The Direct Tax Code is a set of rules that will replace the current Income Tax Act (IT Act). It applies to all taxes governed by the current IT Act, including corporate and personal income taxes. The effort to establish a DTC began in 2009. In this article, we will see the meaning of the Direct Tax Code, which is important for the UPSC exam.

What is the Direct Tax Code?

• The Direct Tax Code is a major tax reform in which the government wants to consolidate all tax laws and regulations into a single piece of legislation.
• Direct taxes are taxes paid directly to the imposing authority by an individual or organisation, with the incidence and impact of taxation falling on the same entity.
• Direct taxes are progressive in the sense that as an individual's or entity's income rises, so does the share of tax liability.
• Different direct taxes are income tax, wealth tax, corporate tax, securities transactions tax etc.
• The Central Board of Direct Taxes (CBDT), which is part of the Ministry of Finance's Department of Revenue, is in charge of direct taxation in India.
• The direct tax code aims to unify and update the law governing all direct taxes in order to create an economically efficient, effective, and equitable direct tax system that encourages voluntary compliance and improves the tax-to-GDP ratio. (e.g., increased tax buoyancy)
• Another goal is to limit the scope of disagreements and avoid litigation.

Why Direct Tax Code?

• The most convincing explanation for eliminating the Income Tax Act is because it is outdated and complicated.
• It is divided into roughly 700 sections. Since 1961, the economic and corporate climate has altered dramatically.
• The Vodafone case, in which the government lost in the Supreme Court, is a classic example of the IT Act's lack of flexibility.
• The Income-Tax Act, 1961, was drafted more than 50 years ago and it needs to be redrafted.
• In September 2017, the government formed a Direct Tax Code Task Force to "write new income tax legislation for India in "consonance with the country's economic demands."

Direct Tax Code – History

• In 2009, the government released a discussion paper on the Direct Tax Code, and in 2010, the Direct Tax Code (DTC) bill was introduced in parliament.
• This bill, like other technical legislation, was referred to the standing committee on finance, which is chaired by Mr Yashwant Sinha.
• The administration intended to adopt DTC on April 1, 2012, but this was not achievable due to a delay in the standing committee's report being submitted. Because state governments aren't involved, it's not a highly controversial bill.

Direct Tax Code – Objectives

The following are the objectives of the Direct Tax Code:

• To simplify and consolidate all of the federal government's direct tax rules.
• To improve the effectiveness and efficiency of the tax system.
• To bring a consolidated law on direct taxes, such as income tax, dividend distribution tax, fringe benefits tax, and wealth tax, into effect.
• In order to achieve horizontal fairness among different classes of taxpayers, best worldwide practices must be followed.
• Tax regulations must be straightforward, stable, and resilient in order to improve compliance.
• To gradually phase out a plethora of tax breaks and deductions in order to broaden and deepen the tax base.

Simplification of Direct Tax laws

The following is a list of ways to simplify direct tax laws:

• The tax code would be rewritten in simple Language.
• There would be fewerexemptions and reductions.
• There will be fewer cross-references.
• There will be an explicit language used.

Consolidation of Direct tax laws

Consolidation of tax laws can be stated as follows:

• The legislation governing direct taxes would be consolidated.
• For example, the Income Tax Act of 1961, the Wealth Tax Act of 1957, and the Gift Tax Act of 1958.

Direct Tax Code (DTC) Proposals

• Income tax slabs have been raised. (The proposed tax slabs were adopted by the government in the fiscal year 2012–2013.)
• Corporate Income Tax or Corporate Tax - The tax rate should be 30% for both domestic and foreign companies, with no surcharge.
• Domestic enterprises are currently subject to a 5% surcharge, whereas foreign firms are subject to a 40% tax rate plus a 2% surcharge.
• The Alternate Tax Rate should be set at a minimum of 20%. The current MAT tax rate is 18.5 percent.
• Under EET, the Savings Scheme should be. These plans are currently under EEE.
• EEE would still apply to a few programssuch as PF, gratuity, pension funds.

GAAR – General Anti Avoidance Rule

GAAR is a provision in the direct tax system that gives tax officials the ability to deny a tax benefit to any company. Tax officers, on the other hand, can break certain provisions of the Income Tax Act and the Double Taxation Avoidance Act.

The key benefit of this law is that it will significantly reduce tax avoidance in order to prevent DTAA abuse. Round-tripping will be restricted under this General Anti-Avoidance Rule.

However, GAAR has a number of drawbacks, which are listed below:

• It gives tax officers discretionary powers.
• Corruption may become more common.
• The level of uncertainty will rise.
• Creditworthiness is going to decline.

Guidelines issued by the government in the implementation of GAAR

The following are the key GAAR implementation guidelines:

• Three high-ranking Income Tax officials should be on the approving panel.
• Only large transactions will invoke GAAR.

Recommendations of the Parthasarathi Shome committee:

• GAAR should be delayed for three years, starting on April 1, 2016.
• The approving committee should decide if GAAR should be used or not.
• The threshold amount will be established at 3 crores.
• The advanced ruling should be granted and capital gains tax should be removed.
• Governments of other nations' tax residence certificates should be accepted.
• GAAR's primary goal should be to prevent tax evasion, and it should only be used in cases of tax evasion.
• If there are specific anti-avoidance measures in place, GAAR should not be used.
• The Shome panel also suggested that retrospective amendments be made only in the most exceptional of circumstances.

Conclusion

The government's goal with the Direct Taxes Code (DTC) is to consolidate India's direct tax rules into a single piece of legislation. The DTC will take the place of the Income Tax Act of 1961 as well as other direct tax laws such as the Wealth Tax Act of 1957.