Direct Tax Code version 2.0: Reinventing the wheel?

While experts pitch for simpler compliance, they are divided on the need for a new law

The government’s move last week to take a fresh look at the 55-year-old Income Tax Act, 1961, has left experts divided on the need for a new direct tax legislation. While the opinion is divided on whether this requires a new law, experts say making changes in the existing Act can serve the purpose. 

The government, on its part, has given a wide mandate to the seven-member expert group to draft new legislation. This includes bringing the direct tax system in line with international best practices and the current economic needs of the country.

The proposal for new legislation, on the lines of the Direct Tax Code Bill, 2010, has perturbed some tax experts. “We discussed and deliberated on the Direct Tax Code for almost a decade. I am wary of going through the same discussions once more,” said an expert. 

The Direct Tax Code Bill was introduced in Parliament in 2010 by the Manmohan Singh-led United Progressive Alliance (UPA) government. However, it lapsed with dissolution of the Lok Sabha in 2014. The current government decided in 2015 not to re-introduce the Bill.  

Experts, however, say there are both pros and cons having a fresh legislation on direct tax. "Having a new tax code altogether will have a lot of uncertainties, transition issues and may not really be fruitful,” Sanjay Sanghvi, partner, Khaitan & Co. He is of the view that the government should focus on having a fair and non-litigious administration of the income tax (I-T) law. Any sector-specific changes in tax rules could very well be brought in the current tax statutes, he adds. 

Further, experts point out that a new I-T law may upset the well-settled tax principles which have emerged from court rulings over the past five decades. “The entire tax environment, including subsidiary rules, forms and procedures, would need to be changed and the tax department will need to undergo a lot of training with a new law,” says Neeru Ahuja, partner, Deloitte India.

Ahuja adds having a new law is an opportunity to incorporate the latest thinking in international taxation into our legislation. This could include incorporating the latest provisions of base erosion profit shifting (BEPS), best practices in taxation from other countries, clarity on taxation of new types of business models and transactions like digital, etc.

Experts point out that many of the recommendations of the expert committees and proposals in the erstwhile direct tax code like General Anti-Avoidance Rules, Place of Effective Management, reducing the rigour of taxation on indirect transfer of shares, among others, have already been incorporated in the current tax regime. This has led to numerous amendments in the current direct tax law over the years. 

Welcoming the move to have a new I-T law, instead of continuous amendments in the existing Act, Girish Vanvari, national head, tax, KPMG in India, says any new law should help change the overall approach to tax administration. “The simplicity and clarity in the new law will help to reduce litigation,” he says.

Experts say the greatest challenge in tax administration is execution. “There is an urgent need for the tax administration to relook at their enforcement-based strategies and need for frequent amendments,” says Abhishek Goenka, partner and leader corporate and international tax, PwC India.   

Experts suggest India needs to come out with well-articulated taxpayer rights. “Help a taxpayer understand what to expect when dealing with the tax gatherer. The citizens’ charter needs to be captured in the law,” says Goenka.   

Vikas Vasal, partner and tax leader, Grant Thornton India, feels the proposed direct tax legislation could lay the ground for a much-simplified tax regime. The focus should be on reduction in the effective tax rate, easing out administrative burden and reducing the litigation on contentious issues where sufficient judicial or administrative guidance is available, he adds.

Cracking the Code

August 2009: Draft Direct Tax Code (DTC) released along with a discussion paper 

June 2010: A revised discussion paper on DTC released

August 2010: The Direct Taxes Code Bill introduced in the Lok Sabha

September 2010: Referred to Parliament's standing committee

March 2012: Standing committee submitted report

March 2014: Revised DTC Bill put up in public domain for comments

May 2014: The DTC Bill, 2010, lapsed with dissolution of the Lok Sabha

July 2014: FM Arun Jaitley says in Budget speech that govt to take a call on the Bill

February 2015:  Jaitley shelves idea of re-introducing the Bill

September 2017: Prime Minister Narendra Modi says the I-T Act needs to be re-drafted

November 2017: Finance ministry forms a committee to draft a new direct taxes law