This article has been authored by Saoumya Vashisht, a fifth-year student at Amity Law School, Delhi.
History of Taxation in India
Taxation in India pre-dates to the earliest empires to have ruled the country. Notably, the Mauryan Empire was known to have had a descriptive tell-all in the guise of ‘Arthashastra’ with respect to the functioning and allocation of all the tax collection from the land. A leap, years into the future brought about the first rudimentary modern form of taxation in 1860, on account of the Military Mutiny in the pan-India Revolt of 1857. Following which, the year 1918 marked the new epoch of taxation which was amended several times in the subsequent years and was finally replaced by the Income Tax Act of 1961 as we know it today, precluding the forthwith amendments.
The Income Tax Act of 1961 was enacted on 1st April 1962 with the vision that it would provide a robust system for taxation for an uncertain yet independent Republic of India with annual fill-ins based on the plight of the economy. This strategy was meant to ensure stability as well as customizable fluctuations which are introduced via the Finance Act every year. With 23 chapters, 298 sections and 5 categories of taxable income, this Act has sustained the socio-economic needs of the nation for around 58 years. Albeit, the need to revamp tax legislature was felt recently to ensure effectiveness ergonomically.
The stability in the Act was not designed to withstand the technological advancements that the world has encountered since then, accompanied by the immense global interdependence, making it a complex structure with constant amendments and add-on provisions. Hence, the government deemed forming a new legislation fit for the purpose of inclusivity of factors. The challenge posing the government throughout the decade has been to frame a piece of legislation which is envisioned to encompass the growth that will take place in the subsequent years while maintaining the requisite balance of amount needed for the economy to function in a seamless manner.
Direct Tax Code: The Ideation of the Bill
The Direct Tax Code Bill (DTC) was introduced in August 2009 to predominantly consolidate and amend all the laws related to direct taxes. The Code was also made open for public comments. After incorporating the inputs received, a Revised Discussion Paper was prepared and tabled in the Parliament in 2010, with the ask of forming a Standing Committee of Finance (SCF) which would look into the revised draft and fashion a report assessing the interests of all the stakeholders involved. The recommendations in the SCF’s Report of 2012 were published by the Central Government in 2014 which eventually led to backsliding of the entire Draft as the new government came to power.
In 2017, an Expert Committee was set up to breathe life into the disposed DTC Bill through new provisions and stakeholder evaluations. This Committee was chaired by Mr. Akhilesh Ranjan, a Central Board of Direct Taxes Member along with various luminaries from the taxation sector. The Report was submitted to Finance Minister in August 2019 but to no avail, since it’s not been made public yet. Notwithstanding the recommendations of the Committee, an influx of new schemes and notifications were released by the government which were in consonance to the changes suggested by the Committee.
The Need for Direct Tax Code
Indian demography consists of extremes, its pendulums between the abundantly endowed and the impecuniously destitute with several variations of income earners in the middle. This galvanization results in unsatisfactory revenue yields if the interests of both of these sections of society are not catered to.
Progressive taxation on principle is the most elaborate rate of taxation, however there is a need to manage the tax payer’s expectations and avoid extreme taxable income disparity, especially to prevent one section of the society from feeling the burden of contribution towards the national treasury. The government felt the need to translate this resentfulness into cooperative spirit with tax base expansion as a feasible medium. This expansion would aim for an increase in the number of tax slabs by easing into a steadier transition within these slabs.
The second issue was concerned with the numerous problems faced by taxpayers and tax administration which are intrinsic to the current system of taxation. Lack of awareness among the taxpayers, complicated filing updates, poor data collection and utilization were only the tip of the iceberg. A comprehensive and coherent legislation dealing with all the issues with reference to the technology available while making adjustments for potential developments was needed for the proper addressal of these hiccups.
India’s linear curve of development is directly proportional to augmenting tax litigations. Annual changes coupled with complex charging and residency issues among many others form a major chunk of the pending litigations within the country. The incoming of a new law would certainly take into account the prominent reasons for such litigations and provide ways to deal with them.
The Objective of Direct Tax Code
Globalization has shifted the financial priorities of the world and thus have led to major changes to the taxation structure of the countries. Emergence of Organisation of Economic Cooperation and Development has forced a lot of countries around the world to rethink their structures and create an atmosphere of cooperative growth to facilitate businesses all over the globe through Double Taxation Agreements. Thus, the new Code aimed to incorporate the best international practices and institutional recommendations based on dynamic business models around the world, into this one Frankenstein piece of legislature which would favor both national and international interests while being adept for the growth of Indian economy. Consequently, this legislation would be designed to promote economic development in the country as it keeps up with the international finance and taxation standards.
