In a meeting held with tax officials in September this year, Prime Minister Narendra Modi had exhorted the need to overhaul the 56-year-old tax law Income Tax Act, 1961. Finally, on Wednesday, the Union cabinet gave its nod for the formation of a special task force overseeing the direct tax overhaul.
Taxman and Central Board of Direct Taxes (CBDT) member Arbind Modi has been appointed the convenor of the eight-member committee. Arbind had played a major role in framing the original Direct Tax Code, 2009 Bill proposed by the UPA government.
The bill eventually lapsed under Pranab Mukherjee as finance minister in the UPA government and was sent to a Standing Committee of Parliament in 2010. The committee submitted its recommendations to the government and was presented again in the Union Budget 2014 by Arun Jaitley. However, he withdrew the bill the next year.
Informed sources in the finance ministry say that Arbind's initial bill was apparently leading to a loss of revenue for the government in its final shape and thus had to be re-tweaked several times. "The DTC is now a mass of documents where there are several contradictory recommendations," said Hasmukh Adhia, Union revenue and finance secretary.
"The new task force will sort out these recommendations, judge their implications and come out with the best fit," said Adhia, who will also be a member of the direct tax reform committee. Chief economic adviser Arvind Subramanian will be a permanent special invitee. Non-official director of State Bank of India Girish Ahuja, EY India chairman and regional managing partner Rajiv Memani, Ahmedabad-based tax advocate Mukesh Patel, ICRIER consultant Mansi Kedia, and retired IRS Officer G.C. Srivastava, are among the other members in the task force.
The task force is expected to submit its final report for DTC within six month. Once it does, it is supposed to replace the Income Tax Act, 1961, and will set up a modern taxation template in the country.
Suggestions are that the new DTC would lead to lesser tax slabs and would exempt income of up to Rs 5 lakhs. The tax slabs are expected to start from 5 per cent, leading to a drop in tax rates from current rates.
However, there are also strong expectations that with the new DTC, the government would remove all exemptions to income tax availed by assesses now and increase the taxable income, and thereby tax liability for businesses and individuals.
Experts have suggested that the complete overhaul of the existing tax regime could lead to despair, if not administered properly. "The present tax law in India is compliant to a lot of global standards like GAAR, transfer pricing and DTC. Removing them all together would only lead to more tax litigations," said Sanjay Sanghvi, partner of legal firm Khaitan & Co, highlighting the fears the new tax law poses for businesses.
For individuals, the DTC is likely to bring in a lot less protection and a lot more exposure of income as taxable. "Diluting the various protection from tax as availed against savings of individuals under the current law will lead to a heavier tax burden for the salaried. It would be beneficial only if the new law is made benign to the common tax payers," predicts Chetan Chandak, head of tax research, H&R Block.
Expectations are high that six months later, the task force would come up with a tax proposal that aims to bolster government revenue, but does not take away any of the protections offered to individual or business tax payers under the current law.
