The government is undertaking a comprehensive review of the Income-Tax Act, with the exercise expected to be completed before the next Budget. Sudhakar Sethuraman explains how overhauling the current law can help reduce compliance burdens and improve clarity for taxpayers.

In HER BUDGET speech in July 2024, finance minister Nirmala Sitharaman had said that the government would be undertaking a comprehensive review of the Income-Tax Act. The potential

new direct tax code would be written in simple, easy-to-understand language with the following objectives: simplified taxes, improved taxpayer services, providing tax certainty and reducing litigation. Besides, the new tax code will be written keeping in mind the Prime Minister’s vision of a seamless, painless and faceless taxation system.

Keeping it relevant

THE INCOME-TAX ACT, 1961, (I-T Act) was introduced in the twelfth year of India becoming a republic. The economic status of the country, the purchasing power of the people, etc., at that point of time were very different from that today. Over the years, the I-T Act has been subject to many amendments to keep pace with the changing times and economic needs. With 23 chapters, 298 sections and over 1000 sub-sections / clauses, the I-T Act is quite complex. For instance, Explanation 1 to Section 2 (42A) has 18 sub-clauses. Section 47, which deals with transactions not regarded as transfer of capital assets, has over 40 clauses.

Impact of the Direct Tax Code, 2009

THE DIRECT TAX Code (DTC) was aimed at simplifying and streamlining the direct tax system in the country. It had provisions aligning with international practices on emerging issues. Many of these provisions have been incorporated in the I-T Act. To name a few, Place of Effective Management (POEM), general anti-avoidance rules as proposed in the DTC have been subsequently included in the I-T Act.

Fewer personal income tax slabs

THERE IS A need to review and reduce the number of tax brackets in personal taxation. Directionally, the government’s thrust towards the new tax regime is gaining significant impetus. The government can look at either increasing the exemption threshold or optimising the tax slab rates. The Direct Taxes Code Bill, 2010 did increase the slabs for individuals substantially for income up to `25 lakh.

Streamlining taxation of savings

THE CHOICE BETWEEN the EET (Exempt-Exempt-Taxed) and EEE (Exempt-Exempt-Exempt) tax regimes is not merely a fiscal matter but also a policy decision, typically reflecting the maturity of the economy. Regardless of the status of the DTC, the government continuously evaluates and reviews these tax regimes to align with evolving economic and policy objectives.

Global tax avoidance rules

THE GLOBAL TAX reforms aimed at addressing artificial structures designed for tax avoidance are poised to benefit all countries grappling with tax avoidance, including India. A key component of these reforms involves the taxation of the digital economy, achieved through the redistribution of tax rights in market economies and the implementation of jurisdictional minimum tax rates, as outlined in Pillar 1 and Pillar 2, respectively, of the Base Erosion and Profit Shifting (BEPS) action plan.

However, there is a growing perception that Pillar 1 and Pillar 2 reforms may disproportionately favour developed economies. This has led to calls for development of international tax rules under the auspices of the United Nations rather than the OECD, which is predominantly composed of developed countries. As a significant voice of the Global South, India is expected to play a crucial role in advocating for a more equitable framework.

Pending reforms in corporate tax

IN TERMS OF corporate taxation, the objective appears to be the establishment of a simplified tax regime featuring a lower corporate tax rate, without the need for tax holidays. One area worth evaluating is the implementation of group tax consolidation, which would allow for the interchangeable use of tax attributes across entities without requiring legal consolidation.

The capital gains tax regime has undergone an overhaul in the 2024 Union Budget. Now there are fewer classifications based on applicable tax rates as compared to the previous regime.