Union Budget 2019: One of the key expectations of taxpayers from the budget is an announcement or update on replacing the current Income Tax Act with a new direct tax law.
Budget 2019: The Modi-led NDA government is in its second term, and the full-fledged Union Budget 2019 is just around the corner, to be presented by India’s first lady full-time Finance Minister Nirmala Sitharaman. Taxpayers have huge expectations from this Budget, though one must bear in mind that the government has not had much time after the elections, for the Budget.
One of the key expectations is an announcement or update on replacing the current Income-tax Act, 1961 (IT Act), with a new direct tax law, the idea of which was conceived a decade back in the form of the Direct Taxes Code (DTC).
The current IT Act was enacted in 1961. Since then, there have been many amendments to the IT Act every year. With time, the IT Act has become more complex in structure, especially with the additions of Explanations and Provisos – this leads to interpretation issues, which in turn leads to litigation between the taxpayer and tax authorities.
In order to overcome this and to adopt international best practices, the government released a draft DTC and a discussion paper for public comments in August 2009. Thereafter, a revised discussion paper was issued in June 2010 and an updated version of the DTC Bill, 2010 was released and placed before the Parliament in August 2010. The Standing Committee examined the DTC Bill and submitted its report to the Parliament in March 2012. However, the Bill was not taken up further in the Parliament.
In 2013, the Finance Minister in his Budget speech acknowledged that the DTC is not intended to be an amended version of the IT Act, but a new code based on best international practices that will be compatible with the needs of a fast developing economy. Thereafter, a new draft of the DTC Bill, 2013 was released for public comments. In 2014, after the change in government, the new government assured that it would consider the comments received from stakeholders on the revised DTC Bill, 2013 and that it would also review the DTC in its present shape and take a view in the whole matter. Thus, the DTC has had a long history.
The objective of the DTC was to simplify the existing tax system and make it easy to comprehend and administer. In addition, one of the key ideas was to broaden the tax base by way of minimising exemptions, introducing lower tax rates, and reducing ambiguity in law which facilitates tax avoidance. Some of the measures proposed in the DTC include making basic concepts of direct tax law clear to a layman, which includes elimination of the concept of ‘previous year’ and ‘assessment year’, and replacing it with a single concept of ‘financial year’. Similarly, it has also been sought to include tax rates in the schedule to the DTC instead of the current practice where tax rates are part of the Finance Act.
The drafts of the DTC include key policy proposals in line with tax practices followed globally. Such policy proposals include (i) residential status of foreign enterprises based on place of effective management [POEM]; (ii) general anti-avoidance rule [GAAR]; (iii) indirect transfer rules; (iv) controlled foreign company [CFC] regulations; (v) Advanced Pricing Agreement [APA] provisions under transfer pricing.
It is interesting to note that other than CFC regulations, all other proposals have already been incorporated in the IT Act over a period of time. Similarly, the proposal of broadening the tax base by reducing tax rates and minimising exemptions has already been initiated.
The DTC was once again revived in November 2017 and a task force was constituted by the government in this regard. The timeline for submission of the report by the task force was extended multiple times; currently, the task force is required to submit its report by 31 July 2019, which is around a month away, and a few weeks after the Budget is presented on 5 July.
Some of the key areas that the DTC needs to consider are continuing the work on phasing-out exemptions and reducing overall tax rates, aligning tax rules to Indian Accounting Standards [Ind AS], taxability of house property and capital gains, focussing on international tax and taxation of the digital economy, revamping minimum alternative tax provisions, re-looking at the assessment and appeal processes (including refunds), etc.
After the passage of a decade since the idea of revamping the direct tax system was first introduced, it appears likely that the efforts will soon bear fruit. The expectations from the DTC or the new direct tax law are very high, especially in making it easy to understand, simpler to comply, ability to reduce litigation and aligning it with the needs of the present economy.
(By Pritin Kumar, Partner; Anil Kadam, Senior Manager; and Jatan Goradia, Deputy Manager with Deloitte Haskins and Sells LLP)