How to make life easy for taxpayers? Direct Tax Code 2.0 awaited in 2019

It is imperative the new law does not compromise on the 3Cs of a tax regime - certainty, clarity, and consistency

The New Year chimes of 2019 will witnesses a progressive celerity of GST law at its infancy, however, the same couldn’t be a case in the headway to Direct Tax Code (DTC) 2.0. Uproar for simplifying the direct tax legislation gets vigorous with the upcoming Lok Sabha elections, considering that the August 2018 deadline was missed with retiral of the task force convener. North Block’s quick revitalising attempt in November with the appointment of the new convener of the task force is clearly a sign of serious efforts to bring a promised non-adversarial tax regime in place, though it’s safe to presume that the earlier work would be improved upon and the February 2019 deadline will be met.

We have witnessed several attempts to simplify and rationalise direct tax laws. The most recent in the race being the DTC 2013 version preceded by the DTC 2009 discussion paper, reworked by successive finance ministers (P Chidambaram & Pranab Mukherjee) followed by a Parliamentary Standing Committee (chaired by Yashwant Sinha) recommendations. The DTC 2013 Bill could not see the light of the day owing to inherent complications and the dissolution of the Lok Sabha in 2014. The extant Income Tax Act of 1961 is charged with an intricate web of cross-references that rarely unwind any confusion, with a catena of branched out ancillaries that only makes life tough for small and large taxpayers alike. This coupled with over 2,000 amendments to successive Finance Acts over the past five decades has made its administration an ardent task. DTC 2.0 is expected to focus on the imperative task to wriggle out inconsistent provisions, including those introduced to override established jurisprudence, and simultaneously weed out provisions which have either lost its relevance due to shift in policies (such as phasing out tax exemptions) or are not in sync with today’s reality (like relevance of digital business over brick and mortar). 

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DTC 2.0 is also expected to be influenced by the recent regulatory changes under the Companies Act, GST, the Insolvency & Bankruptcy Code, and new accounting standards (IND AS, IFC, ICDS, etc) which have assumed relevance in the past few years. Though there is a school of thought that the 2.0 version could be an overdose of regulatory changes, which may increase the cost of compliance, the government’s endeavour is to position it as a well-oriented modern code with due regard to recent changes in other fiscal laws. Intent to keep the simplicity factor alive is evident with how the new indirect law was drafted, with an added advantage that the shortfalls in GST can be taken as a reciprocal reference. The code is expected to be technology-driven from the point of view of compliance of filing and processing and would have an apparent focus on data mining for analysis, monitoring, and forecasting.

Tectonic changes in the tax policy since 2009-13 (DTC 1 period), particularly, phasing out of tax concessions (industry & locational), reduction in corporate tax rates for small and medium businesses to 25 per cent and relief to salaried and self-employed have occurred. Similarly, attempts to plug loopholes in tax treaties to prevent tax avoidance and align them to the promising Organisation for Economic Co-operation and Development (OECD) and G20-led base erosion and profit shifting (BEPS) works for robust anti-avoidance measures to pre-empt the erosion of the tax base should find new chapters in the code. It is thus expected to turn the taxation policy progressive with tax burden better aligned to the payment capacity of the taxpayers with a focus on transparency, besides rearranging the amendments witnessed since DTC 1 version(s). Though the General Anti-Avoidance Rules, the Place of Effective Management, interest cap on deduction and host of changes to the Transfer Pricing regime, among others, have been incorporated in the present code, it is arguable that the new code would rather be a refurbished version without any novel changes. Though the focus is to bring the direct tax system in line with international best practices and the current economic realities, elements of India’s economic realities such as widening the tax base and disincentivising errant taxpayers would continue in the procedural part of the law. For instance, I don’t foresee a regime change on taxation of agricultural income, partly due to constitutional constraints and largely due to political constraints. I, however, expect a change in regime on taxation of political parties, a shift evident in the 2017 budget. Similarly, driven with an objective to curtail parallel economy, the extant law needs significant changes in dealing with not-for-profit bodies, including religious trusts, family trusts, and public charities, which have been avenues for tax leakage. The lawmakers would focus on such category of taxpayers, which will also lend credibility to work undertaken by credible foundations, funded by domestic and international aid.

Legislative measures are required to brush aside the erratic provisions that have a bearing on the settled jurisprudence, especially where the apex court has laid down the law. Unsettling or disturbing the age-old jurisprudence for the sake of enacting a modern law could invite turmoil and distress, an issue that was flagged in the 2009 version and accepted by the Standing Committee. The integration of the Alternate Dispute Resolutions mechanism like arbitration for speedy dispute resolution, as a statutory remedy, would be welcomed as a sign of manifestation of a synchronic economic future, and that would signal a bold direction by India. It is imperative that the new law does not compromise on the 3Cs of a tax regime— certainty, clarity, and consistency.

Theoretical and pragmatic consideration of the taxation policy in relation to DTC 2.0 would, however, be contingent on how the political polarisation affects the government system, for which we need to ‘wait and watch’, and then ‘walk the talk’. Several administrative reforms reflect the government’s endeavour to evolve a taxpayer-focused approach in the policy. At the same time, if the policymakers ensure certainty, clarity, and consistency, the reverberation should go a long way in making India the most sought-after investment destination.

The writer is partner, BMR Legal. He was assisted by advocate Joseph K Antony. Views are personal.