The Government has boldly embarked on the long-awaited revamp of the Income Tax Act, 1961, a law conceived over six decades ago, which no longer suits the complexities of today’s economy.
Why a New Direct Tax Code is Essential:
The Act, designed for its time, may have been suitable for India’s economy then, which was far less complex than todays, where rapid changes in scale, globalization, digitization, and modern business practices have transformed the landscape.
Finance Minister Nirmala Sitharaman unveiled the Direct Tax Code 2025, a significant move aimed at simplifying the law, reducing litigations, enhancing transparency, and fostering voluntary compliance from both individuals and businesses.
Over the past few decades, the current Act has undergone hundreds of amendments, with new provisions introduced repeatedly, resulting in a law that is increasingly complex and confusing. Many provisions have become redundant and no longer apply to the current economic landscape. Efforts to provide exemptions have led to ambiguities, sparking tax disputes & litigation, with contradictory judgments on similar issues. As business practices have evolved with globalization & digitization, the law has struggled to provide clarity on key aspects of international trade. To address the growing backlog of disputes arising from these ambiguities, the Government has had to implement Amnesty Schemes time and again.
To tackle these issues, the Central Board of Direct Taxes (CBDT) has formed an internal committee to oversee a comprehensive review of the Income Tax Act, 1961. As per a Press Information Bureau (PIB) release dated October 7, 2024, the committee has called for public feedback and suggestions in four key areas:
- Simplification of Language
- Litigation Reduction
- Compliance Reduction, and
- Redundant/Obsolete Provisions
Tax authorities have invited public feedback to ensure the proposed revamp of the tax laws with industry expectations.
This is a welcome step forward. It has the potential to eliminate outdated provisions that are no longer relevant. Most importantly, a focused approach to simplifying the language of the tax code to remove ambiguities can significantly reduce high-pitched assessments and resulting unwarranted litigations. It will also ease the compliance burden by eliminating redundant submissions, which has long been a concern for many businesses. Currently, only about 3% of the population pays taxes, a figure that could be increased if attention is given to simplifying the rules around disclosure, filing returns, and their enforcement, alongside a more straightforward tax structure.
Additionally, adjustments can be made to increase threshold limits for certain compliance requirements, as applying them uniformly to all taxpayers serves no real purpose. Exemptions and deductions, which were crucial in driving the economy during India’s earlier development stages, have often been exploited, leading to disputes over claim eligibility. Streamlining and simplifying these provisions would significantly reduce litigation and the associated compliance burdens. As India becomes more integrated into the global economy, there is also a need for greater clarity on transfer pricing, cross-border transactions, and double taxation, which will build trust and strengthen the tax system.
This is a revolutionary step forward. While the transition period may present challenges, as seen during the implementation of Goods & Service Tax Act, the long-term benefits of this reform will undoubtedly outweigh any temporary issues. By simplifying the tax system, reducing litigation, and improving compliance, the new Direct Tax Code will foster a more efficient and transparent tax framework, ultimately driving economic growth and enhancing trust in the system.