The Big Direct Tax Reforms 2019 By Modi Government 2.0
Writing a new income tax – It has been attempted several times before in the last 3 decades but only to fall by the wayside … in the last decade twice the then Finance Ministers Mr. Chidambaram and Mr. Pranab Mukherjee tried to leave their imprint on the Finance Ministry through an ambitious new Direct Tax Code (DTC)… the public and taxpayers got to see the draft of the new law but first the global recession post the Lehman collapse in 2008 and then the furore over the retro amendments in 2012 ensured that neither of the drafts made much headway…
The Modi Govt. surprised many by appointing a tax force in November 2017 to write a new Income tax legislation in “consonance with economic needs of the country…” It would be worthwhile to remember that the push came from right at the top.. Prime Minister Mr. Narendra Modi, in an address to IRS officers in September 2017, had given sufficient hints of what he thought about the Income Tax Act, 1961, which according to him had outlived its utility and needed a re-draft!
The task force, under the Convenorship of senior IRS officer Mr. Akhilesh Ranjan and comprising of members representing different stakeholders, has submitted its report to the Finance Minister Ms. Nirmala Sitharaman a short while ago and the first buzz indicates that the report may not only live up to all the hype and hope it has generated among the taxpayer fraternity but actually may even exceed expectations! Here are the big takeaways from the task force report that is now with the Government!
1. A Report – Yes But along with Draft of a New Law.
For those who thought that it would only be a report outlining the big ticket changes that need to be made, here is the big surprise… the Task Force report is accompanied by a draft of the new income tax law, running into over 300 sections and with attention given to the minute details. According to sources, the ethos that drove the drafting of the new law were two-fold – ” Simplification and removal of ambiguity.”
2. A Shorter, Crisper and Easier to Comprehend Income tax Act:
The current Income Tax Act, that will in less than 2 years complete 6 decades, has over 700 sections when one includes the series of sub-sections in various Chapters… The draft of the new income tax law, according to sources, is half the length, containing around 350-400 sections, with every attempt being made to word it in a simple, lucid manner and keeping the Provisos and Explanations that dominate the 1961 Act, at a bare minimum in the new law.
3. Big Relief to Individual Taxpayers:
The Task Force is learnt to have recommended big ticket changes to the tax brackets, that is likely to result in significant tax relief for middle class and upper middle class, i.e. those earning upto Rs. 45 – 55 lacs per annum.
4. Common Corporate Tax Rate for Foreign Cos & Domestic Cos.
A 25% Corporate tax rate is learnt to have been recommended by the Task Force for both Domestic as well as Foreign Companies. that’s a big slash in corporate tax rate for the foreign companies that currently are taxed at a whopping 40%.
5. Branch Profits Tax:
This concept that found a mention in the previous version of the Direct Tax Code in 2013, finds a prominent place in the report of the Task Force. Which means in addition to the corporate tax, foreign companies will have to shell out a branch profits tax on the amount repatriated to their foreign headquarters.
6. 360° change in Tax Assessments Process:
The Task Force has given a major thrust to the area of assessments and suggested sea changes to the current process and methodology. While codifying e-assessments, the Task Force has done away with the concept of “Assessing Officer” and the same will be replaced by “Assessment Units.” The big change in the new law however is the primacy being given to “Functional Units” that will be made up of IRS officers with Sectoral/Industry knowledge and expertise. The new law also envisages a Separate Technical Unit of IRS officers to assist the Functional/Assessment Units. All this, toe to toe with “anonymous & faceless” assessments where scrutiny cases will be centrally & randomly allotted by the system! Interaction with the tax department is likely to get a boost and facelift with the possible introduction of video-conferencing in certain areas!
7. Litigation Management Unit:
In another significant departure from the current state of affairs, the Task Force is recommending a separate Litigation Management Unit to manage the entire tax litigation process, right from deciding in which cases the appeals ought to be filed, to devising the strategy to defend a case. In essence the officer who drafts the assessment order, will no longer be the one filing appeals!
8. Settlement Through ‘Mediation’:
Another massive and some would call a path-breaking suggestion of the Task Force, is the introduction of the concept of ‘mediation’ for the first time in Indian tax law. Taxpayers will now be able to opt for a negotiated settlement before a Collegium of Commissioners once they receive the draft order. Assisting the negotiations will be mediators on both sides, that will be drawn from a panel! The Task Force hopes this landmark proposal will substantially reduce tax litigations that have clogged the Tribunals and Courts and where the life-cycle of a tax litigation from assessments to CIT(A) to Tribunal and then the Courts, can consume anywhere between 15-20 years or even more! The Settlement Commission meanwhile is likely to be given a quiet burial under the new law.
9. Public Ruling Option for Taxpayers:
For the first time again a concept of ‘public ruling’ is being introduced wherein the taxpayers will have the option of approaching the CBDT for clarification on any important point of law, that shall not be case or fact specific.
10. Transfer Pricing Assessments De-linking:
In an important suggestion the Task Force is learnt to have pushed for de-linking of Transfer Pricing assessments from regular assessments. The TP assessments under the new income tax regime will be carried out by a separate functional unit and they will be done for a block of 4 years, as is prevalent in some other countries. While there may be fewer TP audits based on risk profile of the MNE entities, they are likely to be more intense.
11. Dividend Distribution Tax Elimination:
Its a tax that has created much consternation among corporates. From the looks of it, DDT may soon be going as the Task Force is learnt to be in favour of taxing the dividends in the hands of shareholders.