The Modi government has constituted a six-member task force to review the Income Tax Act, 1961, and draft a new Direct Tax Law in consonance with economic needs of the country. The Terms of Reference of the task force is to draft an appropriate Direct Tax Legislation keeping in view (i) the direct tax system prevalent in various countries, (ii) international best practices, (iii) economic needs of the country, and (iv) any other matter connected thereto. The task force will set its own procedures for regulating its work and is required to submit its report to the government within six months.
It may be recalled that during the Rajaswa Gyan Sangam held on 1st and 2nd September, 2017, Prime Minister Narendra Modi had said that the Income Tax Act, 1961 was drafted more than 50 years ago and needs to be re-drafted.
Commenting on the government move to draft a new direct tax legislation, Vikas Vasal, Partner & Tax Leader, Grant Thornton India LLP, says that it’s a move in the right direction, and in line with government’s stated intent to boost investor and business confidence in the country.
“It’s a long journey, and constitution of the task force is the first step. A simple, easier-to-interpret direct tax code with minimal conflicts will go a long way in providing certainty and clarity to the tax payers. Unnecessary litigation on otherwise settled issues only results in waste of productive time and effort. Hopefully, the new code will address these issues, incorporating the learnings from the current tax law, as well as the decade-long discussions on the earlier Direct Tax Code that was shelved some time back,” he says.
Here’s how the new Direct Tax Law is expected to simplify tax-related issues and boost investor and business confidence:
1. Simplify Law and Declutter Redundant Provisions: The current Income Tax Act is more than 5 decades old and has suffered thousands of amendments over these years. Formation of a committee for drafting a new Direct Tax Code is a progressive step to do away with the past baggage and make the law relevant to the current business environment. A new code would simplify the law and declutter redundant provisions.
2. Pro-Business Development: This is a pro-business development as concerns of the industry can be addressed in the new law. “The government has in recent past taken several initiatives such as the issuance of clarification on debated issues, issuing detailed guidelines on new regulations, acceptance of judicial decisions etc. for the benefit of the taxpayers. One would expect that several of such measures would find a place in the new law,” says Vasal.
3. Reduce Litigation: The provisions of the Income Tax Act have been a subject matter of extensive litigation, which has led to complexity in the interpretation. A new law, without a baggage of past jurisprudence, would be simpler to interpret and is expected to reduce litigation.
4. Plug Loopholes in a Single Shot: The Direct Tax Code would provide an opportunity to the authorities to plug the loopholes in a single shot rather than making it an annual exercise. It is an excellent opportunity to make the law simpler, taxpayer-friendly, less prone to litigation and free from interpretational loopholes.
There is a word of caution though. “We need to learn from our past experience of the previous version of the direct tax code and make sure that a new law is developed on the threshold of simplicity rather than rehashing of the existing Income Tax Act in a new format,” says Vasal.