Direct Tax Code

The Direct Tax Code (DTC) is a proposed comprehensive set of regulations aimed at simplifying and streamlining India’s direct tax system. The Government of India originally proposed it in 2009, with the goal of introducing significant adjustments to the Indian tax system.

Evolution of Direct Tax Code

1. Direct Tax Code 2009-14: On August 12, 2009, the first draft Direct Taxes Code Bill was released, followed by a Revised Discussion Paper (RDP) in 2010. DTC 2010 was introduced in Parliament, and the government established the Standing Committee on Finance (SCF) to consult with numerous stakeholders. In 2012, the SCF gave its report to Parliament. The government heeded the SCF’s recommendations, and a ‘revised’ version of DTC was launched in 2014. It lapsed, however, when the NDA government took office that year.
2. Direct Tax Code 2017-19: The administration of Prime Minister Narendra Modi established an expert committee in 2017 to develop a new Direct Taxes Code. In 2019, Finance Minister Nirmala Sitharaman received the task force’s report on DTC.

Current status

• The Direct Tax Code (DTC) is currently in the proposed stage and has not yet been adopted as legislation as of May 2023. The Government of India introduced the initial draft of the DTC in August 2009, and various rounds of consultations with stakeholders have taken place since then to refine the proposed law.
• The DTC has been revised multiple times throughout the years, and the most recent version was tabled in the Lok Sabha (India’s lower house of parliament) in July 2021. However, the bill was withdrawn in September 2021, and the government has not yet stated when it intends to reintroduce the DTC in parliament.

Key Provisions of Direct Tax Code

• Income taxpayers earning up to Rs 55 lakh per year may receive significant tax relief if recommendations to adjust the tax band and rebates are implemented.
• Foreign corporations may be required to pay Branch Profit Tax. Branch Profit Tax is a tax levied on effectively connected earnings/income of a foreign entity’s branch (or business) in a contracting state (country, in common language) when those earnings are repatriated, or presumed repatriated, to the foreign entity’s home nation
• Abolition of Dividend Distribution Tax (DDT) and Minimum Alternate Tax (MAT)
• To increase the attractiveness of the Indian equity market and to provide relief to a large class of investors whose dividend income is taxable at a lower rate than the rate of DDT, the Finance Act, 2020 repealed the Dividend Distribution Tax, which means that companies are no longer required to pay DDT as of April 1, 2020. Dividend income will only be taxed at the applicable rate in the hands of the recipients.
• The number of start-up incentives will be encouraged.

• Lowering the corporate tax rate to a flat 25% for domestic and foreign firms.
• Corporate tax rates for local and foreign firms will be reduced to 25% from 30% for large corporations and 40% for foreign firms.
• Assessment units will be used to replace assessment officers.
• Faceless examination of cases selected using a centrally and randomly assigned system.

• Change in mediation mechanism between taxpayers and CBDT.
• The proposed DTC will have significantly fewer sections than the Income Tax Act’s, making it simpler and crisper.
• The panel advocated the concept of mediation between the taxpayer and the CBDT to reduce tax disputes.
• According to sources, taxpayers may be able to choose a negotiated settlement before a Collegium of Commissioners once they receive the draft order.
• According to reports, a Litigation Management Unit will oversee the entire tax litigation process, from determining which cases to appeal to creating a defence strategy.
• New terms of reference include faceless and anonymized scrutiny, a mechanism for system-based cross-verification of financial transactions, reduced litigation, and expedited appeals resolution.

Significance of Direct Tax Reforms

The introduction of India’s new Direct Tax Code (DTC) is significant because it aims to simplify and streamline the country’s tax system, making it more transparent and efficient. Here are some of the most important implications of the new DTC for India:

