Direct Tax Code: Government proposes to overhaul taxation system; here is how new rules will affect you

Direct Tax Code appears to be a simpler version as compared to the existing income tax law, which is a welcome measure

Jairaj Purandare August 22, 2019 18:26:26 IST
Direct Tax Code: Government proposes to overhaul taxation system; here is how new rules will affect you
  • On the tax rates front, the Task Force has recommended reducing the overall tax rates along with phasing out of exemptions

  • Some relief is also intended to be provided to the middle-income group income taxpayers

  • The Task Force has recommended a common corporate tax rate of 25 percent for both domestic and foreign companies

The government proposes to bring in a significant change by way of replacing the 58-year-old income tax law with the Direct Tax Code. On account of numerous amendments to the Income-tax Act, 1961, over a period of time, the income tax law has become lengthy and complicated. The objective of the Direct Tax Code (‘the Code’) is to simplify the tax system and make it easy to understand and implement. For this purpose, a Task Force was appointed in November 2017 to rewrite the tax law. The task force has submitted its report to the finance minister earlier this week and it appears that a draft of the new income tax law has also been submitted.

First and foremost, the Code appears to be a simpler version as compared to the existing income tax law, which is a welcome measure.

On the tax rates front, the Task Force has recommended reducing the overall tax rates along with phasing out of exemptions. Some relief is also intended to be provided to the middle-income group income taxpayers.

The Task Force has recommended a common corporate tax rate of 25 percent for both domestic and foreign companies. This rate, however, is higher than the corporate tax rates in other countries like the UK, US, and Singapore. A corporate tax rate of upto 20 percent may be viewed as competitive and in line with the rates in other countries, which may give a boost to both foreign investment and growth.

Direct Tax Code Government proposes to overhaul taxation system here is how new rules will affect you

Representational image. Reuters

Currently, foreign companies are liable to pay tax at 40 percent as compared to 30 percent/25 percent for domestic companies. However, foreign companies are not subject to payment of the Dividend Distribution Tax (‘DDT’) which is imposed on domestic companies and hence, there is a difference in the base tax rates for these two categories. In addition, in the case of dividend exceeding Rs 1,000,000 paid by a domestic company, the shareholder is required to pay tax at 10 percent. This results in taxation of the same income at three stages.

The Task Force has also proposed that DDT should be abolished and dividend should be taxed in the hands of the recipient. On the other hand, in case of foreign companies, a ‘Branch Profit Tax’ is leviable on the amount repatriated to their overseas Head Office. As a result, there may still be some difference in the rates of taxation of domestic and foreign companies.

The faceless assessment scheme may turn out to be a ‘game-changer’ and has the potential to change the image and structure of the Income Tax Department permanently. As per the Code, the concept of ‘Assessing Officer’ will be replaced with ‘Assessment Units’. Scrutiny cases are expected to be allotted centrally by the IT system on a random basis. If implemented properly, this measure can eliminate or reduce to a significant extent, the interaction between taxpayers and tax authorities and thereby, reduce corruption. However, in the initial phase, there could be additional litigation.

Protracted litigation in India has always been a matter of concern. The Task Force has recommended a separate litigation management unit to manage the entire litigation process. It has also introduced the concept of mediation and settlement of litigation through negotiation. These measures will help to resolve pending litigation expeditiously and hopefully, will also provide the much-needed stability and certainty to taxpayers.

However, one needs to read the fine print of the actual draft of the Code to analyse the impact of various proposals.

The Writer is Chairman, JMP Advisors  

Updated Date:

Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.

also read

As Rhea Chakaborty and Bollywood are vilified, silence of industry's biggest stars is no shocker
Entertainment

As Rhea Chakaborty and Bollywood are vilified, silence of industry's biggest stars is no shocker

Despite the ongoing vilification of their industry and of a young member of their professional fraternity that went on for more than three months, none of the big stars of Bollywood found the heart to speak up.

Rhea Chakraborty denied bail: It’s not just SSR case, persecution of random citizens could be watershed moment for India
India

Rhea Chakraborty denied bail: It’s not just SSR case, persecution of random citizens could be watershed moment for India

The persecution of Rhea Chakraborty, the actor’s one-time partner, borders on lunacy, if we are to cling to some notions of rationality and humanity

Umar Khalid’s arrest in connection with February 2020 Delhi riots can be seen as cognitive incarceration of Muslim youth
India

Umar Khalid’s arrest in connection with February 2020 Delhi riots can be seen as cognitive incarceration of Muslim youth

The recent arrest of Umar Khalid is being seen as one of the most outrageous steps in a series of sustained attacks on the flag bearers of a certain cause.