Tax structure and draft Direct Tax Code-2019

Dr. D. Mukhopadhyay
Tax is the major source of revenue for any Government in any country all over the world and India is also of no exception. The economic development of a country invariably depends on how efficient and effective tax structure is. Central Government has been empowered by Entry 82 of the Union List of Schedule VII of the Constitution of India to levy on all income other than agricultural income. Agricultural income tax can only be levied by the State Governments. Taxes are broadly classified under two types and they are Direct Taxes and Indirect Taxes. Direct Taxes are levied on income and profit these Taxes are directly paid or payable by assesses to the Tax Imposing Authority. On the other hand, Indirect Taxes are levied on goods and services and of course not on Income and Profits. Most of the Indirect Taxes are brought under the ambit of Goods and Services Tax Act, 2017 which came into force on 1st July, 2017 and it is more or less now unified and simplified as well. Present write up intends to draw a sketch of Direct Tax System and the forthcoming Direct Tax Code(DTC) as the replacing substitute of the existing Direct Tax Laws. Currently Direct Tax system is administered by the Income Tax Act, 1961, Income Tax Rules , 1962 and relevant notifications, circulars etc issued by the Central Board of Direct Taxes (CBDT) from time to time. However, the existing Direct Tax Laws are found to be not very effective to meet the requirements of facilitating ease of doing business as well as plugging the loopholes for tax evasion , controlling circulation of black money, stopping functioning of another parallel economy, speedy assessment, revision and settlement of disputes between the department and the assesses. There have been a herculean number of amendments in the Income Tax Act, 1961, during last 58 years. In simplicity, Direct Tax levy, collection, search & seizure, assessment, appeal and revision procedure and dispute settlement mechanism have been observed to have been highly complicated and cost of compliance as well as cost of collection of revenue are very high. Under the circumstances, revamping of the Indian Direct Tax system as well structure becomes an inevitable compulsion on the part of the Government of India in order to keep pace along with the pattern of economic reforms taken off more than two decades ago.
It is worth mentioning that dependence on indirect taxes has increased in many folds in the presence of the inefficient and ineffective existing Direct Tax Laws which is not a healthy practice for any economy since indirect tax incidence is devoid of equity as the degree of burden of indirect tax on poor and rich people is the same and even in many cases it is more on the poor than that of rich people. Moreover, it is very difficult to predict the amount of collection of indirect taxes as rise in indirect taxes normally results in rise in prices of the commodities and services which would eventually reduce the demand for commodities and services. Therefore, dependence on indirect tax cannot serve the purpose of revenue generation for the exchequers. Under the given back drop, Government of India has taken an imitative to simplify the Direct Tax Laws and essentially it is to simplify the fifty eight year old Income Tax Act, 1961. Moreover, Direct Tax can easily be levied on the principles of progressive taxation i.e. it has to pay more tax when it earns more profit or more income. Moreover, the major components of Direct Taxes are corporate tax and taxes on income. Cannon Taxation as prescribed by Adam Smith, renowned classical economist, for all time if adopted, can generate desired results because, Direct Tax levying and collection do not suffer from the problems like, inequity, repressiveness, uneconomical and inflationary effects. In the given background, the Union Government has taken bold and epoch making steps for replacement of the almost six decades’ old Income Tax Law and it opts for restructuring policy for the Direct Tax Laws in the country by introducing Direct Tax Code which is in essence to be a single law in the place of multiplicity in volumes and acts for tax levying and collection thereof. Presently, Direct Tax Family is the embodiment of Income Tax, Wealth Tax, Estate Tax or Duty, Securities Transaction Tax , Dividend Distribution Tax, Capital Gains Tax etc. More than one decade has already been invested to finalize the legislation on the new Direct Tax Code under different phases and the last phase itself took almost two years in making the DTC Draft. One Taskforce under the chairmanship of Principal Chief Commissioner of Income Tax was constituted in November, 2017 to review the existing fifty eight years old Income Tax Act, 1961, and the taskforce has submitted its report to the Union Finance Minister in August, 2019. However, the draft report is yet to come in the public domain. The principal feature of the DTC includes bringing all direct taxes under one roof which is technically called one Code i.e. a single window-unified direct tax system which is likely to be in place in near future after the Draft DTC is placed in and passed by the Parliament and it shall subsequently become the Direct Tax Code after getting assent of the President of India. In brief, all direct taxes shall have a single code. Secondly, Under DTC, the tax rates are being made between the First and Fourth Schedule of the DTC which are currently are based on provisions of the Finance Act of the relevant assessment year. But after DTC came into existence, any changes in the schedules was made by passing an Amendment Bill by the Parliament and this is expected to ensure stability in the income tax levying and collection process and day to day operations.
