The Income Tax Act, 1961 (Act) has been in place for nearly six decades. Over the years, due to globalization and advent of technology, business models have drastically changed. While regular amendments have been made to the Act on a year on year basis through Indian annual budget, there was always a need to look at the law from a fresh perspective considering the business realities and also best practices followed across the globe. It was also perceived that the Indian Income Tax law is far complicated, subjective providing substantial powers in the hands of the tax officer which often leads to ligation. This resulted in significant challenge in attracting investments and every attempt by the Government to provide relief further added to complex law.
One such attempt was made in 2009, whereby the erstwhile Government of India introduced a Direct Tax Code Bill for public discussion and implementation. However, this bill was also complex and was expected to create more issues than provide relief. Accordingly, initially this was deferred multiple times, however, ultimately it was scrapped by the new Modi Government in 2014.
In 2017, Modi Government had set-up a task force to draft new direct tax laws in line with the norms prevalent in other countries, incorporating international best practices and keeping in mind the economic needs of the country. Recently, on August 19, 2019, the task force submitted their report in relation to the DTC to the Finance Minister, Ms. Nirmala Sitharaman. Currently, the draft is not available in public domain and it is expected that Government would review the same and then release it to public for its comments. However, based on sources, key takeaways from the task force report are as follows:
Key takeaways from the Task Force Report on New Direct Tax Code
- The task force has not only provided their personalized inputs and/ or recommendations but has also drafted a new income tax law. The endeavour is to keep the law simple and unambiguous and in the process, it has made an attempt to significantly reduce the number of sections.
- The new income tax law is understood to be shorter, crispier and easy to understand. It aims to minimize the use of contents of the current regulation and make it simple for the common man’s understanding.
This also implies that since the draft law is ready the Government is able to implement the same at a reasonable short notice and there may not be significant deferment.
- The DTC proposes to revise the tax brackets for individuals. It is expected that relief could come for taxpayers earning income in the range of INR 4.5 to 5.5 million per year.
This is an interesting proposal as recently the Indian Government has introduced super-rich tax and it would have to be seen whether Government would be comfortable providing the relief to individual taxpayers in above brackets. Historically, the Government is known to provide relief only at the lower level of incomes i.e. below INR 1 million and it would be a significant step forward if the Government is able to adopt this proposal.
- It is proposed to have a standard tax rate for domestic companies as well as foreign companies (including foreign branch). Further, it is proposed to have lower tax rate of 25% for companies, LLP’s, branch, etc.
- It is learned that committee has also proposed to abolish Dividend Distribution Tax (DDT) and taxing dividends in the hands of recipient. However, they have proposed for a branch profit tax for foreign companies.
- Incentives would be provided to start-ups and compliance by small taxpayers would be reduced.
Currently, the tax rates are differing for Small and Mid Sized Companies (25%); larger companies (30%), LLPs and other forms of entity (30%) and foreign companies (40%). To top up, the above taxes are added with surcharges and cess which effectively increases the tax rate by another 3-5%. Move to 25% tax rate without any surcharges and cess would be a bold move and may have some fiscal implications as well. This should obviously be supported by removing the Minimum Alternate Tax (MAT) regime. Also, equalising tax rates and abolishing DDT would bring companies and LLPs on the same footing and thus reduce tax planning strategies adopted by companies on this front.
The proposal to abolish DDT and bring back dividend taxation in hands of shareholders will be one move that would bring cheer to MNCs. With current DDT regime, the tax costs for MNCs operating in India and repatriating profits back to home country is 45%+ and they are not able to tax advantage of tax treaties for lowering the tax effect. They also invariably do not get credit of such DDT paid in India in their home country. It would be interesting to see whether the DDT would be abolished for future profits only or for past profits or there would be some transitionary provisions. MNCs planning any repatriation strategy should hold on a while till the proposals of the DTC are available in public domain.
- In relation to e-assessments, the concept of ’assessing officers’ is proposed to be substituted by ’assessment units’. Further, it is proposed that functional units would be set up consisting of IRS officers having industry expertise and each functional unit would have their own knowledge and solutions team to assist them in assessments.
- It is proposed that the allotment of scrutiny cases would be done centrally and randomly. The possibility of interaction with department authorities over video conferencing is under consideration.
- A separate litigation management unit would manage the entire litigation process starting from filing appeals to defending the same in the court of law. In all probability, this team would be different from the tax officers carrying out the tax assessment.
- In the context of transfer pricing (TP), it is recommended that the TP assessments would not be linked with the regular assessments. It is proposed that the TP assessments would be carried out by a separate functional unit for a block of four years resulting in qualitative and intensive tax audit.
It was always said that while the Indian tax law is complex, what makes it worse is the tax administration and their adversarial approach towards taxpayers. While, a lot has been done and lot has changed over the last 5-7 years, still India is far away from having a taxpayer friendly environment. The task force proposal does intend to achieve that and above proposal can be regarded as path breaking in the area of tax administration.
Separate units for tax litigation and faceless assessment could be game changer in controlling overall frivolous assessments and ensuring tax department also gets appropriate fire power to defend their cases. These measures if implemented in right earnest will create non adversarial taxpayer friendly environment.
De-linking of transfer pricing assessments and doing a block assessment for 4 years is also a good move. This will help the tax authorities to look at the overall business of the company through a 4 year cycle and would help in appreciating the business realities and complexities involved on one hand and they would not be guided by one off year of transactional results on the other hand.
- One of the bold recommendations to resolve tax disputes is providing resolution through mediation. Under this system, the taxpayers can opt for a negotiated settlement before a team of Commissioners. Both the parties would be assisted by mediators.
- Further, it is proposed to introduce an option of ’public ruling’ wherein taxpayers can approach the CBDT for clarification on any principle in law provided the same is not case/fact specific.
Currently, Indian laws have limited options of seeking clarity on tax implications before conducting a transaction. The current options like Authority for Advance Ruling, Lower/ NIL withholding tax process, etc. have not been successful mainly because of the revenue minded approach and no specific timelines. The proposed dispute resolution could be effective in significantly reducing the tax litigations across the country only where a time bound process has been prescribed and independent adjudicators are appointed.
Taxpayers in India would welcome a simpler law with both hands. The first brush of the DTC 2019 looks good and we hope that overall it would not disappoint. We hope that Government does release the report of task force along with the draft law so that taxpayers have time to review their operations and do an impact analysis. The last thing that everyone would want is a hurried implementation of such a good and welcome reform in the direct tax law especially given the experience on the GST side. Companies also should learn a thing or two from GST implementation and start reviewing their positions once the law is available in public domain.