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Direct Tax Code V/S Income Tax Act 1961

Updated on: 16 Jan, 2024 05:49 PM

Will the Income Tax Act 1961 be scrapped?

On 22nd November 2017, the finance ministry sets up a six-member task force to draft a new direct tax law that will better serve the country's economic needs by widening the tax base, improving compliance and ease of doing business.The task force will submit its report to the government within six months.

Will Direct Tax Code replace the Income Tax that was there in the government box since 2009? The answer is still not known.

How Direct Tax Code will impact me?

If you are one of those who is unaware of direct taxes code then you are at the right place

First of all What exactly is Direct Tax Code?

To begin with Direct Tax Code, it is an attempt by the GOI . DTC main aim is to simplify, revise and consolidate the structure of direct taxes laws in India. While Income Tax Act and Direct tax code have lot of similarities. But we are more concerned about the difference.

Let me take you through the journey. I will tell you about the Direct Tax Code. I will also tell you the prominent differences between the IT Act & DTC.

Evolution and Objective

Direct Tax Code was formulated to replace the five-decade-old Income-Tax Act. Since India has a very complex tax structure.

Main factors of this complexity are:-

  1. Wide-spread exemptions and concessions.
  2. Tax provisions are complex
  3. Cascading effects of taxes.

In addition to that, the multitude of judgments of courts at different level made the act incomprehensible to the average tax-payer.

Therefore the former FM proposed the draft Direct Tax Code initially on 12th August 2009. Furthermore, the prime objective was:-

  • To do away the present shortcomings of the taxation system.
  • Eliminating distortion. It will improve the efficiency and equity of the tax system.
  • Also, The tax base in the country will expand.

Thereafter, DTC has undergone many changes. These were based on the suggestions received from various classes of assesses and other stakeholders. As a result of that, the final draft incorporating appropriate suggestions was presented in 2013.

Speaking about DTC, it’s purpose is to establish a direct-tax system. Direct-tax system will be economical, efficient and impartial. DTC will also to reduce disputes and minimize litigation. DTC will also help:-

  • Tax-GDP ratio to increase.
  • Another benefit of DTC is that it will enhance GDP growth, improve equity and allocative efficiency.
  • Reducing compliance costs.
  • Lower administrative burden.
  • Reduce discretion.
  • Providing moderate rates of tax to all taxpayer.

Overview:-

Direct Tax Code had 319 sections and 22 schedules at the inception. Whereas existing IT Act 298 sections and 14 schedules. Once DTC bill is passed in the parliament it will embark the ending of IT Act.

It seems like IT Act and DTC has lot of similarities.Since we are concerned about the difference so that we can assess the impact on our wealth.

Important Events

  • 12th August 2009: First of all an initial draft of DTC with a concept paper was released. In addition to that public suggestions were also invited.
  • 15th June 2010: Revised discussion paper incorporating suggestions was released. The suggestions were from various stakeholders
  • 30th August 2010: The Direct Tax Code Bill, 2010 was introduced in Lok Sabha.
  • 9th September 2010: SCF (Standing Committee on Finance) examined the bill and report thereon. The report was presented in March 2012. The bill was having two parts. One with general recommendations. Other with specific clause wise recommendations. The report had 190 recommendations.
  • 31st March 2014: DTC (Direct Tax Code 2013) revised versions released. The bill included the suggestions of SCF for public comments.
  • 22nd November 2017: Constitution of Task Force for drafting a New Direct Tax Legislation by Ministry of Finance.

Salient Features of the DTC

  • It is a move towards rationalization of direct tax structure.
  • The code would also help in removing ambiguity in law. Thus, facilitating tax avoidance. Therefore resulting in broadening of the tax base of the country.
  • This code is a single code for all direct taxes including wealth tax.
  • The lawsuit scope is expected to decrease. Since the code is drafted in a simple and lucid manner.
  • In order to reduce the complexity. The Direct tax Code has been drafted in a unique manner. Indeed the related sections have been grouped under the respective chapters only.

Example: Exemptions related to salary. This would now fall under the head Income from Employment.

What makes DTC different?

Point of Comparison DTC IT ACT
Residential Status Only Resident and Non-Resident. Includes Resident, Non Resident. Resident but not ordinary resident
Year Only Financial Year prevails. Concept of Previous year and assessment year is used
Income Distributed by LIC companies. And It is to the holders having the equity oriented life insurance Taxable @ 5% Exempt
Income Distributed by Mutual funds companies.And It is to the holders of equity oriented MF's Taxable @ 5%
Exempt
Long Term Capital Gain on transfer of listed share or units Will become part of normal income. But indexation benefit will be there. Since there is a proposal to abolish STT. So STT will not be required to be paid on trading of listed shares It is exempt.
Assesse Definition 1)Tax-payer or/and who is liable for proceeding under the Act.
2)To whom the amount is refundable
3)finally someone who voluntarily files tax return irrespective of tax liability
1.)Tax-payer or/and who is liable for proceeding under the Act.
Income-Sources Income are broadly classified into 2 parts
1.Special sources
2.Ordinary sources
  • Employment income
  • House property income
  • Also Income Business
  • Capital Gains
  • Income from Residuary Sources
Income in IT Act has only one part. i.e income from ordinary sources
Tax Rate for ultra-rich(income of 10 crores or more) 35% 30%+surcharge 15%
Taxation of Dividend 15% Under the Income-tax Act, the dividend distribution tax is to be levied. And it is at the rate of 15 per cent plus cess as applicable.
Who can conduct Tax Audit? As per the new DTC. CA's, CS's and even cost accountant can do tax audit As per IT Act 1961 the tax audit was only done by the CA’s

So now you have the idea of

Direct Tax Code.

It seems that government may introduce The main strength of DTC is that it does away with the discretionary exemptions. Further it will also create the space for for lower tax rates. In addition to that it will help in dealing with the revenue loss.

Official Link
http://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/673/Press-Release-Constitution-Task-Force-drafting-New-Direct-Tax-Legislation-22-11-2017.pdf http://www.incometaxindia.gov.in/news/misccom-constitution-task-force-drafting-new-direct-tax-legislation-22-11-2017.pdf

Link of DTC Bill:
https://www.incometaxindia.gov.in/Documents/direct-tax-code-2010.pdf https://www.incometaxindia.gov.in/Documents/direct-taxes-code-2013-31032014.pdf

For any query related to direct tax code Contact us

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.