Proposed Direct Tax Code: What Changes It Could Bring
The upcoming Direct Tax Code (DTC) aims to overhaul and modernize India’s tax framework, focusing on streamlining compliance, encouraging investment, and fostering transparency. The proposed code, highlighted in the Finance Bill (No. 2) – 2024, suggests reforms intended to simplify tax laws, harmonize tax rates across businesses, and reduce litigation. Here’s a closer look at the key changes we might see:
1. Simplified Structure with Fewer Sections and Additional Schedules
The new code is expected to consolidate and reduce the number of sections, while expanding the use of schedules to classify information. This restructuring is intended to make the tax code more straightforward, minimizing confusion for taxpayers and making filing more accessible for both individuals and businesses.
2. Revised Residency Classification
Taxpayers will now be classified solely as either “residents” or “non-residents,” eliminating the complex categories such as Resident and Not Ordinarily Resident (RNOR) and Resident Ordinarily Resident (ROR). By removing these nuanced classifications, the code aims to simplify residency rules, making them easier for taxpayers to understand and apply correctly.
3. Removal of Deductions and Exemptions for Streamlined Taxation
In an effort to close loopholes and promote a more equitable tax environment, most deductions and exemptions are set to be removed. This approach aims to reduce tax planning complexities and create a system where income is taxed more uniformly, enhancing transparency and fairness in the tax process.
4. Wider Application of TDS and TCS
The scope of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) is likely to be expanded to cover almost all types of income. This ensures a more consistent and frequent flow of tax revenue, reducing opportunities for tax evasion and improving tax compliance across various income categories.
5. Capital Gains Taxation Adjustments
Under the new code, capital gains will be taxed as regular income, rather than being taxed separately with preferential rates. While this could increase the tax liability for some investors, it establishes parity across different income streams, fostering a simpler, more consistent approach to income taxation.
6. Unified Financial Year for Tax Filings
The code proposes to replace the terms “Assessment Year” and “Previous Year” with a single, unified “Financial Year” concept for tax purposes. This shift intends to simplify the tax filing timeline and eliminate confusion for taxpayers who are required to track multiple reporting periods.
7. Expanded Role for Tax Audits
To broaden access and efficiency in tax audits, Company Secretaries (CS) and Cost and Management Accountants (CMA) may be permitted to conduct tax audits, a function that was previously exclusive to Chartered Accountants (CAs). By including additional professionals, the new code aims to make tax audits more accessible, particularly for smaller businesses.
8. Unified Corporate Tax Rates for Domestic and Foreign Companies
A single tax rate for both domestic and foreign companies is expected to be introduced, streamlining compliance requirements and reducing complexities for foreign entities operating in India. This move not only simplifies tax obligations but also signals a more welcoming investment environment, potentially attracting greater foreign investment.
These proposed reforms in the Direct Tax Code reflect a concerted effort to create a more efficient, transparent, and accessible tax structure. By emphasizing simplification and equity, the new code could reshape India’s tax landscape, making it more user-friendly and conducive to economic growth.
