Till date the GST is the biggest reform that we have seen in indirect taxes, it subsumed 17 different indirect tax laws and make several structural changes in Indirect tax in India. With GST the better administration, review & automation done which makes compliance easier for the taxpayer & certainly will improve the collection of revenue to the government and ultimately boost our economy in the year ahead.
With lots of amendments and cosmetic changes, the Income-tax law becomes complicated in some aspects and compliance of same become tougher, which ultimately results in various litigations. so to widen the tax base and make compliance easier for the taxpayer whether the same type of reform required in the Income-tax laws too?
Let’s first understand first Income tax law & meaning of reforms and what reforms required in current income tax law.
Income Tax law
The seventh (VIIth) schedule, entry no 82 of the constitution of India has given power to the central government to levy the Income tax on the income earned other than the agriculture.
The charging statute enacted via the Income-tax Act, 1961 it provides for the levy, administration, collection, and recovery of Income Tax. The Income tax act was enacted in 1961 & commenced from 1st April 1962.
The Income Tax Law consists of Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and judicial pronouncements by the Supreme Court and High Courts.
Tax Reform- Meaning
As per Oxford Dictionary “Reform” means making changes in (something, especially an institution or practice) in order to improve it.
So tax reform is a process of making changes in tax laws in respect to Levy, collection & administration with the intent of improving the same usually undertaken by the government to provide economic & social benefits.
Why reform required in the Income Tax laws
Since the Income-tax act introduced in 1961, there is the number of amendments has been made over time and several cosmetic changes also made which creates lots of complications resultant makes the current income tax law a complex law and ultimately result in lower compliances & lower the revenue collection to the Government.
We can also take reference of economic survey done in 2017-18, which states that there is only 5.9 crore peoples are the taxpayer which constitutes only 4.5% of total population, further for the earlier year Income tax department release at total number of taxpayers which constitutes only 1.79 percent of the total population which is very small in numbers.
Further, only 30,000 people earn more than ₹1 crore per annum. A good 90% of taxpayers contribute to only 23% of tax revenue. A large-scale exclusion of the population is paying income tax is seen. So what is needed is to widen up the current tax base.
So reform required in the Income-tax so that taxpayer will get tax law which is simple, easy-to-understand and same time should have been effective. A few key areas need focus: clarity is required as to whether income tax is on gross income or net income. In other words, is the objective of income tax to tax gross income or income after savings, investment, and consumption? So that compliance rate of Income tax law could increase.
As per International monetary fund reports India ranked 12th unequal income distribution based country in the world, the richest 10 percent owned 80.70 percent wealth and this trend is going upward every year. So the other 90 percent of the population shares the burden of Indirect taxes equally beside the lower income they have. So if income tax brought & income tax collection increased than it will lower the tax burden on the poor by creating fiscal space for a reduction in GST rates.
Government understand the requirement of Tax reform and has appointed a committee headed by Arbind Modi to review the Income Tax Act of 1961. The objective is to introduce A clean direct tax code—which will cover income tax, corporate tax, dividend distribution tax, fringe benefits tax and wealth tax—should help promote economic efficiency as well as protect horizontal and vertical equity.
The purpose of government is to bring all direct taxes under a single code with unified compliance procedures. The code was drafted in simple language to minimize ambiguities; every subsection was a short sentence to convey a single point. The code aimed at flexibility by keeping only general tax principles in the law, while details were found in the income-tax rules. The uncertainty on tax rates after every Union budget was to be dealt with by stipulating tax rates in the code itself, and these could be amended by Parliament. Taxes would not be used to meet regulatory goals, which were best served by the new sectoral regulators who have been put in place over the past two decades.
The government has found that the higher tax rates are the main recipe for the lower tax compliances which means the lower rate for lower incomes and high rates for higher incomes will ensure a better balance.
Another reason for lower compliance is the complexity in the current direct tax system which creates lots of legal disputes among the department and the assessee. As per records, there is a sum of 3.90 Lakhs cases are pending before the applet authorities.
The new direct tax laws key objective is to serve the three goals:
1. It will help make the Indian economy more competitive through tax stability, minimal exemptions and the focus on allocative efficiency
2. It could alter the Indian social contract by increasing the number of people paying income taxes and ultimately will result in higher revenue to the government.
3. Higher direct tax collections could lower the tax burden on the poor by creating fiscal space for a reduction in GST rates.
With new direct tax code, the law becomes simple & same time effective so that the litigation will get reduced, online assessment should get encouraged, Process of assessment of tax and appeal are get simplified and Digital payment will be increased which reduces the chances of Tax evasion.
This purposed tax reform will make compliances easy to the taxpayers & resultant the current tax base got widen up will increase the revenue to the government and at the same time will reduce the tax burden of Poor.
How and when new tax reform will get applicable?
The union cabinet on 16.01.2019 sanctioned Rs. 4,242 Crore budget to enhance the return filling technology which is a backbone of the Income-tax department. Once the new return filing system gets implemented it will make return filling easier and at the same time, it will reduce cycle time for the refund process. This can be seen as government move towards ease of compliance towards taxpayer however the tax reforms which promised by the government is very far from now.
The Direct tax reform’s review committee head Mr. Arbind Modi got retired in September of the previous year, the Government has appointed Shri Akhilesh Ranjan, Member (Legislation), CBDT as Convenor of the Task Force, and new task force currently drafting the new law so new draft law not yet presented to cabinet, the task force requires three to four month to prepare the draft law.
As Loksabha (General) elections are approaching, the reform in the direct taxes can be possible only after the formation of the upcoming government.
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