Direct Tax Code: India's Taxation System, Purpose, Features & UPSC Notes

The Direct Tax Code (DTC) is a proposed legislation aimed at replacing the existing Income Tax Act of 1961 in India. Its goal is to simplify, consolidate, and modernize direct tax laws, making them more transparent and efficient. The DTC seeks to reduce ambiguities, improve compliance, and minimize litigation. It also proposes uniform tax rates, clearer definitions, and a taxpayer-friendly structure, promoting ease of doing business and enhancing India’s overall tax administration.

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Background of Direct Tax Code

The Direct Tax Code (DTC) was introduced to simplify and consolidate India’s complex income tax laws into a single legislation. It aimed to make tax compliance easier and promote transparency and efficiency in the tax system. The Income Tax Act is complex and outdated to contemporary situations and developments. This created a necessity for a simpler Tax law in the country. The timeline of developments regarding the Direct Tax Code is as follows:

• On 12 August 2009, the first draft of the Direct Tax Code Bill was created.
• In 2010, a Revised Discussion Paper was created.
• In 2010, The Direct Tax Code bill was introduced in Parliament, and a Standing Committee of Finance (SCF) was appointed for a detailed discussion.
• In 2012, the committee submitted its report to Parliament.
• In 2014, a revised version of the Direct Tax Code was created after the committee report.
• The bill lapsed due to the change in government after the general elections.
• In 2017, An expert committee was set up to draft a fresh Direct Tax Code.
• In Aug 2019, the task force report was submitted to the Finance Minister. 

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Purpose of Direct Tax Code

The purpose of the Direct Tax Code is to simplify, rationalize, and modernize direct tax laws in India. It aims to ensure better compliance and reduce litigation. The Direct Tax Code seeks to replace the Income Tax Act. Thus, it looks to solve the challenges posed by the previous structure.

• To simplify the structure of all direct taxes and consolidate them for the government.
• To integrate various types of laws related to taxes like Income Tax, Wealth tax, and Dividends Distribution Tax (DDT).
• To make the tax laws simpler and more stable to improve tax compliance among taxpayers.
• To eliminate tax exemptions multiplicity and gradually dispose of the deductions.
• Improvement in the government's tax base.

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Features of Direct tax code

The Direct Tax Code features include uniform tax rates, simpler tax structure, and clearer definitions to reduce ambiguity. It promotes transparency and aims to streamline tax administration. All the features of the Direct Tax Code focus on simplifying and consolidating various direct taxes. 

There are many advantages of the Direct Tax Code, and they are as follows:

• Increasing the Income Tax Slabs: This proposal was adopted by the Government of India in the Fiscal year 2012-13. 
  • This helps better tax rate distribution across different income groups and eases the burden to some extent for lower-income households.
• Corporate Tax Simplification: 30 percent tax rate was proposed for domestic and foreign companies with the elimination of the current surcharge of 5% and 2% for the companies, respectively.
• Minimum Alternate Tax (MAT): The MAT should be increased from 18.5 percent to a minimum of 20 percent.
• Shifting of Schemes: The Savings Schemes should be shifted under EET from the current EEE. 
  • Some programs like Provident Funds, Gratuity, and Pensions would remain under EEE.

Simplification and Consolidation of Direct Tax Laws

Simplification and consolidation of direct tax laws aim to merge various provisions into a single, clear code. This reduces complexity and improves taxpayer understanding and compliance. Simplification of Direct tax laws includes various steps to achieve the same.

• Using Simpler Language: Simpler language will be used for the tax laws, making it easier to understand. Clear language will solve the challenge of tax laws always being complicated documents.
• Multiple Exemptions and Deductions: These tax laws will phase out the multiplicity of issues with the exemptions and Deductions done by the government at various steps.
• Cross-Referencing Issue: Cross-referencing will be reduced with a single document for all taxes. Cross Referencing leads to delay, which eventually results in bad governance.

Consolidation refers to the merging of various tax laws existing right now. Taxes are broadly classified as Direct Taxes and Indirect Taxes. The Direct Tax Code proposes to merge direct taxes like Income Tax Act 1961, the Gift Tax Act 1958, Wealth Tax Act 1957, etc.

Committee on Direct Tax Code and its Recommendations

The Committee on Direct Tax Code, formed by the Government of India, recommended simplifying tax laws, reducing litigation, and ensuring a taxpayer-friendly regime. It proposed clearer rules and lower tax rates. The task force recommendations have yet to be made public, but key takeaways can be taken from the report on the Direct Tax Code.

• Minimize the use of content and make it shorter, which is easier to understand.
• The new tax law is believed to bring relief for individuals paying income tax as the slabs will be increased.
• Introducing branch profit tax for foreign companies and reducing the tax for domestic and foreign companies to 25 percent is also recommended.
• A separate litigation unit is also recommended for processing the litigation cases.
• Various different units are recommended to bring specialization in the tax departments.

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Direct Tax Code 2.0 and Key Points

The Indian government has already taken much-needed steps in the right direction. There is scope for more. Much is needed to be done with the IT Act, which is still complex and has dual interpretation issues, leading to litigation cases.

Direct Tax 2.0 needs to be implemented, which includes multiple key points:

• The highest Income Tax slabs should be increased.
• The corporate tax rate should be fixed at 25 percent for domestic and foreign companies.
• The proposed Direct Tax Code should have fewer sections than Income tax to simplify it.
• Branch Profit Tax can be introduced for foreign firms, and incentives can be given to start-ups.
• Reassessment rules need major changes, and a mediation mechanism should be established between taxpayers and the Central Board of Direct Taxes(CBDT).

GAAR – General Anti-Avoidance Rule

General Anti Avoidance Rule or GAAR is a means provided under the direct tax system. It gives power to tax officials to restrict the tax benefit to any company, and by using GAAR, tax officials can suspend so

• GAAR provides important benefits to the government in handling the issues related to tax evasion. This provision helps in reducing tax avoidance cases and Round tripping will also be restricted under this rule. >
• GAAR can be a double-edged sword if misused. The certainty of GAAR usage for its designated purpose declines. This provision gives independent powers to tax officers, which might lead to cases of corruption or favoring someone over others.

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Guidelines issued by the government in the implementation of GAAR

There are two major guidelines issued in the GAAR implementation:

• Establishing an approving panel with three senior income tax authorities is necessary.
• GAAR will only be used for large transactions.

Parthasarathi Shome Committee Recommendations

The Parthasarathi Shome Committee recommended deferring GAAR implementation and suggested safeguards to prevent its misuse. It emphasized clarity, investor confidence, and fair treatment of taxpayers.

• GAAR should be delayed for three years, beginning April 1, 2016.
• The approving committee should decide whether or not GAAR needs to be used.
• Three crores will serve as the threshold amount.
• The advanced ruling should be permitted, and capital gains tax should be eliminated.
• Government-issued tax residence documents from foreign nations should be accepted.
• GAAR should only be used in cases of contravention with the primary goal of preventing tax misuse.
• GAAR should not be used if specific anti-avoidance rules are present.
• The Shome committee also suggested that only the rarest cases could warrant retroactive amendment.

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Conclusion

The Direct Tax Code has had a rough journey coming out as legislation. The government is moving from an outdated and complicated Income Tax Act towards a simplified and consolidated Direct Tax Code. The objectives and features of the code support the need for legislation that can broaden the country's tax base. The primary focus of the code should be to meet the country’s rising economic needs and to improve the tax base.

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