Towards a robust new direct tax law

Globally, tax laws have been evolving over time to keep pace with changes in the socio-economic and political spheres. These changes have been triggered by the desire to protect and expand the tax base. Internationally, these changes are reflected in initiatives such as Base Erosion and Profit Shifting (BEPs).

The Indian government intends to overhaul its existing Income Tax Act, 1961 (the Act). In order to review the existing Act and to draft a new direct tax law in consonance with the country’s economic needs, the government has constituted a task force. Its mandate is to draft an appropriate direct tax legislation keeping in view the direct tax system prevalent in various countries, international best practices and the country’s economic needs. The task force has to submit its report to the government within six months. The finance secretary has said that the task force will read the existing Act “chapter by chapter” and recommend changes accordingly. With moderate tax rates, the new tax law will not need so many provisions relating to exemptions under chapter 10.

A new Income Tax Act is preferable to continuous amendments in the existing Act. The Act cannot only help meet the country’s growing economic needs but also increase the tax base. The new income tax law should change the overall approach — for example, in many countries the taxpayer does not even meet the taxman. Simplicity and clarity in the new law can help reduce litigation. The country needs a widening of the tax base, since the number of taxpayers is still low when 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 Tax Code, 2010 (DTC) under the Income Tax Act. However, several progressive provisions under the DTC can also be adopted, such as mergers and acquisitions-related amendments and an enlarging of the scope of presumptive taxation.

In line with various Asian and European economies, the new law should help reduce tax rates to enable Indian companies to compete in the international market. The US government has already proposed drastic measures, such as reduction in the corporate tax rate from 35 per cent to 20 per cent. Most countries do not have provisions relating to Minimum Alternate Tax (MAT). Accordingly, MAT-related provisions can be done away with under the new law.

We can consider adopting some international best practices such as allowing “carry backward” of losses. The new law should be in sync with India’s bilateral tax treaties and should not have any unilateral amendments. Adoption of best international practices can help the Indian government achieve its objective of attracting foreign investment.

Though the government intends to draft a new tax law keeping in view international best practices, its reservations against the 2017 update to the OECD Model Tax Convention and Commentary are not in line with international best practices. The government should avoid such an inconsistent approach and should ensure that it incorporates BEPS measures in consensus with the international community.

The government has given the task force six months to submit its report. It is not clear whether this period is only for making recommendations on the new tax law or to draft and entirely new tax law. It would be challenging to draft an entirely new income tax law in such a short time, given that drafting requires broader stakeholder consultations. In order to come up with a robust law, the committee should have been given enough time to prepare a draft and invite consultations on it. The earlier government failed to introduce the new tax code as there was no clarity with respect to the introduction of certain provisions. The new committee should involve all stakeholders and should give the rationale of each provision before introducing the new Act.

It is important to keep in mind various principles laid down by the courts and the new Act should not go against such settled principles. To avoid long-drawn-out litigation, the focus should be on administration of law and resolution of disputes.

The task force also needs to take into consideration how the new Income Tax Act will help to achieve the government’s agenda of Make in India and improve the ease of doing business. If India wants to become a manufacturing hub, it should ponder over whether this can be done through a corporate tax rate cut or whether the focus should be on transparency, quick resolution of disputes and robust tax administration.

In nutshell, the government should make simplicity, transparency and dispute resolution key features of a robust new Income Tax Act that could help make India a preferred investment destination.

The government should make simplicity, transparency and dispute resolution key features of a robust new Income Tax Act that could help make India a preferred investment destination