Government unlikely to replace Income Tax Act with the Direct Tax Code

The government is unlikely to replace the Income Tax Act with the Direct Tax Code, and will only incorporate select suggestions from the draft law to avoid creating more uncertainty for businesses amid an economic slowdown.

Such incorporations shall make the law modern and capable of dealing with new business models by incorporating global best practices without creating any uncertainty among businesses.

A draft legislation was prepared and presented by a panel led by Central Board of Direct Taxes (CBDT) member Akhilesh Ranjan. Some suggestions in the draft legislation, submitted to Finance Minister Nirmala Sitharaman would be incorporated in the Income Tax Act, 1961 through amendments in the next budget session of Parliament. The panel had proposed significant relief for taxpayers, including an across-the-board 25% tax rate for both local and foreign companies, and changes in income tax slabs.

The idea of replacing the old law might not happen now as this would involve unsettling well-established jurisprudence, which could create uncertainty for businesses that are grappling with a deep economic downturn. According to the Finance Ministry, the new ideas proposed in the report may be adopted in the Income Tax Act as replacing it with a completely with a new statute for the sake of simplification might not be an easy task.

In the beginning of the decade, the government led by Manmohan Singh had attempted to introduce a new direct tax code. However, all of its proposals including the General Anti Avoidance Rules were incorporated in the Income Tax Act itself.

The Finance Ministry’s plan is to calibrate the existing Income Tax Act in the light of insights from the comprehensive review made by the expert panel so that it is capable of dealing with the latest trends in movement of capital and profits across borders.