 "Budget 2025: What is Direct Tax Code and will it replace Income Tax Act?")
With the Modi government back in power and Finance Minister Nirmala Sitharaman leading the charge, the introduction of the long-awaited Direct Tax Code (DTC) is on the horizon. The DTC promises to overhaul India’s complex tax structure, making it more user-friendly, understandable, and easier to comply with.
The Income Tax Department has received over 6,500 suggestions from stakeholders for simplifying the Act. The overhaul, led by a committee under the Central Board of Direct Taxes (CBDT), aims to eliminate obsolete provisions and reduce compliance burdens. The updated law could include fewer chapters and sections, trimming down the Act’s existing 298 sections and 23 chapters significantly.
The government, in the ensuing Budget session of Parliament, is likely to introduce a new income tax bill which seeks to simplify the current I-T law, make it comprehensible and reduce the number of pages by about 60%.
Nirmala Sitharaman holds pre-Budget consultation with representatives of trade unions
Finance Minister Nirmala Sitharaman in her July Budget had announced a comprehensive review of the six-decade old Income Tax Act, 1961, within six months.
"The new Income Tax law will be introduced in the Budget session of Parliament. It will be a new law and not an amendment to the existing Act. Currently, the draft law is being vetted by the law ministry and it is likely to be brought in Parliament in the second half of the Budget session," a source told PTI.
Pursuant to the Budget announcement by Ms. Sitharaman for a comprehensive review of the I-T Act, 1961, the CBDT had set up an internal committee to oversee the review and make the Act concise, clear, and easy to understand, which will reduce disputes, litigation, and provide greater tax certainty to taxpayers. Also, 22 specialised sub-committees were established to review various aspects of the Act.
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What is the Direct Tax Code (DTC)?
"The Direct Tax Code is an initiative by the Indian Government to simplify, streamline, and standardize the current complex Income Tax Laws for all," said ClearTax is a note.
The DTCS will simplify the existing Income Tax Laws. The current tax structure is complex, with hundreds of sections, exemptions, and deductions that confuse taxpayers. The new code is designed to:
- Streamline the tax process
- Make compliance easier for both individuals and businesses
- Increase the number of taxpayers in India
Why is the Direct Tax Code Being Introduced?
The primary motivation behind the DTC is to increase the number of taxpayers and improve compliance in India. The government aims to:
- Simplify tax laws: This will encourage more people to pay taxes.
- Improve transparency: A clearer tax structure means fewer chances for errors or confusion.
"By simplifying tax regulations and making them more transparent, the government hopes to encourage more people to contribute to taxes, aiding economic growth," said ClearTax.
What Can Taxpayers Expect from the Direct Tax Code?
As the government prepares to revamp the tax system, here are some of the key expectations from the new Direct Tax Code:
Simplified Residence Rules: The current tax rules around residents, non-residents, and NRIs are confusing. The DTC will streamline these rules, making it easier for individuals to determine their tax liabilities.
Clarified Financial Year vs. Assessment Year: Many taxpayers struggle with the difference between the Financial Year (FY) and Assessment Year (AY). The DTC aims to eliminate this confusion by simplifying the terminology and focusing on one clear system.
Unified Tax Structure: The DTC will aim to align tax rates for domestic and international companies. This will help multinational businesses better navigate India’s tax system and ensure fairness.
Simplified Tax Structure: The current tax law includes 298 sections along with various sub-sections and clauses, making it complicated to understand. The DTC will aim to simplify these provisions so they’re easier for everyone to follow.
Easier Compliance: Filing taxes, paying TDS, and keeping track of deadlines can be overwhelming for many. The DTC will reduce the complexity of these tasks and introduce a more straightforward process to avoid penalties and missed deadlines.
"The DTC 2025 will provide a simplified tax structure, clarify residence rules, and eliminate the confusion around financial year and assessment year, making it easier for individuals to file their returns and comply with tax laws," said ClearTax.
Benefits of the Direct Tax Code
The Direct Tax Code will bring several important benefits for both individuals and businesses:
Reduced Complexity: The DTC will cut down on the number of exemptions and deductions available, focusing only on the most important ones. This will make the entire tax structure easier to navigate.
Increased Compliance: By simplifying the tax process, the DTC will encourage more individuals and companies to comply with tax laws, reducing the need for audits and penalties.
Unified Tax Rates: The DTC proposes tax rates that are more in line with international standards. This could make India more attractive for foreign investors and businesses.
Minimized Legal Disputes: With simpler tax laws, there will be fewer opportunities for disputes and litigation, making the system fairer for all taxpayers.
When Will the Direct Tax Code Be Implemented?
Currently, the DTC is under review and discussion with various stakeholders. The Direct Tax Code may be ntroduced in Budget 2025, bringing a long-awaited change to the Indian tax system. "The enactment and implementation of the new Direct Tax Code (DTC) is a time-intensive process that may take several months. The Ministry of Finance has already begun gathering suggestions through the Income Tax website portal. Inputs from various bodies and consulting firms will also be considered to achieve the intended objectives of the DTC. After evaluating these suggestions and conducting thorough research, the the Committee will draft the proposed law and release it for public comments. Given the complexity and length of time of this process, it is highly unlikely that the DTC will be introduced in the upcoming budget," said Abhishek Soni, CEO, Tax2win.in - an ITR filing website.