Direct Taxes Code (DTC) – A Half Way Journey


The Direct Taxes Code (DTC) is said to replace the existing Indian Income Tax Act, 1961. The direct tax code seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. Another objective is to reduce the scope for disputes and minimize litigation. It is designed to provide stability in the tax regime as it is based on well accepted principles of taxation and best international practices. It will eventually pave the way for a single unified taxpayer reporting system.

Salient Features

Single Code for direct taxes: all the direct taxes have been brought under a single Code and compliance procedures unified. This will eventually pave the way for a single unified taxpayer reporting system.

Use of simple language: with the expansion of the economy, the number of taxpayers can be expected to increase significantly. The bulk of these taxpayers will be small, paying moderate amounts of tax. Therefore, it is necessary to keep the cost of compliance low by facilitating voluntary compliance by them. This is sought to be achieved, inter alia, by using simple language in drafting so as to convey, with clarity, the intent, scope and amplitude of the provision of law

Reducing the scope for litigation: wherever possible, an attempt has been made to avoid ambiguity in the provisions that invariably give rise to rival interpretations. The objective is that the tax administrator and the tax payer are ad idem on the provisions of the law and the assessment results in a finality to the tax liability of the tax payer. To further this objective, power has also been delegated to the Central Government/Board to avoid protracted litigation on procedural issues.

Flexibility: the structure of the statute has been developed in a manner which is capable of accommodating the changes in the structure of a growing economy without resorting to frequent amendments. Therefore, to the extent possible, the essential and general principles have been reflected in the statute and the matters of detail are contained in the rules/schedules.

Ensure that the law can be reflected in a Form: for most taxpayers, particularly the small and marginal category, the tax law is what is reflected in the Form. Therefore, the structure of the tax law has been designed so that it is capable of being logically reproduced in a Form.

Consolidation of provisions: in order to enable a better understanding of tax legislation, provisions relating to definitions, incentives, procedure and rates of taxes have been consolidated. Further, the various provisions have also been rearranged to make it consistent with the general scheme of the Act.

Elimination of regulatory functions: traditionally, the taxing statute has also been used as a regulatory tool. However, with regulatory authorities being established in various sectors of the economy, the regulatory function of the taxing statute has been withdrawn. This has significantly contributed to the simplification exercise.

Providing stability: at present, the rates of taxes are stipulated in the Finance Act of the relevant year. Therefore, there is a certain degree of uncertainty and instability in the prevailing rates of taxes. Under the Code, all rates of taxes are proposed to be prescribed in the First to the Fourth Schedule to the Code itself thereby obviating the need for an annual Finance Bill. The changes in the rates, if any, will be done through appropriate amendments to the Schedule brought before Parliament in the form of an Amendment Bill.
Direct Tax Code Withdrawn

DTC was an initiative taken by P Chidambaram as Finance Minister in 2008. It was intended to revise the Income Tax Act of 1961, the basic taxation template in India. It aims to consolidate all other direct tax legislations into one manuscript and facilitate voluntary tax compliance on part of tax payers. A DTC bill was first introduced in parliament in 2010 by Chidambaram’s successor Pranab Mukherjee under the name of DTC 2010. A standing committee was subsequently appointed for advice on the bill. Following the recommendations of the committee, the present Finance Minister Arun Jaitley presented a revised version of the bill, called DTC 2013, in his post-election Budget in 2014.

In the Budget 2015  - 16, the Finance Minister withdrew DTC Bill 2013, suggesting that it was a dated bill and some of its provisions had already been incorporated in the Income Tax Act, while most others were incorporated in the Budget itself. Some of these provisions have been listed below. These have either been modified or done away with entirely.

General Anti Avoidance Rules: GAAR is aimed at preventing foreign companies from escaping taxation in India by exploiting loopholes in the tax system. Companies use creative accounting maneuvers to avoid taxation by transferring wealth and profits earned in India to other, low tax-regime countries (called tax havens). This costs the government dearly. GAAR allows tax authorities to question suspect overseas fund transfers and amend the company’s taxable income accordingly, if necessary. The rule was expected to be introduced in the upcoming fiscal year but due to concerns over its language and the objective of making India’s investment environment welcoming for foreign companies, it has been deferred to 2017. Even then, it will only apply to investments made in financial year 2017 and beyond, as opposed to also being applied retrospectively.

Minimum alternate tax (MAT): DTC provided for gains made by foreign investors (including FIIs, FDIs and NRIs) by investing in India to be taxed at a minimum rate of 18.5% if their tax liability were to fall below this. However, this year’s Budget provides a complete MAT relief to FIIs while staying quiet about other categories of overseas investors.

Wealth tax: This is a provision of the Income Tax Act that provides for incremental taxation of ‘super-rich’ individuals, Hindu families and corporations, so as to bring in circulation excess wealth that has been lying unused with them. DTC 2013 altered the provisions related to wealth tax by increasing the threshold for charging wealth tax from Rs 30 lakh to Rs 50 crore, while simultaneously decreasing the tax rate to be charged to 0.25% from 1%. It also widened the base of assets for wealth tax to be charged on by including certain financial assets such as shares to it. In the Budget, wealth tax has been replaced by a surcharge. According to this, instead of ascertaining a threshold based on net worth, an incremental charge of 12% (as against 10% earlier) has been levied on an annual income of over Rs 1 crore.

Identifying tax residence:  According to Indian tax laws, a company can be considered a tax resident of India and its global revenues taxed here, if its significant control and management were based in India during a financial year. This rule allowed Indian companies to set up small subsidiaries in tax havens and vest superficial control of their international operations in them. Through this, they avoided paying taxes on overseas operations and only paid taxes on Indian operations. DTC 2013 proposed the introduction of the place of effective management (POEM) rule to prevent such exploitation. Under POEM, a company’s global income will be eligible for taxation in India if its effective management and control was situated in India ‘at any time’ during a year instead of throughout the year. The proposal has been incorporated in 2015-16 Budget.

Thursday, 07th Apr 2016, 04:00:15 AM

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