Expectations from Direct Tax Code 2.0

“The Only Thing That Is Constant Is Change”- Heraclitus

The system of taxation has been in existence in India since ancient times. Twentieth century India saw the direct tax legislation codified initially in 1922 and subsequently in the post-independence period in 1961.

Since the passing of the legislation, the Income tax law has undergone many changes to incorporate policy changes, globalisation, changes to the economic environment and business models, rapid technology advances, global best practices, judicial precedents, etc. Over a period of time, the volume of tax law burgeoned (23 Chapters, nearly 300 sections and 14 Schedules). The tax law is also read along with the Finance Acts, the Income tax Rules, several departmental circulars, notifications and Supreme Court judgements. On top of this, disputes on tax positions taken by taxpayers reach courts every year in large numbers. The basic structure of the Income tax Act has been over-burdened and its language has become complex. No wonder an average tax payer finds it difficult to understand the maze of Income tax provisions. So the Government of India felt a need to revamp the law.

The Direct Taxes Code Bill, 2010 (DTC 2010) was presented by the then Finance Minister in the Lok Sabha on 30 August 2010, after considering feedback from public and on concerns received from businesses. New principles / concepts were introduced in the DTC Bill, such as rates of taxes proposed to be prescribed in the Schedule to the Code itself rather than an annual Finance Bill, dropping off the existing concept of assessment year and adoption of reference to the 'financial year, classification of all accruals and receipts in the nature of income, into a 'special source' or an 'ordinary source'. Several international best practices were also introduced e.g., residence of company to be based on Place of Effective Management, General Anti Avoidance Rule (GAAR), Controlled Foreign Company (CFC) provision for countering deferral of repatriation of income, Advance Pricing Agreements (APA), Transfer Pricing to apply if a transaction is undertaken with another enterprise located in a prescribed jurisdiction, Branch Profit Tax on foreign companies in lieu of higher rate of taxation and Wealth Tax on international assets.

The proposed DTC Bill, 2010 comprised of 22 Chapters, 319 Clauses and 22 Schedules, running into more than 400 pages!

Subsequently, DTC 2010 was referred to the Paliamentary Standing Committee on Finance for a detailed examination, which issued the report in March 2012. However, with the dissolution of the 15th Lok Sabha in 2014, DTC 2010 also lapsed.

During the Rajaswa Gyan Sangam held on 2 September, 2017, the Prime Minister observed that the Income-tax Act was drafted more than 50 years ago and that there was a need for it to be re-drafted. In November 2017, the Government set up a Task Force with a mandate to draft an appropriate direct tax legislation considering the direct tax system prevalent in various countries, international best practices, economic needs of the country and other connected matters. In November 2018, the Task Force was reconstituted and is required to submit its report by the extended timeline of 31 July 2019.

In a way DTC version 2.0 is on the cards! A redrawing of legislation is a herculean task. We have seen that with the New Companies Act 2013, the introduction of the Goods and Services Tax Act 2017 and the Insolvency and Bankruptcy Code, 2016.

While the world is moving towards the Fourth Industrial Revolution, tax laws should not be left behind. In recent years, India has been an active participant in the global tax initiatives of the G20 and the OCED. So the Task Force will be expected to envision internationally accepted tax provisions, seamless adoption of use of technology, data analysis and block chain for curtailing tax leaks and compliance, inch closer to a paper-less tax office, simplification and deletion of exemption provisions which otherwise lead to litigation with reduced tax rates and to adhere to the “ease of doing business” mantra of the current government.

India has improved its rankings in the competitiveness and ease of doing business and ranks 77 amongst 190 countries assessed in 2018 as per the World Bank. The government has identified nodal departments and constituted the Task Force for each of the indicators needed for the ranking on ease of doing business. ‘Paying taxes’ is one of the indicators of the ranking for ‘Ease of doing business’, where India is still at 121st rank in 2018, improved from its 156th rank in 2014. So the Task Force will play a very important role in setting in place, the tax reforms in the Direct Tax Code.

India is eagerly awaiting a Direct Tax Code 2.0 that is easy to understand and implement, reduces litigations, facilitates voluntary compliance, increases tax base, improves efficiency and is equitable and fair.

Bahroze Kamdin is Partner, Deloitte India and Smita Parulkar is Director with Deloitte Haskins and Sells LLP