Account Assets Audit Bank Bookkeeping Finance Concept
For years, management of tax affairs in India has been perennially in contention, including reforms and deliberations, with the law of the Income Tax Act of 1961 as the successor of direct taxes for more than 60 years. However, this is about to change entirely with the coming of the Direct Tax Code (DTC), which is set to replace the Income Tax Act. This article discusses the major advantages of the Direct Tax Code, the most significant factors that warrant its introduction, and the impact it will have on the taxpayers and the Indian economy as a whole.
The Direct Tax Code (DTC) is an additional layer of extensive reforms targeted to improve India’s current framework for direct taxation. In a nutshell, this intends to replace the existing Income Tax Act of 1961 and the wealth tax laws with a more simplified, transparent, and efficient legal framework. The DTC aims to introduce a tax system that is simple yet thorough enough to be understood by both the taxpayers and the tax administrators but also helps in improving compliance, decreasing disputes, and expanding the economy.
The DTC was first introduced by the government in 2009 as a draft and has undergone various revisions since then. While it has not yet come into force, the new code is expected to replace the Income Tax Act in the near future, marking a major reform in the country’s fiscal policies.
Key Features of the Direct Tax Code
- Simplification of Tax Slabs
One of the most notable changes under the DTC is the restructuring of tax slabs. The current system in India has multiple tax brackets, each with specific income ranges and rates. Under the proposed DTC, there is a significant reduction in the number of tax slabs, making the tax structure more uniform and easier to understand.
For instance, the DTC proposes a two-slab system for individual taxpayers: a 10% tax on income up to ₹10 lakh and a 30% tax on income above ₹10 lakh. By simplifying the structure, the government aims to reduce confusion and make the tax system more accessible for taxpayers, particularly those in lower-income groups.
- Corporate Tax Rates
The DTC also brings significant changes to corporate taxation. The tax rate for companies is expected to be reduced under the new code, making India more attractive for foreign investment. The DTC proposes a corporate tax rate of 22%, which is lower than the current rate, and offers relief to domestic and international businesses alike. Additionally, the code allows tax incentives for companies that engage in research and development, innovation, and infrastructure development, which is expected to spur growth in these sectors.
The Direct Tax Code was introduced in 2009 as a missed opportunity with several amendments since then. The Code is yet to come into effect. But very rightly expected to replace the Income Tax Act soon, which will be tantamount to a considerable overhaul in the fiscal policy of the country. Additionally, it also allows tax-based incentives to companies such as R&D benefits, innovation, and infrastructure development that can substantially increase business in these fields.
- Increase In Taxable Income Threshold
Another major feature of the DTC is that the threshold for income tax exemptions would be increased. Individuals currently get exemptions for many allowable allowances including house loans, and savings, under different sections like Section 80C of the Income Tax Act. What the Direct Tax Code plans to do is to increase the limit of these exemptions, offering more tax benefits to individuals and easing the overall tax burden. For example, exemptions for house loans, education loans, and other investments will be increased, providing relief for the middle class, who account for a significant portion of the taxpayer base. It also aims to rationalize different exemptions so that they are simpler, convenient for the taxpayer, and sound.
- Rationalization Of Wealth Tax And Possible Inheritance Tax
Implementation of a standard wealth tax again would be introduced under the DTC in a simpler and much more efficient mode. Although no information has been released yet, it is possible that a new way of taxing the wealth of people would be structured in line with international best practices. The DTC also raised the chance of introducing an inheritance tax. This tax can be imposed when assets are transferred following a death. This would be a new tax and would be a good step in controlling the wealth inequality gap, with levies on huge estates transferred from one generation to another.
- Tax transparency and compliance.
The DTC seeks to promote openness and simplicity, in meeting requirements by diminishing disputes and clarifying certain aspects of the Income Tax Act to prevent misinterpretations and fraudulent activities effectively in a clearer manner to enhance transparency and compliance measures, for individuals and businesses alike. Moreover, the DTC suggests enhancing the conflict resolution process by introducing tax tribunals to handle cases and reduce delays in resolving tax matters swiftly.
Why is the change necessary?
Since the advent of the Income Tax Act and its numerous amendments, the Indian taxation system has changed many times, but the old practices as well as some features of the 1961 Act are still problematic. As perhaps intended, the system has developed over time to be so complex and bewildering that even trying to comprehend the rules is a chore for the average taxpayer. The Direct Tax Code is however expected to eliminate these problems by providing an improved system and procedures that are more effective, simple, transparent, and forward-looking. With the phenomenal growth of the Indian economy and its increasing integration into the global economy, it becomes imperative to change the tax system for this is the only way to sustain global standards and business convenience. Also, an optimal structure of the tax system would assist in broadening the tax base and enhancing tax compliance which is crucial for creating the revenue required for the development of the country.
About The Author
