####அறிவோம்####
DIRECT TAX CODE
Why in news?
Recently, the draft legislation of the new Direct Tax
Code (DTC) was submitted by the task force, headed
by Akhilesh Ranjan, to the Government of India.
More on the news
• The Direct Tax Code (DTC) is an attempt by the
Government of India to simplify the direct tax
laws in India.
o It will revise, consolidate and simplify the
structure of direct tax laws in India into a
single legislation.
o When implemented, it will replace the
Income-tax Act, 1961 (ITA), and other direct
tax legislations like the Wealth Tax Act,
1957.
• The task force was constituted by the government to frame draft legislation for this proposed DTC in
November 2017 and review the existing Income Tax Act.
Related Information
• What is a Direct Tax?
o These are the taxes, paid directly to the
government by the taxpayer. Under the direct tax
system, the incidence and impact of taxation fall on
the same entity, which cannot be transferred to
another person.
o It is termed as a progressive tax because the
proportion of tax liability rises as an individual or
entity's income increases.
o Examples- Income tax, corporate Tax, Dividend
Distribution Tax, Capital Gain Tax, Security
Transaction Tax.
• The system of Direct taxation is governed by the
Central Board of Direct Taxes (CBDT). It is a part of the
Department of Revenue in the Ministry of Finance.
Need
• The Income Tax Act, 1961 with over 700 sections
was drafted as per the nature of Indian economy in
1960s and the capacity to mobilize resources from
taxpayers directly.
• However, in these 58 years, there have been
following developments
o Changes in the Indian economy towards
liberalisation and privatisation.
o Changes in the Global economy towards more
integration and globalisation.
o Changes in the models of doing business such
as e-commerce.
o Changes in the technology which can be leveraged towards better tax administration
• Also, the IT Act has been amended various times which has made it complex and increased tax litigations.
Trends of Direct Tax collection
• There has been a growth of more than 80% in the
number of returns filed in the last four financial
years and direct tax-GDP ratio rose to 5.98% in FY
2017-18, the highest it has been in the last 10
years.
• Further, the number of persons filing income tax
returns also increased by about 65% during period
from 2014-2018.
• Moreover, Direct Tax-GDP ratio rose to 5.98% in
FY 2017-18, which is highest in the last 10 years.
This shows a sign of improvement of Tax-Buoyancy
in the economy.
Key Provisions of the draft DTC
• Rejig of tax brackets- to widen them and which can bring a significant relief for the middle and upper middle
class
o A common corporate rate of 25% will apply to both large local as well as foreign companies that are
present in India without a subsidiary.
• Removal of Surcharges and Cesses- which are currently imposed above a certain income slab and for
specific purposes.
• Negotiated Settlements- a new concept of settling disputes through mediation between the taxpayer and a
collegium of officers. Here, the assessee will only have to pay the tax and interest and no penalty in case of a
negotiated settlement.
• Assessment System- creation of an assessment unit to replace an assessing officer and a separate litigation
unit. It has favoured jurisdiction-free, anonymous assessment by domain experts with the involvement of
senior officials.
• Incentives for Start-Ups- by treating them differently from that of a normal company. It is proposed that the
funds raised by the start-ups will not require any kind of scrutiny.
Benefits
• Simplification of processes for taxpayers- due to features such as basic tax slabs and limited number of
efforts needed to file taxes.
o E.g. Surcharge and cess complicate the tax calculations especially for tax-deduction purposes and also
add to unnecessary disputes.
• Expansion of tax base- as large number of
people will be covered in the lowest tax slab,
which will promote voluntary tax compliance.
o Despite being a country of over 1.3 billion
people, there are only 74 million effective
taxpayers in India as per the last count.
• Address contemporary needs- such as greater
mobility of capital, capital account
convertibility, tax competition among countries.
o Further, it will be capable of dealing with
new business models in a digital economy.
Evolution of the digital economy has
allowed companies to offer their services
despite not having physical presence in a
country.
• Bring objectivity in tax architecture- as the
draft has also proposed concrete principles of
taxation, which would guide the future tax
proposals by all governments.
• Reduction in malpractices- through faceless assessment, whereby there will be no requirement of physical
presence of the assesse (tax payer) or the identity of the assessor (tax official).
o There is an emphasis on reducing litigation and making the interface of the department with taxpayers
anonymous to eliminate harassment and corruption.
• Boost to savings and investment- as the corporate tax regime will be rationalised which will create
predictability in the minds of individual and corporate players.
o The DTC also pays specific attention to startups under stressed positions due to taxation.
o The capital gains tax regime, minimum alternate tax and dividend distribution tax have also been
reviewed by the task force.
Significance of Direct tax collection
• High Tax buoyancy: It is an important metric to know
the expected level of government borrowings from the
debt market. Higher tax buoyancy would mean the
government would borrow less, keeping interest rates
lower, while giving room for corporates also to borrow
at lower rates thus reducing crowding out effect in the
economy.
• Fiscal Health: High rate of direct tax collection increases
spending capacity of government on social sectors such
as education and health, without compromising the
fiscal prudence in the economy.
• Maintaining Inflationary Trends: High rate of direct tax
collection helps in maintaining the optimum interest
rate in the economy, which in turn assists in
maintaining the inflationary pressure.
• Lower Indirect tax: Higher direct tax collections could
lower the tax burden on the poor by creating fiscal
space for a reduction in GST rates.
Way Forward
• Although previous efforts to develop an alternative mechanism for settlement of tax disputes, including
mediation, have not had too much success, but it can be ensured through the DTC in the following way
o There is a need for a robust database of jurisprudence, and proper training to tax officers, chartered
accountants and other professionals empanelled to ensure a proper, effective and impartial approach to
settling litigation.
o Periodically release internal manuals, which contain the revenue department’s interpretation of the
provisions keeping in mind court rulings.
• Further, there should be an institutional mechanism, with participation of all the stakeholders, to
periodically oversee the changing requirement and amend the DTC as required.
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