Every year the rate of tax applicable on various stakeholders is determined by the Finance Act for the respective financial year, which germinates a lot of hysteria and instability among the people, the Code is envisioned to encompass all the rates making it easier for people to navigate their way through taxation and streamlining the entire process of it. The new legislation would amalgamate all direct taxation laws into one, essentially merging acts like the Income Tax Act of 1961, Wealth Tax Act of 1957 and the Gift Tax Act of 1958 together. In line with Committee recommendations, any change then would become a permanent feature of the Code only when it has the backing of public opinion.
Another reason for lack of stability is the complex nature of prevailing Income Tax Act, 1961. Its age-old provisions reformed with new provisos and exceptions has only made the process of compliance tougher for a civilian bereft of any legal knowledge. One of the major factors of this Code then becomes simplification of the law. To serve this purpose, the Committee recommended getting rid of unbidden complexities which accompany the concepts of “Financial Year” and “Assessment Year” and replacing it with “Financial Year” only so that the process of filing tax is swift and convenient to a layman as well.
All the above-mentioned objectives culminate into an expansion in the tax base which further leads to amplification of funds utilized for development, the government also aims at minimizing exemptions, introducing lower tax rates and reducing the ambiguity pertaining to tax avoidance to facilitate the acceleration of obtaining this goal of tax base expansion.
The Recommendations of the Expert Committee
The Expert Panel made detailed and drastic changes juxtaposed to the Income Tax Act of 1961 to reach the desired objective. Few of the key changes involved the Committee purporting to increase the number of Income Tax slabs with fixed rates in the Code while eliminating the levy of surcharge, which was introduced as a temporary feature, altogether. These slabs have been widened in the new Code which is to bring relief to the middle income and high-income groups.
Judging the current increase in the number of start-ups emerging in India, the Code also provides a string of incentives to these booming businesses, especially by doing away with the “angel tax” which causes a lot of start-ups to find alternatives for funding.
The Committee also extended a favourable arm to the established businesses and corporations by reducing the Corporate Tax to a mere 25% standard simultaneously scrapping the Dividend Distribution Tax which incentivizes the Corporations to reveal their income scrupulously.
In the light of dealing with tax avoidance, the Committee highlighted the concept of statelessness. There is a need to bring a reform in the Residence Rules as High Net Individuals (HNIs) avoid tax by mainly operating from India and planning their stay overseas in a way that they can circumvent paying the taxes on their total income in India. The Committee then recommended the number of days to be reduced from the present threshold of 182 days to 90 days.
The General Anti Avoidance Rules (GAAR) propagated by the Committee grants discretionary powers to tax officials to declare an agreement “impermissible” if it takes place only to obtain tax benefits. These Rules followed by transparency in taxation is assumed to steer maximum compliance from the taxpayers.
Another drastic measure recommended by the Committee oversaw the application of the Double Tax Avoidance Treaty with the domestic tax law which would do away with the choice that taxpayers have to opt for anyone of the two with respect to being governed under either of them, essentially providing that where the tax rate under DTAA is less than under the Indian Income Tax Act, the former shall prevail.
Reducing litigations is one of the major reasons for contemplating a new legislation, which was suggested by way of incorporating Mediation as one of the Dispute Resolution Mechanisms within the Code. A negotiated settlement before a Collegium of Commissioners would quicken the dispute procedure and substantially prevent and reduce potential as well as pending litigation respectively.
Conclusion: Assessing the Intended Reforms
The Direct Tax Code comes as a cross to bear for the government, which explains the reason for it to have not been made public yet. The Code solves problems as it creates new ones, essentially causing a conundrum for both the taxpayers and administration. The first major lacunae within the ideation of this Code is the fixation of tax rates in black and white within the Code itself. Indian economy is highly volatile, its financial requirements change with each passing year, it is not possible for the framers of the Code to predict the said requirements for a long period of time, especially when the determinant at hand is economic and not judicial or legislative. The framers can specify thresholds of tax rates within the Code but cannot bind the future Parliaments.
The GAAR recommended by the Committee provides unchecked discretionary powers to tax officials which could induce corruption into the system while lessening the creditworthiness of the myriad of processes among the people.
India within the last few years has gone through major financial overhaul (such as Demonetization) creating a sense of insecurity among the population. Public sentiment plays a huge role in financial matters of a country; hence the government is reluctant in introducing an entirely unexplored piece of legislation within the market with no sense of familiarity. The new Schemes and Notifications released by the government are fundamentally the reforms set to be included in the Code, in a new and au courant packaging for the people to abidingly embrace without any question.