24-August-2024-Editorial

OVERHAUL OF THE INCOME TAX ACT, 1961

The Indian Income Tax Act of 1961, a cornerstone in the country’s direct tax system, is undergoing a significant revision.

This initiative, led by the Income Tax Department through an internal committee, is part of a larger central government effort to modernize and simplify the tax laws.

The move, guided by the Central Board of Direct Taxes (CBDT), seeks to align the income tax framework with contemporary economic realities, making it more user-friendly and transparent.

Why is the Income Tax Act Being Reviewed?

Historical Complexity:

• The Income Tax Act, 1961, has often been criticized for its intricate and outdated provisions.
• Previous attempts to simplify the Act, such as the 1958 Law Commission’s review of the Income Tax Act of 1922, revealed that a fundamental restructuring of the tax framework was necessary for true simplification.

Need for Modernization:

• The complexity of the Act has led to frequent disputes and confusion among taxpayers.
• This revision aims to update the law to reflect current economic conditions and incorporate global best practices, thus making it easier to understand and follow.

Improvement of Compliance:

• By simplifying the tax laws, the review is expected to enhance taxpayer compliance, reducing ambiguities and streamlining the filing process.
• The broader goal is to create a more efficient tax system in line with international standards.

Dispute Resolution:

• The review will also address dispute resolution, building on initiatives like the Vivad Se Vishwas scheme, which was introduced to settle long-pending disputes.
• Key considerations include reducing the reassessment period and increasing monetary thresholds to minimize conflicts between taxpayers and the tax department.

Income Tax Act, 1961

About the Act:

• The Income Tax Act of 1961 serves as the foundational legal framework governing income taxation in India, encompassing various rules and procedures related to income tax.
• The Act includes 298 sections across 23 chapters, covering all aspects of taxation in India.

Objectives:

• Economic Stability: The Act seeks to maintain economic stability by regulating private spending and ensuring that taxation is progressive.
• Progressive Taxation: It aims to promote fairness by ensuring that individuals are taxed according to their income levels.
• Revenue Collection: By defining clear rules for taxing income from various sources, the Act facilitates efficient revenue collection and management.

Key Provisions:

• Tax Slabs: The Act outlines different income brackets and corresponding tax rates for individuals and businesses.
• Deductions: It allows for various deductions under sections like 80C (investments), 80D (medical insurance), and 80G (donations), subject to annual limits.
• Assessment: Outlines the procedures for evaluating taxable income, submitting tax returns, and carrying out audits.
• Tax Deducted at Source (TDS): The Act requires tax to be deducted at the source for specific payments, simplifying the tax collection process.
• Capital Gains: Regulates taxation on profits from the sale of assets, with distinct provisions for short-term and long-term gains.
• Penalties and Appeals: It defines penalties for non-compliance and outlines the procedures for resolving disputes through appeals.

Recent Reforms in the Income Tax Act

Corporate Tax Rates:

• Reforms have led to a reduction in corporate tax rates, alongside the gradual phasing out of certain incentives.
• The effective tax rate for corporate taxpayers decreased from 29.49% in 2017-18 to 23.26% in 2021-22, and the tax rate for foreign companies was reduced to 35%. The angel tax was also abolished.

Personal Income Tax Slabs:

• Simplified tax slabs and lower rates for lower-income groups have benefited many taxpayers.
• The number of taxpayers increased from 89.8 million in 2019-20 to 93.7 million in 2022-23.

Expected Benefits of the Overhaul

Conciseness and Clarity:

• The revised Act is expected to be more concise, making it easier to understand and follow.
• Eliminating redundant and outdated clauses will reduce the administrative burden on taxpayers and authorities alike.

Enhanced Taxpayer Experience:

• A more straightforward tax law will reduce uncertainty, making it easier for taxpayers to comply, thereby fostering greater trust in the system.

Capital Gains Tax Reform:

• Plans to reform the capital gains tax regime include aligning it with global trends, possibly increasing taxes on equity capital gains, and raising the securities transaction tax on futures and options.

Broader Tax Base:

• Simplified compliance procedures and clearer regulations are expected to lead to higher tax compliance, broadening the tax base.
• Better enforcement and reduced loopholes could boost revenue collection, even if tax rates or exemptions are lowered.

Improved Business Environment:

• A transparent and predictable tax regime will make India more attractive for both domestic and foreign investors.
• Adjustments to corporate and capital gains tax rates are expected to stimulate investment and economic growth.

Long-Term Economic Benefits:

• A modernized tax system will support economic growth and stability, contributing to India’s goal of becoming a developed nation by 2047.
• Streamlined processes and clearer regulations will enhance overall tax administration efficiency and reduce compliance costs.

About Central Board of Direct Taxes (CBDT)

Historical Background:

• The CBDT’s origins date back to the Central Board of Revenue Act, 1924, which initially created a board responsible for both direct and indirect taxes.
• In 1964, the board was divided into two entities: the Central Board of Direct Taxes (CBDT) for direct taxes and the Central Board of Excise and Customs for indirect taxes. This division was formalized by the Central Boards of Revenue Act, 1963

Structure:

• The CBDT is headed by a chairman and consists of six members, each holding the rank of ex-officio Special Secretary to the Government of India.

Functions:

• The CBDT is responsible for policy formulation related to direct taxes and oversees the functioning of the Income Tax Department.
• It also proposes changes to direct tax laws, aligning with government policies, and suggests legislative amendments to improve the tax system.