Tax Thoughts

Is a new Direct Tax Code necessary?

Mr. Arvind Datar (Senior Advocate)
May 3, 2018

A committee has been formed to draft a new Direct Taxes Code (DTC).  It is submitted that this proposed Code is wholly unnecessary and will be an exercise in futility.  Any simplification can be done to the present Act itself and, in the end, what matters is not the simplicity or complexity of the Act but the manner in which the statute is implemented.  The unresolved problem is an uncontrolled, unchecked aggressive tax machinery that is driven by unrealistic revenue targets and accountable to no one.

Earlier attempts:

Repeated attempts have been made in the last decade to draft a new DTC.  The attempts mercifully did not succeed. The draft DTC bills were merely the same tax provisions with some changes in the language. While presenting the Union Budget for 2007 – 2008, the Finance Minister promised a “comprehensive review” in a new “Direct Taxes Code” (DTC) which was to be introduced in Parliament that year.[1]   Two years later, the Finance Minister promised to make “structural changes” in direct taxes in the new DTC that was to be released in the last quarter of 2009.[2] In August 2009, the draft DTC along with a discussion paper was released for public comment. Finally, on August 27, 2010, the new Direct Code Bill, 2010 was introduced in the Lok Sabha by the Finance Minister.The Statement of Objects and Reasons of this Bill gives reasons that are truly remarkable. The Finance Minister pointed out that the 1961 Act had been amended “no less than 34 (sic)  times,  making its basic structure overburdened”  and that the Act had become “complex”.  Further, “tax administrators, accountants, and tax-payers have raised concern about the complex structure of the Income Tax Act. In particular, numerous amendments had rendered the Act difficult to decipher by the average taxpayer.”

What was the cure for this complex and indecipherable 1961 Act? A new Direct Taxes Code Bill, 2010! The existing Income-tax Act, 1961 consisting of approximately 350 sections and fourteen schedules was to be replaced by the new DTC with 314 sections and twenty-two schedules.  The new definition section alone had 297 sub-sections:  from section 314(1) to section 314(297).  And these were in addition to the definitions found in various sections.  In substance,   a complex statute was to be being replaced by an equally complex Code, all in the name of simplification and rationalization. The draft Code was also referred to a Parliamentary Standing Committee and was hailed “as a pioneering effort in participative legislation.”[3] The new Code was initially to come into force from April 1, 2011[4]  but postponed to April 01, 2012[5]. Both deadlines were missed. 

In the Union Budget for 2012-13, the Finance Minister announced that he was “still examining the recommendations of the Parliamentary Standing Committee” and the DTC Bill would be “enacted at the earliest”[6].  Mercifully, with the fall of the previous Government, the DTC bill never saw the light of the day.

Other Statutes:

Apart from direct taxes, repeated attempts were made to replace Companies Act, 1957. Each time, a Bill was prepared to “simplify” the Act and finally the Companies, 2013 replaced the old Act. Instead of simplification, the new Act has increased compliance requirements and even its most ardent supporter cannot say that the law has been simplified.   The same provisions have been recast with no benefit to the corporate sector.  All changes could have been made to the Companies Act, 1956 itself.

Similarly, the GST enactments have simply aggregated the VAT, excise and service tax provisions resulting in a large, unwieldy and complex statute.   Whatever the virtues of GST, it is not a simple tax.  Its complexity has been further compounded by innumerable change and clarifications in the last one year.

DTC and simplification:

 Earlier attempts to prepare DTC did not result in any simplification.    The overall architecture of the Income-tax Act, 1961 shows that there are provisions relating to the head of income (which are the substantive provisions), special provisions like clubbing and those relating to presumptive taxation, MAT, deductions and exemptions, assessment, penalty, prosecution,  transfer pricing,  and GAAR.  If the new DTC is going to be based on the same architecture, it will be impossible to simplify the present Act. 

It is, therefore, suggested that the proposal to prepare a new DTC to dbe shelved and attention can be focused only on those sections that result in either a larger amount of litigation or cause serious hardship to the assessee.

[1] 289 ITR (St.) 89, 117 (para 162).

* The Author is Senior Advocate of the Madras High Court and practicing at the Supreme Court of India.

[2] 314 ITR (St.) 29, 47, (paras 82-83).

[3] 331 ITR (St) 21, 25 (para 22).

[4] 321 ITR (St) 1, 5 (para 26).

[5] 331 ITR (St) 21, 25 (para 22).

[6] 342 ITR (St) 1, 6 (para 26).

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