Rewriting the Income Tax Code : Putting the cart before the horse?

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The CBDT surprised the tax world last week when they announced the formation of a tax force to redraft the income tax code. While constituting this tax force, the CBDT referred the Prime Minister's speech to several hundred IRS officers a few months ago wherein he commented that the Income tax Act is outdated and needed to be written afresh. 

Has the Income Tax Act 1961 really outlived its utility? Is the current Income Tax Code too complicated, a recipe for litigation, unwieldy, a taxpayer's nightmare and a tax professional's delight? or Would it be wiser for the Government, given the not so pleasant experience with GST roll-out, to take a deep breath and hold on to this exercise which has been tried several times in the past, albeit unsuccessfully? Is it humanly possible to write a simple Income- Tax code as is the avowed objective of the CBDT? Will the new Tax-code unsettle settled tax positions and judicial precedents that have held the field for several decades? 

But assuming this exercise is really the need of the hour, what are the fundamental, radical changes that need to be effected to the Income-Tax Code in order to make it simple, leave little room for interpretation and in line with international best practices?

Dinesh Kanabar
CEO, Dhruva Advisors

The issue as to whether there is a need to rewrite the Income-tax Act, 1961 or not may now be a bit academic, given that the Government has already announced its decision to do so. Of course, there is this  view that what is needed is to administer the law better rather than to rewrite the law; we need to move past that and focus on whether the rewrite can be in a manner that we achieve the administrative reform.

‎There are a few things which the task force needs to look at to achieve the desired result:

- the biggest issue around the tax laws is the uncertainty around interpretation. This is because we have each officer interpreting the law, with no uniform position. What we need is a system of position papers so that interpretative issues at the tax office are minimal.

- the attendant issue is the long drawn litigation‎. This is a systemic issue and not restricted to tax arena. We need to get implementation of Advance Rulings right, to get faster resolutions of litigation and to have a process of settlement of disputes.

-...

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Mukesh Butani
Founder BMR Legal

Based on Prime Minister Modi’s observation that the present Income Tax act needs to be re-drafted in consonance with economic needs, the Ministry of Finance has in its brief proposed drafting a new Income tax code, keeping in line international best practices. However, the official communique sets out the task force responsibility to submit its report within 6 months, it is unclear if the mandate is to merely make recommendations on the new code or draft the new code. If it is the latter, it is a tall order to accomplish drafting the code in such short period given that drafting requires wider stakeholder consultation. I was comparing the objectives that were set out in 2009, wherein the then government unveiled a draft new Direct Tax Code with in objective to reduce complexity and compliance cost, broadening the tax base by minimizing exemptions, checking tax evasion and removing ambiguity. The 2009 Direct Taxes Code (DTC) went through several alterations though it failed to see light of the day with expiry of the DTC bill of 2010.  The then Standing Committee of Finance made useful recommendations at that time. 

Given that the present provisions of the Income-tax law...

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Gautam Doshi
Group MD, Reliance Group

The present Government has a clear track record of initiating and achieving difficult reforms. Therefore, the focus by this Government on direct tax reform is a welcome step which should go a long way to achieve the desire, indicated by the Hon’ble Prime Minister, of giving to India a modernised tax system which it deserves. But, the constitution of a committee for drafting a new direct tax legislation may be seen as putting the cart before the horse.

Direct tax reform must start with establishing the objectives which India’s direct taxes must satisfy. This requires a consideration of certain fundamental issues such as, should India compete to encourage foreign investment or encourage establishment of international/regional headquarters or encourage setting up in India of IT back offices and / or manufacturing hubs, or encourage Indian multi-nationals or all of them. Should this be done by competing on tax rates or is simplification and time bound and visibly fair and transparent procedures for adjudication and appeal sufficient, especially, if accompanied by steps for reducing the scope for litigation. The focus should also be on questions like whether India should go back to a system of taxing not...

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Gautam Mehra
Partner, Leader, India Tax and Regulatory, PwC

Change is the new normal, with Indian and global businesses experiencing change like never before. With the indirect tax law consolidated, direct tax law is now slated for an overhaul, almost 60 years after its introduction - the earlier one was replaced in 39 years. The Committee set up has been tasked with drafting a code keeping in view the economic needs of the country and international best practices, amongst others.

Pain?

Introducing a new legislation is certainly a tumultuous task for all - administrators, taxpayers and tax professionals, and both on the design front as well as in implementation, it will involve hard work.

At the design level, enormous effort and brainpower has been put in by multiple stakeholders at the time of the Direct Taxes Code in 2010; leveraging learnings from that exercise will be important as one focusses on the important incremental inputs arising out of developments since then.

At the implementation stage, the technological disruption would likely to be minimal relative to the GST, given the present wider use of technology on the direct tax front.

And as far as onboarding is concerned,...

