“Everything should be made as simple as possible, but not simpler” quoted Albert Einstein. Looks like Mr. Einstein would have time travelled to have a view on the much-awaited Direct Tax Code (DTC) which is thought to soon replace the Income-tax Act, 1961, that is a 60-year-old law (the principles in the law being much older) in the current form, which has been hammered, amended, clarified and transformed from time to time, yeas-on-year, to suit the modern requirements of business dynamics.
There comes a time, where such an old institution, due to consistent changes needs to undergo an overhaul and replenishment in the life-cycle, so that it makes a way to a new set of regulation on which the foundation of the tax law would be built again.
The Modi government had appointed a tax force in November 2017 for laying down the new Income-tax law, which is as per the modern-day economic needs of the country. Such a tax law needs to follow principles of taxation yet be simple for the nation and business to understand and to attract investments. The task force was set up under the convener-ship of senior IRS officer Shri. Akhilesh Ranjan with members and dignitaries representing different facets of the economy and tax practice.
The report is submitted by the task force to the Hon. Finance Minister, Ms. Nirmala Sitharaman on 19 August 2019. The report has two parts, one is the draft bill and the other is the recommendations. The same is not made public yet, however, one may soon find the draft legislation in the public domain for consultation and comments.
While the new draft code yet stays a mystery for few more days to unveil, we have laid down top 5 expectations from industry, professionals and common man for the new Direct Tax code to carry:
I. Simpler compliance: With all the transactions going electronic and linked with Aadhar and PAN, the compliances should come down. Pre-filled Income-tax returns, Simpler tax forms, relaxation in tax brackets for individuals are some of the key points of hope from the salary and individual class.
II. Reduction of tax rates: The business world is in general happy to share one forth of their profits in taxes with the administration. Currently, there are multiple layers of tax rates for domestic companies (25%, 30%, surcharges, education cess) and foreign companies (40% + surcharges + education cess). On top of it is the dividend distribution tax (15%), which jacks up the tax rates for every investor who has invested in the company. Further, there is a Minimum Alternate Tax (MAT) (18.5% on book profits), which is paid if tax book profit is higher than the tax on profit as per computation rules. A single rate that can make everyone at the same level would be a big booster for the economy. No need to complicate, as the accounting and taxation rules are much convergent than what they were 10 years back.
III. Treating investors as growth drivers: Investments in a country drives growth for the economy. While an investor invests his hard-earned money and time in the country, they should be remunerated with no Long term Capital gains on the sale of such investment.
IV. Tax Assessments and Audits: It is expected that the new code eases off the assessment proceedings and brings in rationality to the selection of cases based on risks and also practicality aspect to the scrutiny assessment. An independent bench is expected by the industry to be incorporated in place of first level appeals to redress the case on hand on merits without any bias opinions. Transfer Pricing assessments to be performed in the block of 4-5 years (as per global standards), by a special transfer pricing cell, with a selection of cases on risks involved, thereby improving the quality of the outcome of transfer pricing assessments.
V. GAAR and POEM: Concepts like GAAR and POEM to be strengthened, which could act as a deterrent to potential tax avoidances. Having the law in the books of taxes is not as important as its rightful implementation. It is in the best interest of the country to not have the law rather than have it with half-hearted implementation. The absence of GAAR panel even after 2 years of formal enactment of GAAR law in India goes against the premise for which the law was brought in to force.
VI. Keep it simple: The tax law should be simple to interpret yet effective to implement. A thinner version with additional clarity on the above-mentioned aspects would be much appreciated by the industry at large.
Hopefully, the new DTC 2019 lives up the above-mentioned expectations and we would see the same in public consultation soon. The draft bill is expected to be tabled in the parliament in the budget session of 2020. Let us hope, India wakes up to modern-day tax legislation in the year 2021.
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10 Big-ticket Recommendations of Task Force on New Direct Tax Law – By Arun Giri