The Lok Sabha Elections are underway, and with the poll results scheduled for June 4, discussions and speculations have already begun regarding the reforms and major pending works the new government will undertake. One of the major pending tasks in this regard is the implementation of the Direct Tax Code (DTC), which has been overdue for a long time.
Media reports, citing sources, suggest that if the BJP-led NDA government is re-elected in the ongoing elections, they will prioritize the implementation of the DTC. A report in the Financial Express last month stated that discussions were underway in the finance ministry regarding the implementation of key direct tax reforms, with the draft prepared in 2019 by a special task force serving as the foundation for the overhaul.
History and hurdles in the way of Direct Tax Code
During the UPA-1 government in 2009, the Direct Tax Code was first proposed. However, the proposal did not see any conclusive progress and went through several revisions until 2014 and ultimately lapsed with the dissolution of the 15th Lok Sabha. In August 2019, a task force appointed by the Modi government submitted its report on direct tax reforms, aimed at overhauling the six-decades-old Income Tax Act.
Experts are of the view that whoever comes to power, the NDA or INDIA bloc, at the Center next month, direct tax reforms or Direct Tax Code will remain one of the key agendas of that government.
Also Read: Govt kicks off direct tax code revision
Direct Tax Code and its main objectives:
The DTC is the regulation that aims to replace the existing Income Tax Act. It covers all types of taxes, including corporate and personal income taxes. Through the direct tax reforms, the government wants to establish a single legislation with simplified tax laws and regulations.
Chintak Shah, Vice President of Anand Rathi Wealth Ltd, shared his insights on the DTC and its implications and benefits for taxpayers, emphasizing that the proposal was essentially introduced with primary objectives of simplifying tax laws, rationalizing tax rates, and broadening the taxpayer base. “It’s worth noting that the total number of Income Tax Returns (ITRs) filed in the country for FY22-23 was 7.78 crore whereas India’s population in 2022 is estimated to be at 141 crore.”
Shah said the DTC aims to simplify the tax structure through the following:
Reduction of complexity: Elimination of various exemptions, deductions, and special provisions which are there in the current Income Tax Act.
Clearer definitions and terminologies: Simpler language will be used for the tax laws, making it easier to understand and interpret, leaving less room for ambiguity.
On whether the implementation of the Direct Tax Code will affect the new tax regime, he said that the implementation of the DTC is unlikely to introduce any significant changes to the new regime.
As discussions around direct tax reforms have been summarized, taxpayers are left wondering whether there will be no deductions and exemptions at all once the DTC is implemented.
On this, he said it is unlikely that the DTC will eliminate all deductions and exemptions. Certain key deductions and exemptions are very likely to be retained. Examples of deductions which may get retained include life insurance payments, provident fund contributions, etc. Exemptions that serve important social or economic purposes may be retained under the DTC as well.
Implications and benefits for taxpayers if DTC gets implemented:
After the implementation of the DTC, taxpayers may face potentially higher tax outflows and might need to reconsider their investment strategies due to changes in tax rates, according to it.
The potential benefits of the DTC include significant ease in tax compliance and a reduction in litigation due to the clearer language of the DTC. With fewer deductions and exemptions, filing tax returns will become less complex than it is currently. This reduced reliance implies reliance on chartered accountants or tax consultants to accurately file tax returns.
