
While the present Income Tax Act 1961 (the Act) has stood the test of time, it has been tampered with and tweaked far too many times in reaction to taxpayers’ ingenuities without aligning the overall framework to the economic objectives of the country from time to time.
The prior attempts to re-draft the Act were largely aimed at augmenting revenue rather than augmenting economic activity and making India an attractive destination for companies and individuals to house and grow businesses. For example, tax policy on start-ups has undergone numerous changes in the last few years mainly trying to define rules for exempting the share premium received that is otherwise not taxable being a capital receipt.
It is expected that the relaxations contained in recommendations of the direct tax task force shall enable the startups to function without getting caught in the fine print rather than entangle them with another set of rules to comply with.
Today, it is as important to let Indian entrepreneurs’ set up new businesses in India as attracting foreign investment in existing businesses. Considering that technology has the potential to create disproportionate wealth and jobs, the opportunity cost to the country of letting any tech entrepreneurs setup or move business elsewhere owing to complex tax laws is simply unimaginable.
Writers Comment- 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.
Author- CA.Rohit Ruwatia Agarwal is Past Vice-Chairman (CIRC) of The Institute of Chartered Accountants of India (Setup by an act of Parliament).