The draft legislation on the new Direct Tax Code (DTC), nearly two years in the making, was finally submitted to Finance Minister Nirmala Sitharaman on Monday. The task force headed by Principal Chief Commissioner of Income Tax Akhilesh Ranjan, which was constituted in November 2017 to review the existing six-decade-old Income-tax Act, has reportedly proposed several far-reaching changes in its report, which are yet to be made public.
Here are some of the major announcements likely to be made under the new law for income tax.
More money in the hands of individual taxpayers
The new Direct Tax Code might bring some cheer for individual taxpayers. The upcoming direct tax law might see tax brackets below the Rs 55-lakh range adjusted in such a way that they leave more money in the hands of individual taxpayers. Disposable income in the hands of individuals will directly aid consumption within the economy.
'Assessing Unit', not 'Assessing Officer'
To check harassment by taxmen, individual 'assessment officers' are likely to be replaced with 'assessment units' to deal with individual taxpayers. Corporate taxpayers will also have assessment units including multiple officers along with industry specialists. All communication between taxpayers and taxmen will be digital, equipped with anonymous codes for identification.
Uniform corporate tax
One of the key announcements under the new Direct Tax Code is likely to further reduce the tax burden on India Inc that has been reeling under economic slowdown. The new income tax law might call for moving away from surcharges on income and reduce corporate tax to 25 per cent across the board.
India imposes 25 per cent corporate tax on small companies up to Rs 400 crore in revenue, 30 per cent on large domestic companies above Rs 400 crore and 40 per cent on foreign firms, plus a 4 per cent health and education surcharge on total tax payments. This is among the highest in the world. Besides, there's a surcharge of 12 per cent for domestic companies and 5 per cent for foreign companies that boast a taxable income of over Rs 10 crore.
On July 5, while presenting Budget 2019, Sitharaman had announced that companies with annual turnover up to Rs 400 crore will be taxed at the lower rate of 25 per cent as a step towards phased reduction in tax rates. Previously the lower rate was only applicable to companies with annual turnover up to Rs 250 crore while the rest of India Inc incurred a 30 per cent tax rate. With this move, 99.3 per cent industries are already covered by the lower corporate tax rate and speculation is rife that the rest will join the bandwagon once DTC is implemented.
Also, the new law for direct taxes might come with a special set of incentives and provisions for startups.
No Dividend Distribution Tax
The new tax law might help companies with Dividend Distribution Tax as well. It might allow for dividends to be taxed only in the hands of shareholders.
The upcoming Direct Tax Code might also propose a "branch profit tax" for foreign companies on the earnings they repatriate to their overseas parent. This will be over and above the corporate tax. For instance, the Tax Cuts and Jobs Act rolled out by the US government in 2017 encourages overseas arms of American companies to repatriate their profits to their parent companies.
Personal income tax
One of the main objectives of the Akhilesh Ranjan-led Task Force was to make the Income-Tax Act simpler, focusing on easing the tax and compliance burden on individuals. The primary focus of the panel is believed to be on simplifying tax brackets to provide relief to middle-income taxpayers while removing any excess surcharges that add to the tax burden.
A FinMin source told India Today last month that the panel is likely to recommend introducing a 10 per cent tax rate slab for annual income between Rs 2.5 lakh and Rs 10 lakh followed by a 20 per cent slab for the Rs 10-20 lakh income bracket and a 30 per cent, or higher, slab for higher income levels. If true, this will come as a major relief those in the Rs 5-8 lakh slab, who have been stuck paying 20 per cent tax since 2010-11. The upper threshold for this rate was subsequently pushed up to Rs 10 lakh for FY13.
The lower middle class already had much to cheer in Budget 2017 - when former Finance Minister Arun Jaitley halved the personal income tax in the Rs 2.5-5 lakh bracket to 5 per cent - and again in the Interim Budget 2019 thanks to the full tax rebate offered to individuals with taxable annual income up to Rs 5 lakh.
Those with a total annual income of over Rs 10 lakh currently fall in the 30 per cent tax slab. The buzz is that those earning up to Rs 55 lakh may also get major tax relief.
The draft code might announce a new concept of settling disputes through mediation between the taxpayer and a Collegium of Commissioners. This is supposed to help avoid tax litigation.
Vastly simplified law
As against the 700-odd sections in the six-decade old Income-tax Act, the new Direct Tax Code will be simplified greatly, containing less than 400 sections. Some announcements under the new tax law might make compliance easier for taxpayers.
A person privy to the discussion of the Task Force told BusinessToday.In that as per the draft tax code, if a person gets a (tax) demand order on account of 20 items, the assessee has a choice that of the 20 items if he agrees on 10, he can pay the tax on only those 10 items, and get exemption from paying any interest or penalty.
The items on which the assessee does not agree, he can go for a negotiated settlement. If a negotiated settlement is reached, the assessee will only have to pay the tax and interest and no penalty.
If one does not agree with everything, he can partly agree and partly litigate. This move is designed to slash tax litigations that have long plagued the Income Tax Department.
Taxpayers might even be able to approach tax authorities to seek clarification on a point of law
Litigation Management Unit
A Litigation Management Unit will deal with tax litigation process under the new income tax law. Also, the officer raising the tax demand cannot file for litigation in the same case.
Avoid legal ambiguity
Provisions and explanations that dominate the current Income-Tax Act are reportedly being kept to bare minimum to make the new law easy to comprehend and safe from multiple interpretations.
The government will release the report of the eight-member panel in the public domain for consultations after examining all the recommendations. Some of them may make their way into the government's 2020-21 budget proposals.