The current review of the Income-Tax Act holds the potential to revolutionize India’s tax system by reducing complexities, improving clarity, and making it easier for taxpayers to comply.
The Indian government is currently undertaking a significant review of the Income-Tax Act, 1961, with the goal of simplifying the law and reducing the burden on taxpayers. This extensive review, which is expected to conclude before the upcoming budget, holds the promise of reducing complexities, increasing clarity, and providing better tax certainty for taxpayers. Here’s why overhauling the current law is essential and how it could benefit everyone involved.
Reducing Complexities in Taxation
In her July 2024 budget speech, Finance Minister Nirmala Sitharaman highlighted the need for a comprehensive review of the Income-Tax Act. The aim of the new direct tax code is to make the tax laws simple, easy to understand, and in line with modern economic realities. By focusing on objectives such as simplified tax structures, improved taxpayer services, and the reduction of litigation, the government aims to create a seamless, painless, and faceless taxation system.
Keeping Tax Laws Relevant
The current Income-Tax Act, introduced in 1961, was implemented when India’s economy was significantly different. Over time, the law has been subject to numerous amendments to keep up with the changing landscape. However, the complexity has grown as well, with 23 chapters, 298 sections, and more than 1,000 subsections and clauses. For example, Section 47, which outlines transactions not regarded as capital asset transfers, includes over 40 clauses, making it difficult for taxpayers to navigate. An overhaul would modernize the tax code to reflect the current economic environment and reduce the complexity for both taxpayers and professionals.
Learning from the Direct Tax Code of 2009
The Direct Tax Code (DTC) was introduced to simplify and streamline India’s tax system. Several provisions from the DTC, such as Place of Effective Management (POEM) and General Anti-Avoidance Rules (GAAR), have since been included in the current Income-Tax Act. However, the DTC was never fully adopted, and many of its intended reforms remain relevant. A fresh attempt at a simplified direct tax code would build upon the lessons from the DTC and adapt them to today’s needs.
Simplifying Personal Income Tax Slabs
One of the most anticipated changes is a revision of personal income tax slabs. The current system has multiple tax brackets, which can be complicated for individuals to manage. The government is likely to streamline the tax slabs, either by increasing the exemption threshold or adjusting the tax rates for different income levels. This was already a focus of the Direct Taxes Code Bill, 2010, which significantly increased the slabs for individuals earning up to ₹25 lakh. A simplified tax system could offer relief to taxpayers and improve compliance.
Aligning Savings with Economic Maturity
The debate between the Exempt-Exempt-Taxed (EET) and Exempt-Exempt-Exempt (EEE) tax regimes continues. The choice between these systems is not just a fiscal decision but reflects the maturity of the economy. With every Union Budget, the government reviews these tax regimes to ensure they are aligned with evolving economic conditions and policy objectives. Streamlining the taxation of savings will allow for a more consistent and predictable framework for individual investors.
Tackling Global Tax Avoidance
Global tax reforms addressing tax avoidance structures have become increasingly relevant for India. The Base Erosion and Profit Shifting (BEPS) initiative, which includes the redistribution of tax rights in market economies and the implementation of jurisdictional minimum tax rates, has gained momentum worldwide. While beneficial, there is a perception that these reforms may disproportionately favor developed countries. As a key voice among emerging economies, India is expected to advocate for a more equitable global tax system, possibly through forums such as the United Nations rather than the OECD.
Pending Corporate Tax Reforms
In terms of corporate taxation, India is moving towards a simplified regime with lower rates and fewer tax holidays. However, there is still room for improvement, particularly in areas such as group tax consolidation, which would allow companies to use tax attributes across different entities. Additionally, the capital gains tax system underwent significant changes in the 2024 Union Budget, reducing the number of classifications and simplifying tax rates. Further reforms could provide businesses with more certainty and reduce administrative burdens.
Conclusion
The current review of the Income-Tax Act holds the potential to revolutionize India’s tax system by reducing complexities, improving clarity, and making it easier for taxpayers to comply. A new, simplified tax code would be a significant step toward creating a more modern and efficient tax environment that aligns with India’s evolving economic needs. As the government prepares to finalize these reforms, taxpayers and businesses alike can look forward to a more straightforward and equitable taxation system.
Also Read: Income Tax Compliance Calendar for September 2024: Key Deadlines
READ MORE
CBDT Forms Committee to Revise Income Tax Act 1961, Plans to Eliminate ‘Sunset’ Clauses
Simultaneous Deduction Allowed under u/s. 54 and 54F for the Same Asset: ITAT Ruling