Summary: The simplification of India’s direct tax laws remains a critical but complex issue. While the introduction of GST in 2017 marked a significant reform in indirect taxation, the progress on direct tax laws, particularly the Income Tax Act, has been slower. The government is now exploring options such as introducing a new Direct Tax Code in 2025 or significantly amending the existing law to simplify its provisions. However, challenges persist. Simplification must consider India’s unique demographics, population size, social intricacies, and economic disparities. Unlike smaller nations with simpler tax systems, India’s vast and diverse needs inevitably lead to a more detailed and evolving tax structure. Additionally, rising black money, inflation, and ineffective enforcement due to manpower shortages and over-reliance on technology remain significant barriers. Issues such as faceless assessments and reduced oversight have limited the efficacy of tax collection, enabling tax evasion through undisclosed cash transactions and inadequate scrutiny of high-value entities, including politicians. While technological advancements like TDS and TCS have aided compliance, they cannot fully address systemic inefficiencies. Any new or modified tax law must tackle these realities to ensure equitable revenue generation, curb income disparities, and attract foreign investments.
Time and again, the simplification of Indian taxation laws has been one of the most debated and popular subjects in both the domestic and overseas media, as well as in the administrative circles, since the liberalization of the Indian economy in 1991. The very well-founded reason is that, in the present global economy, attracting foreign direct investment as well as rejuvenating domestic private investment requires rapid reforms of both direct and indirect taxes. These are a prime dispensation for the Union government and all governments to date, and in this direction, particularly, the present regime is working assiduously to meet international taxation standards and simplify laws to sustain growth momentum. To this end, the first initiative of the present regime was implementing the long-pending unified indirect tax system, GST, in 2017. To what extent it has benefited both the domestic economy and commerce remains in the domain of experts in indirect taxes.
Now, with regard to direct taxes, particularly the Income Tax law—which is the head of both national and international economic overtures as well as the only instrument to maintain social financial equilibrium—little to no effort has been seen from the present Union government. It has remained more concerned with GST for its effectiveness in easy revenue collection, filling the national exchequer, albeit at the cost of the dangerous risk of fanning spiraling inflation as well as the colonial-type high exploitation of common people. These individuals constitute 64% of the GST tax base, which is now a harsh reality. The mandarins of both South and North Blocks have now awakened to the two harsh realities plaguing the domestic economy due to the most ineffectual usage of direct taxes despite having more than sufficient safeguards since 2016. These are the skyrocketing of black money, which blunts both the government’s and RBI’s hard efforts to contain swelling inflation, and India’s failure to reap the benefit of the USA-China trade war, resulting in the rapid migration of foreign investment from China to other nations. The high complexities of direct tax laws have been identified as one of the prime reasons for these issues.
Now, for this simplification and rationalization, the Union government is really working hard by mulling two options: either to introduce the new Direct Tax Code, 2025, in the Budget of 2025, substituting the current Income Tax law, or to retain the existing law by making rapid modifications, dispensing with many sections, subsections, provisos, clauses, and penalties, etc., to simplify the language for easy understanding. Definitely, this is one of the central reasons identified, and it is a very positive initiative on the part of our Union government. However, two issues must be imparted for deliberation. One is: can Income Tax law be simplified to the extent of other competing nations for FDI, like Vietnam, Malaysia, Laos, Indonesia, etc.? Second is: will the new tax regime be able to reign over the burgeoning black money? In my humble opinion, both are billion-dollar questions, particularly when the entire world is facing diminishing economic growth and spiraling, unbridled inflation.
Now, with regard to the first issue about the simplification of direct taxes, the answer is that apparently, by the stroke of a pen, the volume and complexities can definitely be done away with, and it ought to be, as it is long overdue. But the billion-dollar question is: how long will the new or modified, trimmed version of the Act remain simple, both in linguistic and volumetric terms? In this regard, both the domestic and international media are citing the lucidity of corresponding direct tax laws of competing nations for their greater successes in attracting shifting FDI from China, from an Indian perspective. Actually, those citing these instances, including many important persons and institutions, are all citizens of the economic and financial world who hardly have an iota of idea about the legal world and legal jurisprudence, which is the highest form of logic and philosophy. In the words of the greatest Roman orator Cicero, “It is the highest form of reason.” The Income Tax Act is the most complex subject among all legal jurisprudence. Not only the world but also the entire universe is governed by two laws: natural laws (science) and codified laws (jurisprudence). The laws of every nation, at any echelon, are enacted, amended, and interpreted in the perspective of the distinctive features of each nation, comprising its volume of geographical size, number of population, social intricacies, and age-old customs. Income Tax law too is not beyond these factors. Rather, it holds the highest importance among all laws to administer and regulate all economic activities, overseas and domestic trade and commerce, and to maintain social-economic equilibrium, discouraging domestic income inequality and tapping unaccounted black money and investments. It is the only safety valve to contain inflation, proper job creation, good investment in trade and commerce, revenue generation, as well as to stem any possibility of social unrest due to income disparities.
Now, the instances of nations’ FDI successes cited by these individuals in comparison to India must account for the geographical size, volume of population, social customs, complexities of societies, and national requirements in financial fields. These factors gradually constrain large nations to insert many new sections, clauses, provisos, and explanations, apart from judicial dictums. As the Indian legal system is far more developed and organized than even China, particularly with our judiciary being world-class in terms of knowledge and natural justice—the core word of democracy—these trimmed Acts tend to become voluminous gradually, not by choice but by ground realities and dispensations.
The quality and reputation of our taxation enactments and judiciary can be easily proven by the bare fact of the imitation of our taxation system by developed and rich Arab nations, including the UAE, and even China and other Southeast Asian nations. This is apart from the domination of Indians in the international taxation and accounting fields, much like in IT and medical sectors.
Regarding the second issue of black money, inflation, and the growing revenue deficit problem, the sole reason is the lack of sufficient manpower in direct tax administration and the overdependence of the government on technology. This issue is even more acrimonious than the first. Firstly, the government’s persistent efforts to manage its inability to make sufficient appointments of manpower due to financial constraints by shifting to the technological sphere, particularly faceless assessment, and reducing the PCIT ranges by merging, have had the most adverse effects on direct tax collection. This has rendered the JAO toothless and free from the pressure of targeted revenue collection through massive scrutiny, search and seizure, surveys, and notices under Section 148. Only JAOs and inspectors have the prerogatives and local knowledge of big tax evaders, who are now totally out of the revenue net, thus creating mountains of black money through undisclosed cash transactions and clandestine cash investments. These still constitute 80% of domestic high-value transactions.
Secondly, the non-tapping and selective assessment of politicians, who constitute 15% of wealthy Indians, due to rampant corruption, has also deeply dented the revenue bill. Thirdly, the government’s overdependence on technology and TDS/TCS to recuperate massive shortages of manpower is like scaling the mountain of black money Everest with a 10-rupee thread.
So, in view of the said harsh ground realities, how much the new Act or the modified old law will succeed in addressing so many national woes is a matter to be seen in the near future.
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