A panel focusing on a complete revamp of the existing direct tax rules recently handed over its report to the Government, alongside a proposed draft of the new Income Tax laws. The current Income Tax Act, enacted nearly six decades ago, does indeed need an overhaul, but any changes must align with the current economic context in the country.
The Direct Tax Code Proposals
The Direct Tax Code (DTC) panel has advocated for a restructuring of the personal income tax brackets, a plan for cutting corporate tax rates to 25% for corporations, and measures aimed at alleviating compliance burdens by simplifying procedures and managing litigation. Additionally, the panel proposed changes to the Dividend Distribution Tax and Minimum Alternate Tax (MAT). These changes aim to introduce new tax concepts, as well as schemes to reduce litigation.
Relevance of Minimum Alternate Tax
Occasionally, a company may generate income during the year, yet it manages to decrease its tax liability or avoid tax altogether, thanks to certain provisions in the Income Tax Law like exemptions, deductions, and depreciation. This led to the introduction of the Minimum Alternate Tax (MAT) in 1987, aimed at taxing ‘zero-tax’ companies. MAT dictates that tax is calculated at 18.5% on the book profit, or the usual corporate rates, whichever is higher. This applies to all companies operating in India, both domestic and foreign.
| Year | Event |
|---|---|
| 1987 | MAT was introduced |
| 1990 | MAT was withdrawn |
| 1996 | MAT was reintroduced |
History of the Task Force
The Task Force that reviewed the Income Tax Act and drafted the new Direct Tax Law was formed in November 2017. Initially led by Arbind Modi, a former member of the Central Board of Direct Taxes (CBDT), the task force’s leadership was later transferred to Akhilesh Ranjan. The draft proposals aim at providing certainty to the taxation processes of personal and corporate income, as well as capital gains tax.
Key Suggestions from the Panel
The proposal contained key recommendations on litigation management and reducing tax compliance burdens. This included amendments to Sections 147 and 148 of the I-T Act, empowering tax officers to reopen assessment cases based on predefined criteria. Also, the panel suggested increasing the threshold for opening cases, currently set at Rs 1 lakh.
Towards Reduced Compliance Burdens
Proposal suggested leveraging global trends and best practices to streamline tax compliance, thereby expanding the tax base. The panel also recommended using Artificial Intelligence in tax compliance and administration processes, and integrating data from banks and financial institutions with the GST network to broaden taxable income sources.
Changes in Personal Income Tax Rates
There’s a proposed rejig of rates between 5% and 20%. Currently, the personal income tax structure is divided into three categories depending on age — for individuals below 60 years, those above but less than 80 years, and those aged 80 years and above. The current structure with varying slabs per category has been maintained.
The Proposed Corporate Tax Reduction
The plan includes gradually reducing corporate tax rates to 25% for all companies. Over the past five years, the rate has been phased down from 30% to 25% for 99.3% of companies. However, the remaining 0.7% that are not privy to this benefit constitute almost 80% of total corporate taxes collected and pay up to 30%. If implemented, these reductions could significantly stimulate the corporate sector, leading to an economic upturn.