More Direct Tax Reforms Ahead: What Is the Direct Tax Code?

If the Narendra Modi-led government comes to power after the Lok Sabha 2024 elections, they are likely to implement the Direct Taxes Code that simplifies tax laws, according to official sources.
More Direct Tax Reforms Ahead
More Direct Tax Reforms Ahead

If the Bharatiya Janata Party government is re-elected to power, it will implement the long-awaited Direct Taxes Code (DTC) on a priority basis to simplify tax laws and align them with global standards, Financial Express said in a story citing anonymous official sources. Sources within the government revealed that discussions are already underway in the finance ministry, with the draft prepared in 2019 by a special task force forming the basis for the revamp.

Direct Tax Code: Simplifying Tax Laws By Global Norms

The proposed DTC will streamline direct tax laws, making them more in alignment with international standards. Key proposals of a draft prepared in 2019 under consideration include restructuring the capital gains tax regime and removing irritants in the implementation of the tax deducted at source.

The DTC was originally proposed in 2009 by the UPA I government, but its progress has been hindered by revisions over the years till 2014 and lapsed with the dissolution of the 15th Lok Sabha. While BJP-led governments since then have taken steps to ease tax compliance, reduce exemptions and make tax rates benign, several pending reforms remain, particularly revamping capital gains taxation and simplifying tax laws.

Tax experts stressed the need for simplification of tax laws, rationalisation of tax rates for capital gains, tax deducted at source (TDS) and strengthened alternative dispute resolution mechanisms. Financial Express cited Sudhir Kapadia, Partner at EY India Tax & Regulatory Services, advocating for a simplified direct tax regime, given the current tax regulations "becoming unrecognisable due to numerous amendments since last 60 years".

Currently, the long-term capital gains tax (LTCG) is more favourable on listed shares than on other types of assets, such as debt mutual funds or real estate. Taxpayers must hold on to real estate and unlisted shares for longer periods to avoid higher short-term taxes. The holding period for long-term capital gains tax is more than 12 months for listed shares and debt securities, more than 24 months for unlisted shares and real estate, and 36 months for debt mutual funds and securities. If the rules are rationalised further, it can free up their working capital.

Similarly, the tax deduction at source (TDS) regime has become complex with over 30 sections dealing with 36 different types of payments in which TDS rates vary from 0.1 per cent to 30 per cent. According to the FE report, Kapadia said as the government can track transactions digitally, the TDS (Tax Deducted at Source) rates should only have three categories such as normal slab rates for salaries, 30 per cent for lottery and horse race winnings, and 2 per cent for all other payments. This proposal would free the assessee's working capital, and the government can save interest amount paid at 6 per cent per annum, along with enormous tax refunds paid each year.

The task force appointed by the Modi government has already recommended rationalisation of personal income tax rates, and stability in the tax system, without annual changes in rate, the report said.

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