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Last Updated : Sep 17, 2019 12:32 PM IST | Source:

New Income-tax law – third time lucky?

It is believed that the DTC may rejig the slabs for those earning income up to Rs 55 lakh per annum. This should leave more disposable income in the hands of the middle class and give a boost to consumption.

Moneycontrol Contributor @moneycontrolcom

Himanshu Parekh

The current Income-tax Act, enacted in 1961, is nearly six decades old. With time, there have been a plethora of amendments making it a complex piece of legislation. This has led to several interpretation issues, resulting in protracted litigation between taxpayers and tax authorities.

A task force was constituted in November 2017 to undertake a complete overhaul of this 58-year-old law with a view to simplify it and harmonise it with the economic needs of the country. With the task force submitting its report to the finance minister, the wait for a complete revamp of the Indian taxation system is inching towards its climax. The report is yet not placed in the public domain but sources reveal that the broad thrust is to lower tax rates, simplify architecture and use information technology extensively. Furthermore, it appears that the report is accompanied by a draft of the new Income-tax law, known as the Direct Tax Code (DTC), which is a good surprise.


Two big-ticket items, which may bring cheer to the investor community, are in relation to Long-Term Capital Gain (LTCG) and Dividend Distribution Tax (DDT). Currently, LTCGs exceeding Rs 1 lakh, arising from transfer of a long-term capital asset, being an equity share or specified unit, are taxable at 10 percent. Furthermore, Indian companies declaring dividends are subject to DDT at 20.56 percent. DTC proposes to abolish tax on LTCG and DDT, bringing much-needed certainty for the investor community and lead to reinventing the investment cycle.

It is believed that the DTC may rejig the slabs for those earning income up to Rs 55 lakh per annum. This should leave more disposable income in the hands of the middle class and give a boost to consumption.

Currently, domestic companies are taxed at 25 percent or 30 percent based on their turnover. As against this, foreign companies are taxed at 40 percent. The report is known to have endorsed a corporate tax rate of 25 percent for both, domestic and foreign companies. Although this may come as a major relief to foreign companies, it is to be noted that on repatriation of funds by foreign companies outside India, a branch profit tax is proposed to be imposed. This may bring the total tax outgo for foreign companies in India somewhere closer to that under the existing regime.

One of the path-breaking proposals of DTC is on streamlining of the litigation process. Currently, the number of tax cases pending in the judicial system are astounding. DTC promises certain radical measures in the area of litigation and is expected to bring down the litigation on the tax front significantly.

It is expected that the new code will do away with assessing officers and replace them with assessment units. DTC proposes to introduce functional units that will comprise IRS officers with sector-specific knowledge and expertise. DTC may also introduce a separate litigation management unit to manage the entire tax litigation process spanning from deciding the cases fit to be appealed against to devising strategies to defend cases. This will rest the decision of filing appeals in the hands of an officer other than the one who drafts the assessment order.

DTC has proposed to discontinue the existing mechanism of the Settlement Commission by introducing the concept of mediation, whereby the taxpayers will be able to opt for a negotiated settlement before a collegium of commissioners for settlement of tax disputes. The task force has also recommended carrying out transfer-pricing assessments by a separate functional unit. Such assessments will be undertaken for a block of four years.

The concept of public ruling is also being introduced, wherein the taxpayers will have the option of approaching the CBDT (Central Board of Direct Taxes) for clarification on any important point of law.

The submission of the report comes at a time when the government is in a huddle to find ways to beat the economic slowdown. If the above recommendations are implemented, it should boost the sagging economic spirits and usher India towards its goal of a $5 trillion economy. After two futile attempts at revamping the direct tax system in the last decade, it appears likely that this time the efforts will bear fruit and DTC may become third time lucky and see the light of the day.

(The author Parekh is, Partner and Head, Corporate and International Tax, KPMG in India. Chartered Accountants Maulik Mehta and Ravish Kotadia contributed to the piece.)

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First Published on Sep 14, 2019 11:14 am
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