SIMPLIFICATION OF DIRECT TAX LAWS

WHY IN THE NEWS?

The income tax laws are complex in the country over the years, despite the government’s action to overhaul direct tax laws like the way it did for indirect taxes with the implementation of GST. Recently, the Revenue Secretary, while addressing tax professionals at an event, stressed the need to rewrite the tax laws to get rid of numerous exemptions and special treatment bestowed on select business activities or individuals.

DIRECT TAX

• Direct taxes are taxes paid directly by an individual or organization, with the incidence and impact of taxation falling on the same entity.
• Direct taxes are progressive in nature such that as an individual’s or entity’s income rises, so does the share of tax liability.
• Income tax, corporate tax, securities transactions tax, etc. are some direct taxes.

 INDIRECT TAX

• Indirect tax is a type of tax where the incidence and impact of taxation do not fall on the same entity. In the case of indirect tax, the burden of tax can be shifted by the taxpayer to someone else.
• Indirect taxes are regressive in nature that are levied equally upon taxpayers, no matter their income, so rich or poor, everyone has to pay them. Thus, it widens the inequality in the country.
• The most common example of an indirect tax is Goods and Service Tax, import duties, etc.

STATUS ON INCOME TAX ACT 1961

• Constitutes 1200 pages,298 sections, and 14 schedules.
• Highly complex and need to consult tax analyst for even filing tax returns.
• Existence of contradictory provisions leading to increased litigations.
• Introduced in 1961 to suit the socialist philosophy of the then period.

 PROCESS OF SIMPLIFICATION OF DIRECT TAX LAWS

1. Post-independence, India had witnessed a maximum tax limit of 97.5%. However, in 1997, former Finance Minister P Chidambaram during his budget presentation reduced and stabilized the tax limit to 30%.
2. In 2009, the drafting of the Direct Tax Code was first mooted and the revised draft was introduced in Parliament. Subsequently, the Parliamentary Select Committee submitted its report in 2012 and prepared the Direct Tax Code. However, the bill was not taken up and subsequently lapsed due dissolution of the lower house.
3. In 2014, the then government focused on simplification of indirect tax laws and introduced the game-changer – “Goods and Service Tax” on 1 July 2017, and the GST council for regulating GST and its implementation.
4. Finance Bill now confines mostly direct tax provisions and clauses.
5. In 2017, an expert committee was constituted and drafted a new Direct Tax Code in 2019 which is yet to be published.

NEED FOR SIMPLIFICATION OF DIRECT TAX LAWS

1. To reduce tax compliance cost
2. Widen tax base to improve social and economic betterment for the society
3. Remove tax evasions and tax avoidance: Simplify the laws to contain the use of loopholes in the taxation system.
4. Balance between Direct and indirect tax: Since indirect tax is regressive in nature, an alarming increase in indirect tax should be minimized, and focus on direct tax collection to ensure progressive development.
5. Reduce Inequality: Reassessment of direct tax laws can bridge the inequality crisis to a considerable extent.
6. Changing ecosystem: Socialist philosophy of 1961 has changed to a mixed ideology, so make amendments to incorporate the changing needs.
7. New litigation methods: New methods of Alternative Dispute Resolution (ADR) such as arbitration, and conciliation which are outside formal systems to be adopted.
8. Goodwill: Instills confidence and a sense of credibility in foreign markets for investing in the Indian economy.

MEASURES TAKEN FOR SIMPLIFYING DIRECT TAX LAWS

1. Changed tax structure: introduced more tax slabs and reduced tax rates.
2. Freedom to taxpayers: Taxpayers are free to follow old tax slabs with exemptions or new tax slabs without exemptions.
3. Changed corporate tax rate: Effective Corporate tax rate has been reduced from 30% to 25. 17% (including 22% + Cess& Surcharges).
4. Abolished Dividend Distribution Tax in the union budget 2021-2022
5. Amendment to Capital Gain tax regime will improve compliance of investors and the income tax department in administration.
6. Simplified procedures: Provided tax holidays and simplified tax procedures for Startups.
7. Retrospective taxation: Doing away with retrospective taxation (Cairn Energy issue) reinstates India’s credibility at the global level.
8. Faceless assessment: Improves transparency, efficiency, and accountability in income tax assessments.
9. Faceless appeal: Helps in eliminating the interface between taxpayers and income tax authorities and conducting faceless appeal proceedings in an unbiased manner.
10. DIN: Introduced Document Identification Number which is used for tracking taxpayers.

WAY FORWARD

1. Single tax code with unified compliance procedures in simple language enhances compliance.
2. Remove exemptions in the taxation system and a further reduction in the tax rate will widen the tax base.
3. Equal treatment: Different tax procedures for different businesses should be avoided.
4. Incorporate value addition of agriculture sector to taxation system beyond a fixed limit.
5. Technological and psychological measures to be utilized for maximizing transparency and compliance.
6. No opportunity cost: The difference between Tax evasion gains and the cost of tax compliance must be nil.

 CONCLUSION

Rationalization and simplification of direct tax laws can have a multitude of benefits for the economy. The aforesaid changes need to be introduced in a step-by-step manner to avoid short-term disruptions. Thus, simplifying the direct tax regime will ultimately help the country to achieve its SDG goal 10 – “Reduced Inequalities” in the long term.

QUESTION

The major pressing reform required in Indian Economy is Direct Taxes Code. Comment.(250 Words, 15 Marks)