This may also be helpful in reducing compliance cost and collection cost accruable to both the assesses and the Department. The DTC shall also provide for political contributions by five percent of gross total income that can be deductible expenses of the corporate and business entities.. The DTC shall also provide for flexibility in framing any rules that shall be necessitated to ensure achieving desired growth of the economy without having any amendments on constant basis. The DTC is based on the principles of simplicity and users’ friendly interpretation of the provisions of the law and it is supposed to be devoid of any sorts of contradiction, ambiguity and non-transparency. As a consequence, volume of litigations shall become low and this is expected to expedite the dispute resolution and settlement process. Another, path breaking provision is likely to be made for taxing fringe benefits in the hands of the employees and not in the hands of the employers. It is another objective of the DTC to cover more number of assesses under the circumference of tax net. It also aims at enhancing the degree of competitiveness of the business the lowering the corporate tax rate . Reduction in the income tax rates generally affects the economic behaviour of the assesses through income and substitution effects.
The positive impact of tax rates reduction shall help in raising the volume of saving and consequently the same shall culminate into investment. This higher after-tax rewards may induce more savings, entail capital formation and commit more investment through substitution effects. On an overall comparison between the existing tax administration mechanism and the mechanism that is likely to be in place under the DTC, it may be asserted that the DTC is going to have a modern approach in tax administration and is based on scientific principles and international practices. Besides this, it needs to focus more on structural reforms than that of policy reforms.
The tax administration system and mechanism is presently very complicated and many a time the assesses could hardly understand what the problem is all about. Under the circumstances, they need to avail the services of the experts and advisors but it raises the compliance cost. It is therefore recommended that Government may customarily take the considered stock as to who are the competent professionals having expertise in the subject of taxation and it must make the suitable provisions that the assesses should get the opportunity to avail the professional services at competitive rates of fees. In our country, professionals such as Advocates (Adv.), Chartered Accountants (CAs), Cost & Management Accountants (CMAs) and Company Secretaries (CSs) within the meaning of the Advocates Act, 1961, the Chartered Accountants Act, 1949, the Cost & Works Accountants Act, 1959 and the Company Secretaries Act, 1980 respectively may be considered to be the experts in Taxation and
therefore, Government of India should include all of them in the forthcoming DTC as the experts for rendering professional services to the tax payers i.e. any Person as defined under Section 2(31) of the current Income Tax Act, 1961, and the proposed DTC should not empower any one particular Professional . This is expected to accrue two types of benefits to the tax payers and the assesses in general. Firstly, quality of service of the professionals shall up to the mark since there shall be a stiff competition among the prescribed Professionals and the assesses shall be able to avail the services of that particular Professionals who can render quality service at competitive price i.e. fees here.
If any other suitably competent Professionals are available besides above, they should also be included in the forthcoming DTC because DTC is the symbol of fiscal reforms and it should be adopted flawlessly. This is the age of openness, globalization and competition and any kind of monopoly in any market of goods and services should not be encouraged by the Government.
Moreover, before adopting the draft legislation for legislation, there must be comprehensive debate and discussion at length and breadth since boosting economic performance in near future shall greatly depend on the efficient and effective implementation of the DTC. All the relevant Professional Bodies, CII, various Chambers of Commerce and public in general should be heard by the Parliamentary Committees.
(The author is Professor and Dean- Faculty of Management, SMVD University, Katra)