Income Tax Act set for revamp

Context

• Government sets up a task force to draft a new direct tax law that aims widening the tax base, improving compliance and ease of doing business; panel to submit the report in 6 months

What is the Income-tax Act, 1961?

• The Income-tax Act, 1961 is the charging Statute of Income Tax in India. It provides for levy, administration, collection and recovery of Income Tax.
• The Government of India brought a draft statute called the “Direct Taxes Code” intended to replace the Income Tax Act, 1961 and the Wealth Tax Act, 1957.
• The Income Tax Act was enacted in the year 1961 and is the statute under which everything related to taxation is listed. This includes levy, collection, administration and recovery of income tax.
• The act basically aims to consolidate and amend the rules related to taxation in the country.
• The Income tax Act contains a long list of sections, each of which deal with different aspects of taxation in the country.

What are the amendments to the law?

• The Taxation Laws (Second Amendment) Act, 2016 is an amendment Act, No.48 of 2016, to Income-tax Act, 1961 and the Finance Act, 2016.
• It was passed during the 2016 Winter Session of Indian Parliament.
• The Taxation Laws (Second Amendment) Bill, 2016 was passed in Lok Sabha as a money bill on 29 November 2016 enabling people to declare their undisclosed incomes after Indian 500 and 1000 rupee note demonetization

What is Direct Tax Code?

• DTC main aim is to simplify, revise and consolidate the structure of direct taxes laws in India. Direct Tax Code was formulated to replace the five-decade-old Income-Tax Act.
• Direct Tax Code had 319 sections and 22 schedules at the inception, whereas existing IT Act 298 sections and 14 schedules.
• The Bill had proposed annual I-T exemption limit at Rs 2 lakh, and levying 10 per cent tax on income between Rs 2 lakh and Rs 5 lakh, 20 per cent on Rs 5-10 lakh and 30 per cent above Rs 10 lakh.
• For domestic companies, it suggested tax rate of 30 per cent of business income.

What are the steps being taken to draft the new law?

• In order to review the Act and to draft a new direct tax law in consonance with economic needs of the country, the Government has constituted a task force
• The task force would draft direct tax laws in line with tax laws prevalent in other countries, incorporating international best practices, and keeping in mind the economic needs of the country.
• The move is aimed to make direct taxes income and corporate simple.
• The task force would submit its report to the government within six months.

Is it really needed to alter the existing law?

• It might not be a wise decision to unsettle the settled law, especially in present environment where entities are endeavoring their best to implement India’s biggest tax reform, GST in its true spirit
• A simpler code with fewer tax breaks and lower tax rates is, in theory, a good idea.
• However, there is a dilemma out on whether there is a need for a new code or to fine-tune the existing law
• Any decision should be not be hurried in order to push the agenda
• The government must not end up discarding a law that is largely settled and enriched by years of jurisprudence and replace it by a half baked tax code

What is the way ahead?

• Instead of changing the entire law, the government should consider modifying the existing law so that the disputable provisions and litigations could be minimized.
• It is heartening to note that the new law will be drafted keeping in view the economic needs of the country
• DTC advocated removal of profit-linked deductions, which have already been announced under I-T Act
• It would be helpful if the new tax law emphasizes more reasonable and fair administration of the tax laws to address the concerns of uncertainties and needless tax litigations.