Three suggestions on how finance minister can reform the direct tax law6 min read . Updated: 25 Nov 2019, 12:05 AM IST
- It’s not clear when the draft DTC will get implemented, but Budget 2020 may introduce some changes
- We tell you what changes experts want the finance minister to make through either the new direct tax law or Budget 2020
Prepaprations have already begun for Budget 2020. Earlier this month, the ministry of finance, through a circular dated 11 November, requested suggestions from the industry and trade associations regarding changes in direct and indirect taxes in Budget 2020.
There has been long-standing demand for a new law altogether, to bring the tax rules and laws in line with the present requirements, given that the current Income-tax Act was formalized about 60 years ago, though there have been many amendments and changes ever since. The intent of introducing Direct Tax Code (DTC) was proposed in 2005, but its drafting has been under process for more than a decade now. Though a couple of months ago, the task force assigned with the duty to draft DTC submitted a report to the finance ministry, the recommendations are not out in the public domain yet.
In essence, DTC is meant to simplify direct taxes. Till date, the government has not given any indication on when the draft DTC will be made public or get implemented. However, we can expect some reforms to be incorporated in the upcoming budget.
“The policies and procedures cannot remain arrested and must be altered from time to time to remove ambiguities," said Neha Malhotra, executive director, Nangia Andersen LLP, a chartered accountancy firm. Also, given the current slowdown, changes in taxation can add to the income of consumers, in turn boosting the economy. “With the current state of economy, it is necessary for the government to look at revising tax rates or slabs, rationalizing deductions and exemptions and decreasing operational inefficiencies and litigation by providing clarity," said Saraswathi Kasturirangan, partner, Deloitte India, a tax and audit firm.
We tell you three changes experts want the finance minister to make through either the new direct tax law or Budget 2020.
Simplification of tax laws and rules
Experts claim that there are various ambiguities in tax laws which need to be addressed. “Simplification of tax rules is a must, it should be done in such a way that it will be able to help the government as well as the taxpayers, and there should be no uncertainty, which right now is prevailing and results in lot of litigations. Often, taxpayers and the tax authority differ on a particular point of view and it goes into litigation. Once litigation starts, the matter gets locked for many years," said Neeraj Sharma, senior executive director, SKP Business Consulting LLP, a business and tax consulting and accounting services firm.
Even after several amendments and updation of tax laws, there is still lack of clarity and a lot of loopholes. “For instance, exemption from capital gains under Sections 54, 54F, 54EC or 54B of the Income-tax Act is allowed only when an assessee reinvests the capital gain in specified assets. However, assessees are often denied such exemption, if the new asset is purchased in the name of their close relative. The Act is silent on this issue, giving rise to litigation. Thus, to quash the speculation, suitable amendments could be brought about to widen the scope of exemption, suggested Malhotra.
There is also a lot of uncertainty for residents who travel abroad regularly. “Specifically for internationally mobile employees, there is significant amount of ambiguity around matters like taxation of stock award, taxation of overseas social security, availing of tax treaty benefit at the time of tax withholding, and so on. Specific clarification around these areas would reduce litigation," said Kasturirangan.
Though problems do exist, experts said it may not be possible to change the entire tax law in one go as it could jeopardize the system. “It has to be done in bits and pieces or in a phased manner. So, only part of the suggestions drafted by DTC task force may be introduced in the upcoming budget," said Sharma.
What sudden big bang changes can do was experienced when the big change in indirect tax law, the implementation of the goods and services tax (GST), hit several roadblocks and with systems still struggling to adjust to the new regime. “While the country is still settling in with a new indirect tax law and its compliance, it may be prudent to postpone the overhaul of direct taxes for some more time," said Archit Gupta, founder and chief executive officer, ClearTax, a tax filing and investment advisory portal.
Rationalization of tax rates and benefits
After the recent cut in corporate tax rates, there is speculation that the government may reduce the tax slab rates applicable to individual taxpayers. Experts have mixed views on that.
“Subsequent to reduction of corporate tax rate, there should be reduction in income tax rates for individuals for a consumption-led revival of the economy and putting more money in the hands of the common man," said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP, a chartered accountancy firm.
Increasing the slab rate or reducing the tax rate “will result in more disposable income in the hands of individuals, which in turn will fuel economic growth," said Sanjiv Chaudhary, partner and leader, tax and regulatory services, Delhi NCR, BDO India, an accounting, tax and advisory firm.
Some other experts, however, don’t think there’s any scope to reduce tax rates. “These expectations are inept, since the intent behind the corporate tax rate cut was to revive India Inc. Even across the world, personal tax rates are kept high and corporate tax rates are low to attract foreign investment. Thus, it is unlikely that the government will slash slab rates," said Malhotra.
However, experts expect the government to rationalize the numbers of deductions and exemptions currently available. Many taxpayers are not even aware of all types of deductions available to them or get confused. “Based on the recommendations in the DTC, some rationalization must be considered. There are several old and redundant allowances, which can be done away with. There is a proposal to subsume deductions. This would help assimilate deductions under proper heads and allow recall and help taxpayers to maximize them," said Gupta.
Some experts believe that the government may not increase the limit of existing deduction or introduce a new one. “The idea of simplification is to reduce as much deductions as possible and make them straightforward," said Sharma. The government’s intention to phase out deduction is also evident from the recent reduction in corporate tax rates, wherein the government introduced two sets of rates—a higher one for those who claim deductions and a lower one for those who don’t.
Removal of arbitrage in investments
Another thing experts would expect the government to do is abolishing or reducing the arbitrage in investments products when it comes to tax benefits, and introduce similar benefits for similar products. “The disparity in tax benefits that unit-linked insurance plans or Ulips and mutual funds get unnecessarily creates confusion when a person is selecting a product. Tax arbitrages may impact a proper selection that should be largely based upon financial goals," said Gupta.
Besides, currently, different products are eligible to become long-term capital assets for different holding periods for taxation purposes. For instance, equity holdings become long term after a year, real estate holding after two years and debt holdings after three years. “The basis and the objectives must be aligned and the holding window may be made consistent across similar assets, to reduce taxpayers’ hardship in assessing the impact. This can help in improving compliance," added Gupta. Read more and also at. Keep watching the space for updates.