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Girish Vanvari
Partner and Head (Tax, KPMG in India)

New Income-tax law is a welcome move instead of continuous amendments to the existing Income-tax Act. It should be in line with best international practices and suitable for new dynamic business models. It will help to meet the rising economic needs of the country and will also help to increase the tax base. The new Income-tax law should change the overall approach, e.g., in many countries taxpayer does not even meet the taxman. Simplicity and clarity in the new law will help to reduce litigation. Increase in the tax base is a need of the hour in India where still the number of taxpayers are lesser compared to the overall population. The focus of the new law should be to reduce litigation and bring simplicity in taxation provisions. It should provide stability to local as well as global business. The government has already taken several steps in line with Direct Taxes Code, 2010 (DTC) under the Income-tax Act. However, several progressive provisions under the DTC can also be adopted, for e.g. mergers and acquisitions related amendments, enlarging the scope of presumptive taxation, etc.

In line with various Asian and European economies, the new law should...

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Ketan Dalal
Managing Partner, Katalyst Advisors

Tax laws all over the world are complex and the Indian tax law is no exception.  However, the real issue, more than the complexity of the law, is the on ground administration, uncertainty and inability to resolve disputes within a reasonable period of time.  Also, the fact that Indian interpretation of law has often lagged global interpretation; as such, if India intends to be part of the global community, remaining an outlier to global interpretation may perhaps not send the right message.

The setting up of the task forces to draft a new Direct tax legislation is commendable, but it is crucial to identify the objectives before embarking on drafting.  We are living in an uncertain world with significant economic challenges and India has made important strides to partly mitigate the issues faced by businesses, by constantly seeking to address the “Ease of Doing Business” (EODB).  The task force may want to consider EODB as a key criterion in its drafting.  Additionally, preventing disputes to the extent possible, mitigating disputes and resolving disputes within a time bound frame which is in line with global trends is crucial and should be considered as a key objective. ...

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K. R. Sekar
Partner Deloitte Haskins & Sells, LLP

The importance of new tax law cannot be overemphasised in view of new business models, increased business of digital transactions and the way the business is being conducted has undergone a significant change. Further the profit based incentives is being phased out and the government plans to introduce and in the process of introducing investment based incentives. Also against the backdrop of globalisation and continued investor interest in India , it calls for new legislation. Though there are significant and more than many reasons for introducing new direct tax code but the government should take views of all stakeholder. The last attempt to introduce Direct Tax code was a failure as both assesses and revenue were at loss to understand the rationale of certain provisions and hence the attempt by earlier government to introduce Direct Tax code did not receive appreciation. The new committee should take few lessons out of that and take views of all stakeholders before introducing new tax code. Also the various principles laid down by various courts on multiple issues should be adhered while framing the code. It is also important that while framing code more emphasis and focus should be on administration...

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Rajendra Nayak
Partner, International Tax Services, Ernst & Young LLP

On 22 November 2017, a six-member task force was constituted to review the current income tax law and to draft a new law in consonance with the economic needs to the country and international best practices. A wide range of direct tax reforms have been initiated in India since the 1990s and the topic continues to be on the forefront of the reforms agenda even today. To begin with, reform measures were undertaken on the basis of the recommendations of Tax Reforms Committee (1991) headed by Dr Raja Chelliah. Subsequently, the Shome Committee on Tax Policy and Administration for the 10th Plan (2001) and the Kelkar Task Force (2002) have highlighted that the factors responsible for low tax-GDP ratio relate to structure as well as to the administration of the taxes. More recently, in 2013 a Tax Administration Reform Commission (TARC) was set up to review the application of tax policies and tax laws in context of global best practices and recommend measure for reforms required in Tax Administration to enhance its effectiveness and efficiency.

Notwithstanding a plethora of reforms attempted in the last three decades, there is a need to take a stock of...

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P. V. Srinivasan
Corporate Advisor

It is commendable that the Central Government is taking concrete measures to accelerate the pace of economic change by introducing new laws on taxation.  In this context, formulating a new Direct Tax Code is timely, since many countries have acted on lowering the tax rates while enhancing / protecting the tax base.  However, the treasure of settled jurisprudence under the Income-tax Act 1961. should not be buried with a wholesome re-writing of law with new words and phrases, triggering unwarranted fresh litigation.  A comprehensive review would be justified only if agricultural income is also brought within the folds of chargeability of income-tax, obviously pursuant to a Constitutional amendment!  Otherwise, it may turnout to be a repositioning of chapters and provisions, which would serve the purpose convenient referencing without achieving the goal of policy resetting.

 

T.P. Ostwal
Partner, T. P. Ostwal & Associates LLP

Frankly speaking, the IT Act has become very complicated and needs to be simplified. In my opinion, the Direct Tax Code should be made very simple so that it is not a nightmare for the taxpayers and tax professionals should not flourish on account of dual interpretation and litigation.

However, the way the Direct Taxes Code (DTC) was presented in the past shows that it is a very complicated exercise. While the Govt's desire was to make the DTC simple, the Committee that was formed to draft the DTC legislation did not make it simple at all. Accordingly, I don't think even the currently constituted Committee will make it simple and that is the big problem. If the Govt says keeping in mind the best practices of the world, you have to write a new Direct Tax Code in 6 months, then let me confidently tell you that it will be a "cut and paste" of the last DTC with few changes because between 2013 & 2017, so many new concepts were introduced in the IT Act. Further, in my opinion, the Govt. should not create one more complication after changes in the Companies Act,...

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