New direct tax code won’t change income tax slabs, rates
Prime Minister Narendra Modi’s parting shot in policymaking before 2019 Lok Sabha elections—the draft direct tax code—is likely to be a strong message about stability and certainty in taxation rather than any structural shift. The tax code, therefore, will not propose tax rate changes or tax slab revisions. Instead, it will focus on making the Income Tax Act, 1961, simpler and less prone to litigation.
The idea is to clean up the law, incorporate the jurisprudence on key concepts of taxation evolved over the years from numerous court cases and make the law easier to comply with. Any decision relating to tax rate changes, whenever they are to be taken, will only be executed outside the direct tax code by way of annual Finance Acts to be passed by Parliament as part of the Union Budget exercise.
“The objective is to simplify the Act, make it less prone to interpretation and give tax certainty. Reducing tax rates or altering tax slabs are policy decisions. That is not part of the mandate of the direct tax code task force,” said a person privy to the deliberations in the finance ministry.
The government will only have just enough time to invite public comments on the new draft before 2019 Lok Sabha elections and the work will need to be carried forward after the polls.
The task force, which was set up in November 2017 to prepare a new direct tax code, could not formally submit its report in August 2018 due to the superannuation of its convener. The government last week decided to take a fresh look at modernizing the Income Tax Act by appointing Akhilesh Ranjan, member (legislation), Central Board of Direct Taxes, as the new convener. The panel has till 28 February to submit its report, by which time the 16th Lok Sabha will be on the last leg of its tenure.
A second person familiar with the discussions in the government said the focus on streamlining the law was not the result of time constraints, but because it could have a positive impact on tax collections.
According to information available with the income tax department, as on 1 April, over ₹6 trillion of tax demands were on appeal at the commissioner (appeals) level, the first stage of litigation.
“Reducing litigation, making the tax law relevant to new business models and ensuring accountability at the level of field officers should be priority in the new direct tax code,” said Amit Maheshwary, partner, Ashok Maheshwary and Associates LLP.
The benefit of a lower corporate tax rate of 25% was first offered to companies with annual sales below ₹50 crore in the Union Budget 2018. It was extended to businesses with annual sales up to ₹250 crore in 2018-19. Extending this relief to all companies is a political call to be taken by the government outside the proposed direct tax code and will largely be linked to revenue collections. As far as personal income tax is concerned, there is no intention of any reduction in the short term.
“Personal income tax rates are already the lowest in India,” said the first person quoted earlier. Personal income is taxed in the range of 35-40% in most developed economies.
Girish Vanvari, founder of advisory firm Transaction Square, said it was important to reduce tax litigation and make the corporate tax rate more competitive.
“Globally, corporate tax rate is coming down to 20-22%. The government has committed to lowering corporate tax rate to 25%, which is important to attract investments into India, considering that tax exemptions are being phased out,” said Vanvari.
In recent years, the government has made structural changes in taxation to add more personal income taxpayers and check the corporate practice of aggressive tax planning. It amended the tax treaty with Mauritius in 2016 to prevent tax-evaded money transferred out of the country coming back in the guise of foreign direct investment (FDI). A new 6% levy was introduced in 2016 to tax digital services and efforts are on to renegotiate tax treaties with other countries to step up taxation of the digital economy.
India also introduced a stringent penalty for not disclosing assets held abroad under the Black Money Act that came into effect in 2016. New Delhi was also part of a global effort to make multinational corporations more open about their intra-group dealings and prevent them from moving profits artificially to low-tax countries. This had led to a multilateral anti-abuse agreement last June.