Expect simplified direct tax laws early next year

The task force to redraft the 50 year old Income Tax laws that will focus on simplification of the language.

Expect simplified direct tax laws early next year

A panel headed by Central Board of Direct Taxes (CBDT) member Akhilesh Ranjan has been set up to redraft the Income Tax law with a focus on simplification of language and tackling “problematic” areas. The Income Tax Act was originally passed in 1961 and has over the decades seen a lot of amendments and addition of provisos. These insertions of explanations and provisos have inadvertently resulted in the creation of confusion in terms of the language as well as the interpretation.

The panel comprises eminent tax experts Girish Ahuja (chartered accountant), Rajiv Memani (Chairman and Regional Managing Partner of EY), Mukesh Patel (Practicing Tax Advocate), Mansi Kedia (Consultant, ICRIER) and G C Srivastava (retired IRS and Advocate) and has been asked to submit their work by the end of February next year.

Related: IT department warns salaried taxpayers against filing incorrect returns 

The expectation from the task force would be to draft direct tax laws in line with the simpler formats used by other countries, international best practices and with an eye on the economic requirement of the country. The impetus for this initiative can be linked to the Prime Minister’s opinion that the Income Tax Act was over 50 years old and therefore might need redrafting.

How large is the direct tax net in India?

In India very small portion of the total population comes under the ambit of the Income Tax Act. This is because of the high rate of poverty as well as the rampant tax evasion. In the previous tax season, 60 million people filed their income tax return in India, a 50% increase over the previous year. The finance minister suggests that out of the 250 million families in India at least 125 families can file a return and pay tax. Even if one person from each of those families files a return, the coverage of direct tax can further double in the coming years. 

It must be noted that all the people who file an income tax return may not have a tax liability and therefore don’t pay any tax.

Related: Understanding the differences between direct and indirect taxes

Why the Income Tax Act is considered complex?

Since the introduction of the Income Tax Act in 1961, there have been many amendments made to the Act. Explanations have been introduced against points which needed more clarity and further provisos were added where the original explanations seemed insufficient. The Act itself is divided into chapters, schedules and sections making it a voluminous reading.

Related: Why tax planning alone won't make you rich 

What is the possible outcome of this exercise?

The intended use of this report would be to include it in the final budget for 2019-20 to be presented after the upcoming general elections. Another outcome is expected to be an improvement in compliance due to the certainty and clarity in the tax laws.

Related: Budget 2018: Changes in the income tax slabs over years

Was there any previous mention of simplification in recent past?

There has been a growing push for direct tax law simplification. In 2009, the then finance minister P. Chidambaram proposed a direct tax code to replace the bulky Act and bring in a cleaner new law. He was in favour of keeping the tax rates low and doing away with the numerous exemptions as a trade-off. In the same vein, even Arun Jaitley expressed about plans to reduce corporate tax from 30% to 25% within four years.

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