Towards a Modern Tax System: The Need for a New Income-Tax Act in India

Review Announced in Budget Speech

In her budget speech in July 2024, Finance Minister Nirmala Sitharaman announced a comprehensive review of the Income-Tax Act. The review is expected to be completed before the next Budget, aiming to reduce compliance burdens and improve clarity for taxpayers.

Reducing Complexities in the Current Law

The current Income-Tax Act, introduced in 1961, has become overly complex with 23 chapters, 298 sections, and over 1,000 sub-sections. The new direct tax code aims to simplify the language, improve taxpayer services, provide tax certainty, and reduce litigation.

Keeping the Law Relevant

The Act was created when India's economic status and purchasing power were vastly different. Despite numerous amendments, the law struggles to keep pace with current economic realities.

Impact of the Direct Tax Code, 2009

The Direct Tax Code (DTC) introduced provisions aligning with international practices on emerging issues. Elements like the Place of Effective Management (POEM) and general anti-avoidance rules have since been included in the current Act.

Fewer Personal Income Tax Slabs

There is a need to reduce the number of tax brackets in personal taxation. The government could consider raising the exemption threshold or optimizing tax slab rates, as seen in the Direct Taxes Code Bill, 2010, which substantially increased slabs for incomes up to ₹25 lakh.

Streamlining Taxation of Savings

The choice between EET (Exempt-Exempt-Taxed) and EEE (Exempt-Exempt-Exempt) tax regimes reflects policy decisions based on economic maturity. The government continues to review these regimes to align with evolving economic goals.

Global Tax Avoidance Rules

Global tax reforms, particularly the BEPS action plan, address artificial tax avoidance structures. However, reforms like Pillar 1 and Pillar 2 may favor developed economies, prompting calls for a more equitable international tax framework under the UN, with India playing a key advocacy role.

Pending Reforms in Corporate Tax

In corporate taxation, the goal is to establish a simplified tax regime with lower corporate tax rates, eliminating the need for tax holidays. A significant area for consideration is group tax consolidation, which would allow companies to use tax attributes interchangeably across entities without requiring legal consolidation. The capital gains tax regime also saw an overhaul in the 2024 Union Budget, reducing classifications and simplifying applicable tax rates.

These points underscore the need for a new, simplified, and globally aligned Income-Tax Act that addresses the complexities of current economic and policy landscapes.