Four months after the government implemented the new indirect tax regime, it announced on Wednesday that it has appointed a task force to draft a new direct tax law after reviewing the over 50-year old Income Tax Act, 1961. The proposed direct tax code is expected to simplify and consolidate existing laws into a single legislation. The task force has been given six months to carry out the exercise. Arbind Modi, member of central board of direct taxes (CBDT), has been named convener of the seven-member group. The terms of reference for the task force include studying the direct tax system prevalent in various countries along with the international best practices. Additionally, the new direct tax code would be based on the economic needs of the country and other connected matters, the government said in a statement.
A draft direct tax code (DTC) was put in the public domain in 2009, but after multiple iterations of public consultation including suggestions from standing committee on finance, the draft was not passed by Parliament. However, a revised version of DTC was released in 2014, which has not been taken further by the current government. The revised DTC had proposed an exemption of up to Rs 3 lakh on personal income while suggesting that the peak rate of 30% tax should apply to those with income above Rs 25 lakh. For income tax on corporates, the draft code had proposed withdrawal of several exemptions and cutting the tax rate to 25% in phases, a process which is anyway on. Further, a dividend tax was proposed on the income earned by resident shareholders in excess of Rs 1 crore. It also proposed a tax rate of 35% for individuals and Hindu undivided family (HUFs) where the total income exceeds Rs 10 crore.
For corporates, the DTC 2013 proposes to introduce General Anti Avoidance Rules (GAAR), taxation of Controlled Foreign Companies (CFC), Place of Effective Management (POEM) rule and also contained expanded source rules for taxation of royalty, fees for technical services (FTS) and interest. Since then, however, many of these proposals have been introduced in the existing tax law including GAAR, taxation of indirect transfer of assets, widening the source rule for taxation of royalty and fees for technical services. “While the stated objective of this proposal is laudable, the present Income Tax Law in the country already contains most of the international best practices such as GAAR, transfer pricing / CBCR, BEPS and so on. It would be helpful if the new tax law emphasises more reasonable and fair administration of the tax laws to address the concerns of uncertainties and needless tax litigations,” Sanjay Sanghvi, partner, Khaitan & Co, said.
The task force will be also be represented by chief economic adviser Arvind Subramanian as permanent special invitee to the task force. Other members include Girish Ahuja, practicing chartered accountant and non-official director of State Bank of India; Rajiv Memani, chairman and regional managing partner of E&Y; Mukesh Patel, practicing tax advocate; Mansi Kedia, consultant at ICRIER; and GC Srivastava, a retired Indian Revenue Services (IRS) official. “Most provisions of the current income tax law are now settled and clear. Instead of changing the entire law, the government should consider modifying the existing law so that the disputable provisions and litigations could be minimised. DTC advocated removal of profit-linked deductions, which have already been announced under the income tax Act. So, it would not be a wise decision to unsettle the settled law, especially in the present environment where entities are endeavouring their best to implement India’s biggest tax reform, GST, in its true spirit.” Naveen Wadhwa, DGM, Taxmann.com, said.