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Direct Taxes Code

Direct Taxes Code

What is a Tax?

  • Taxes are generally an involuntary fee levied on individuals and corporations by the government in order to finance government activities. Taxes are essentially of quid pro quo in nature. It means a favour or advantage granted in return for something.

Direct Tax

  • A Direct tax is imposed directly on the taxpayer and paid directly to the government by the ones on whom it is imposed.
  • Some important direct taxes imposed in India are as under:
    • Corporate Tax: It is the tax on all the income or gains generated by corporations. It is generally levied on the profits earned.
    • Income Tax: It is levied on and paid by the same person according to the different tax brackets as defined by the income tax department.
    • Gift Tax: It is the tax that an individual receiving the taxable gift pays to the government.
    • Inheritance Tax:  It is a tax on the estate, or total value of the money and property, of a person who has died.

Advantages of Direct Taxes

  • Economical and lower cost mechanism
  • Relatively Elastic
  • Social and economic equity
  • Controls Inflation
  • Certainty of tax to be paid

Disadvantages of direct taxes  | Direct Taxes Code

  • Arbitrary rate of taxation
  • Tax Evasion
  • There is imbalance in sectoral taxation
  • Inconvenient
  • Impacts capital formation

History of Implementation of Direct tax Code

  • The government published a discussion paper on Direct Tax Code in 2009 and issued the Direct Tax Code (DTC) bill in parliament in 2010.
  • Like all technical bills, this bill too was referred to the standing committee on finance headed by Mr Yashwant Sinha. The government wanted to implement DTC from 1 Apr 2012 but due to delay in the report being submitted by the standing committee, it was not possible. It is not a very controversial bill as state governments are not involved in it.

Objectives of the Direct Tax code

  • To make the tax system more effective and efficient.
  • To simplify and consolidate all direct tax laws of the central government
  • To bring horizontal equity among different classes of taxpayers in line with best international practices.
  • To bring the consolidated law relating to direct taxes, that is, income-tax, dividend
  • distribution tax, fringe benefits tax and wealth-tax
  • To phase out the multiplicity of tax exemptions and deductions in order to widen and deepen the tax base.
  • To improve compliance further, tax laws need to be simple, stable and robust.

Consolidation Of Direct Tax Laws   | Direct Taxes Code

  • All tax laws dealing with direct taxes would be merged.
  • g. Income Tax Act, 1961; Wealth Tax Act, 1957; Gift Tax Act, 1958.

Simplification Of Direct Tax Laws

  • Tax laws would be re-written in simple language
  • Exemptions and reductions would be reduced
  • Cross-references will be reduced
  • Explicit Language will be used.    (Direct Taxes Code)

Direct Tax Code (DTC) Proposals

  • Increase in Income tax slabs. (Government adopted the proposed tax slabs in the financial year 2012 – 2013)
  • Corporate Income Tax or Corporate Tax – For both domestic and foreign firms, the tax rate should be 30% and no surcharge will be applicable. Currently, there is a 5% surcharge that is applicable for domestic firms and for foreign firms, tax is 40% along with 2% surcharge is also applicable.
  • Minimum Alternate Tax rate should be 20%. Currently, the tax rate of MAT is 18.5%.
  • Savings Scheme should be under EET. Presently these schemes are under EEE.
  • Few schemes like PF, Gratuity, pension funds etc would still come under EEE.

What Is Fiscal Deficit?

  • The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.

How is Fiscal Deficit calculated?

  • Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts)
  • If the total expenditure of the government exceeds its total revenue and non-revenue receipts in a financial year, then that gap is the fiscal deficit for the financial year. The fiscal deficit is usually mentioned as a percentage of GDP. For example, if the gap between the Centre’s expenditure and total income is Rs 5 lakh crore and the country’s GDP is Rs 200 lakh crore, the fiscal deficit is 2.5% of the GDP.

Need For New Tax Code  | Direct Taxes Code

  • Income Tax Act, 1961, was constituted and enacted considering the need and state of the economy at that time, taking into account the mindset and thought process of the people about how income could be taxed.
  • Over the last 58 years, the economy has become more integrated, globalized, liberalized and new models of business have arisen. Therefore, the act needs to be redrafted and be made accommodative of the needs of the present as well as of the next few decades.     (Direct Taxes Code)

Challenges In Direct Tax System

  • Tax Rate: The tax rate in India is quite high for both individuals as well as corporate.
    • The reduction in corporate tax rate by Trump administration has led to the shifting of investment from other regions to the USA.
    • However, the government had reduced the corporate tax rate to 25% but treating domestic and foreign companies at par is an issue that needs to be resolved.
    • The individual tax rates also need to be rationalized in order to increase the tax base.
  • Tax Assessment: In India, the assessment process is physical which leads to the allegation of harassment by tax officials often referred to as tax terrorism.
    • This is a major roadblock in compliance and increasing the tax base.
  • Tax Dispute: In the Indian taxation system, there has been a huge number of tax litigations, which makes the whole tax dispute resolving mechanism unviable.
    • This is a major cause of concern in ease of doing business and enforcing contracts.
  • Exemptions: There are a plethora of exemptions in direct tax code which makes the filling process more complex and reduce the effective tax rate.

Relevance of New Direct Code

  • Demographics: In the country of more than 1.2 billion, there are only 74 million effective taxpayers which is a very shallow figure. Considering the scale of Indian population and demographics, tax administration needs to take proactive steps in bringing more people within the tax-fold.
  • Complexities: The six-decade old tax code consists of around 700 sections of a very complex nature. It has evolved over time taking into account many amendments. Now the whole tax code has assumed a very haphazard form. Therefore, the simplification of tax laws would enable more people to become part of the direct tax regime.
  • Changing Form of Business: In the past 6 decades, the nature of business has evolved a lot. The social media and internet marketing has become a new commodity which needs to be appropriately taxed. Therefore, the new tax code should involve provisions for taxing stakeholders beyond geographical boundaries.
  • Tax Administration: The present tax administration has evolved taking into account the experience it has gained in the past 6 decades.
    • Therefore, the new tax code provides an opportunity to remove procedural loopholes and make the tax administration user-friendly, which is presently infamous for harassment.
    • Use of Technology: In 1961, the taxation process was completely physical. Now the use of new technology, social media, artificial intelligence has to be accommodated to make the process simpler and transparent.
    • Recently, the Income Tax department started the faceless assessment scheme on a pilot basis.

 

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