• Tax law simplification: The DTC wants to streamline tax laws and minimize the complexity of the tax system. This will make it easier for taxpayers to comprehend and comply with tax regulations, lowering compliance costs and increasing compliance rates.
• Increase in flexibility: Direct tax code aims to update taxation rules and procedures to reflect the country’s economic needs and to stay up with evolving global best practices. Since 1961, the economic and corporate climate has altered dramatically. The Vodafone case, in which the government lost in the Supreme Court, is a classic example of the IT Act’s lack of flexibility.
• Tax Rate Reduction: The DTC suggests lowering tax rates for both people and corporations. This would boost the competitiveness and attractiveness of India’s tax system to businesses, resulting in increased investment and economic growth.
• Improved Tax Administration: Taxation was entirely physical in 1961. The usage of new technology, such as social media and artificial intelligence, must now be accommodated to make the process simpler and more transparent. The DTC suggests steps to improve tax administration, such as the e-assessment system and the taxpayer’s charter. This will decrease tax authorities’ discretionary powers, promote openness, and increase accountability.
• Increased Tax Collection: The DTC suggests broadening the tax base and increasing tax collection by discouraging tax evasion and encouraging compliance. This will broaden the government’s revenue base, allowing it to fund public goods and services such as infrastructure, education, and healthcare.
• Economic Growth Promotion: The DTC aspires to build a tax system that is clear, transparent, and supportive of company growth. This will attract more investments and encourage economic growth, resulting in job creation and higher living standards for citizens.

Implication for Stakeholders in New Direct Tax Code

1. Individuals: Simplifying tax regulations and making tax administration more user-friendly can aid in increasing tax compliance and lowering the cost of tax evasion. Individuals and organizations may be more prone to avoid taxes or make errors on their tax returns when tax regulations are overly complex and difficult to grasp. This may necessitate more stringent enforcement methods and raise the cost of managing the tax system.
2. Corporate: In recent years, India has achieved substantial progress in terms of improving the ease of doing business, with the World Bank’s Doing Business Report 2021 rating India 63rd out of 190 nations. This ranking incorporates advancements in areas such as loan availability, minority investor protection, and insolvency resolution.
   The government’s new direct tax code, has the potential to improve the investment climate in India by simplifying the tax system, lowering compliance costs, and promoting investment. The new code is supposed to be more user-friendly and to solve concerns such as tax controversies and administrative difficulties.
3. Economy: The new Direct Tax Code (DTC) in India has the potential to improve the tax system and increase tax revenue by simplifying tax laws, reducing compliance costs, and improving tax administration. This can broaden the tax base and encourage more individuals and businesses to participate in the formal tax system, ultimately leading to increased funding for public goods and services such as infrastructure, education, and healthcare. Additionally, increasing the tax-to-GDP ratio is an important goal of tax policy, and the DTC can contribute to this by reducing tax evasion and increasing tax compliance, thereby generating more revenue for the government.

Recent Reforms in Direct Taxation

• Individuals earning up to Rs. 5 lakhs are exempt from income tax, and the standard deduction has been increased. Furthermore, the Finance Act, 2019 exempted an individual taxpayer with taxable income up to Rs. 5 lakhs from payment of income tax by providing a 100% tax rebate. In addition, to help salaried taxpayers, the Finance Act, 2019 increased the standard deduction from Rs. 40,000 to Rs. 50,000.
• Corporate tax rate reduction for all current domestic companies: To encourage growth and investment, the government implemented a historic tax reform through the Taxation Laws (Amendment) Ordinance 2019, which provided a 22% tax regime for all existing domestic companies from FY 2019-20 if they did not take advantage of any specified exemption or incentive. Furthermore, such businesses are exempt from paying the Minimum Alternate Tax (MAT).
• To attract investment in the manufacturing sector, the Taxation Laws (Amendment) Ordinance 2019 has drastically reduced the tax rate for new manufacturing domestic companies to 15% if such company does not qualify for any specified exemption or incentive. These businesses are also exempt from paying the Minimum Alternate Tax (MAT).
• Lowering the MAT rate: The MAT rate has also been decreased from 18.5% to 15% to provide relief to enterprises that continue to benefit from exemption/deduction and pay tax under MAT.
• Personal Income Tax: To reform Personal Income Tax, the Finance Act, 2020 has given individuals and co-operatives the option of paying income tax at concessional rates if they do not qualify for defined exemptions and incentives.
• Document Identification Number (DIN): In order to improve efficiency and transparency in the functioning of the Income Tax Department, every communication issued by the Department, whether related to assessment, appeals, investigation, penalty, or rectification, among other things, must have a computer-generated unique document identification number (DIN) beginning October 1, 2019.
• Pre-filled Income Tax Return: Individual taxpayers have been given pre-filled Income Tax Returns (ITR) to make tax compliance easier. The ITR form now includes pre-filled information for some earnings, such as salary income. By pre-filling more transactions in the ITR, the breadth of information for pre-filling is constantly expanding.