The new direct tax code (DTC) is expected to be in consonance with economic needs of the country, and will replace the 58-year old existing Income Tax Act, 1961. A panel was set up to draft the code in view of direct tax systems across various countries, international best practices and economic needs of the country.
It has been more than two years since the introduction of the goods and services tax (GST). The government now has an opportunity to do the same with the direct tax system. Direct & Indirect taxes should complement each other. Thus with GST in force we also need a simpler direct tax system with lesser tax slabs & exemptions.
A substantial cut in personal income taxes is expected to bring relief to India’s middle class. The new direct tax code is expected to make personal income tax rates more ‘progressive’. It is also aimed at reforming the complex income tax laws into simpler tax codes with reduced rates, fewer exemptions, and tax slabs. The panel has also recommended the government not to levy surcharges. Some of the proposed tax rates as against the existing tax slabs are as follows:
|Income (Rs.)||Current Tax rate||Proposed|
|2.5-5 lakhs||5% with rebate||5% with rebate|
|5-10 lakhs||20%+ surcharge||10%|
|20 lakhs- 2 cr||30%|
|2 cr & Above|
A lower corporation tax is understood to be other major recommendations of the DTC panel. To be competitive globally, we need to have an effective tax rate of 20-22%, which is not the case currently. It seems that the corporate tax rate is likely to be cut down to 25% for all corporates. All major economies have been competing with low tax jurisdictions for their share of tax revenues. This will, therefore, take India a step closer to lower tax rates prevalent in large economies like the US which reduced the tax on corporates from 35% to 21% last year. The panel also recommends scrapping minimum alternate tax (MAT).
The panel has also likely proposed that dividend distribution tax (DDT) be taxed only in the hands of recipient and not in the hands of companies as is the case today. DDT is presently chargeable at the rate of 20.56% of the dividend paid by the company.
Deduction in corporate taxes and DDT ought to result in increased earnings per share (EPS) and could result in Indian equities attracting higher valuations.
A good tax system thus has to promote rather than hinder economic activity, aid economic equality rather than inequality, and be easy rather than complicated to administer. A new DTC will thus be important in a distributional sense as well. Higher direct tax collections can create space for a massive restructuring of the GST—with a maximum three slabs and a far lower standard rate. That will help economic growth, as well as make the tax system more progressive.
Reducing litigation, simplifying compliances and bringing in certainty are also likely to improve the country’s ranking for ease of doing business and generate goodwill for the economy. Hence the step to bring in major changes in the tax system is a very pragmatic one.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 10 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’