Prof D Mukherjee
The New Direct Tax Code (DTC) 2025 aims to overhaul India’s outdated Income Tax Act of 1961, modernizing the country’s tax system. The DTC will replace the complex 1961 Act, which had become difficult to navigate due to numerous amendments, notifications, exemptions, and deductions. The primary objectives of the DTC 2025 include simplifying tax laws, improving transparency, reducing litigation, and aligning with global best practices for revenue collection. After years of delays, the DTC is set to be implemented in April 2025, for the financial year 2025-26.The DTC 2025 addresses the need for a simpler, more efficient tax system. It classifies taxpayers as residents or non-residents, removing outdated categories such as Resident but Not Ordinarily Resident (RNOR). Under the new rules, individuals spending more than 120 days in India (instead of 182) will be considered residents, thereby improving tax compliance. The DTC eliminates the use of terms like Assessment Year (AY) and Previous Year (PY), replacing them with the Financial Year (FY) for streamlined filing.
Key changes in the proposed DTC include the treatment of capital gains as part of normal income, which may lead to higher tax rates for some taxpayers. The five existing heads of income remain but are renamed for clarity, such as ‘Income from Salary’ becoming’Employment Income’ and Income from Other Sources as ‘Residuary Sources of Income’.It also introduces a common tax rate for domestic and foreign firms, making compliance easier for multinational corporations. Moreover, it the number of sections is likely to 319 in the place of existing 298 sections and increases schedules from 14 to 22, streamlining the tax code further.A significant focus of the DTC is expanding the taxpayer base. Currently, only about 1% of the population pays income tax, and the government aims to increase this to 7.5%. Additionally, most current deductions and exemptions are expected to be eliminated, simplifying tax filing and reducing loopholes.The DTC introduces provisions to combat Base Erosion and Profit Shifting (BEPS), in line with international standards set by the Organisation for Economic Co-operation and Development (OECD), to curb tax evasion by multinational corporations. It also aims to reduce litigation by creating an independent administrative appellate tribunal and simplifying dispute resolution mechanisms.Further, it reduces corporate tax rates and rationalizes rules for tax residency, which is expected to boost foreign direct investment (FDI) and enhance India’s global competitiveness. By consolidating tax provisions, providing clear dispute resolution guidelines, and reducing exemptions, the DTC promotes voluntary compliance and reduces tax avoidance opportunities. It is designed to improve India’s standing in the global tax regime by adhering to international norms.While the DTC 2025 aims to enhance tax revenue, it maintains exemptions for political parties, which has raised concerns among taxpayers. However, overall, the DTC is seen as a major step toward a modern, transparent, and efficient tax system that encourages compliance and reduces the potential for disputes.
The proposal to extend tax audit rights to Cost and Management Accountants (CMAs) and Company Secretaries (CSs), alongside Chartered Accountants (CAs), marks a progressive step towards broadening options for tax-paying entities and utilizing the expertise of these professionals. Traditionally, only CAs were authorized under the Income Tax Act of 1961 to conduct tax audits, but the professional landscape has evolved. Today, the Institute of Cost Accountants of India (ICMAI) and the Institute of Company Secretaries of India (ICSI) are as competent in taxation, audit, and governance as the Institute of Chartered Accountants of India (ICAI).
Expanding tax audit responsibilities to CMAs and CSs is both rational and necessary.CMAs specialize in cost management, strategic planning, and financial analysis, while CSs focus on corporate governance, compliance, and legal aspects of business operations. These skill sets are crucial for tax audits, and their inclusion would acknowledge their expertise and professional acumen. Currently, businesses are limited to engaging CAs for tax audits, but allowing CMAs and CSs to participate would offer more choices, promote competition, and improve service quality, particularly benefiting small and medium enterprises (SMEs).The complexity of tax laws, including GST, digital transactions, and international regulations like BEPS, requires diverse expertise. CMAs and CSs can provide valuable insights into these areas, enhancing the overall quality of tax audits. Their rigorous training in taxation, auditing, and financial reporting qualifies them for these expanded roles, fulfilling their career aspirations and enhancing the appeal of their professions.By involving more professionals in tax audits, the system becomes more robust, ensuring quicker compliance, reduced errors, and greater adherence to regulations. Besides driving service quality, the increased competition can lower costs, and greater efficiency. The proposal to allow CMAs and CSs to conduct tax audits alongside CAs reflects the evolving professional landscape and promotes fairness, efficiency, and inclusivity in India’s tax system.
Simplification and transparency in fiscal management are critical. The proposed DTC aims to simplify India’s tax structure by consolidating provisions, reducing ambiguity, and making compliance easier. In countries like the U.S., UK, France, and Australia, tax systems are simplified through clear tax brackets, digital platforms, and user-friendly filing systems. Australia’s self-assessment and Singapore’s transparent tax regime are particularly effective models. The DTC is crucial for aligning India’s tax code with these nations, promoting compliance and reducing litigation. Regarding corporate tax competitiveness, the DTC proposes lower rates to attract foreign investment and enhance India’s global competitiveness. The U.S. reduced its corporate tax rate to 21% in 2017, while the UK offers a 19% rate. China has a 25% rate but provides incentives, and Singapore’s 17% rate makes it a business hub. Lower corporate taxes under the DTC are vital to keeping India competitive.The DTC also seeks to widen India’s tax base, mirroring developed nations like the U.S., UK, and China, which have broad tax bases ensuring higher compliance and revenue. Stricter tax residency rules under the DTC, classifying individuals in India for more than 120 days as tax residents, will help prevent tax avoidance and align with global practices.Additionally, the DTC needs clearer provisions for taxing the digital economy, following examples from France and the UK, ensuring that global tech giants pay their fair share.
As far as glaring shortcomings of the proposed DTC are observed, to reduce tax exemptions could lead to dissatisfaction among taxpayers who currently enjoy several benefits. For instance, individuals who rely on tax-saving investments might face a higher tax burden, thereby discouraging savings and investments. The transition from the existing tax structure to the DTC could pose significant challenges in terms of adaptation. Taxpayers, businesses, and tax officials would need time to adjust to the new provisions, and this might result in short-term compliance issues. With the rise of the digital economy, there is growing concern over how multinational digital businesses are taxed. The DTC’s current provisions might not fully address the unique challenges posed by e-commerce and digital transactions, leading to potential loopholes. Besides, the questions relating to the rationale for keeping the political parties including MLAs and MPs, large agricultural land holding farmers entirely out of the tax bracket may peep in the minds of the tax payers in general. Small and marginal agricultural land holders may be kept out of the tax implications.
To avoid confusion, the Government should consider a phased rollout of the DTC, allowing taxpayers to gradually adapt to the new rules and ensuring a smooth transition. Given the growing importance of the digital economy, clearer and more comprehensive rules for taxing digital businesses should be introduced, addressing potential gaps and ensuring fairness.Simplifying the tax code alone may not be enough. The Government should invest in taxpayer education programs to ensure that individuals and businesses understand the new provisions and their obligations under the DTC. Leveraging technology, such as artificial intelligence and data analytics, can help in identifying potential tax evasion, improving tax collection efficiency, and reducing manual errors in filing and processing.
Overall, the enactment of DTC by replacing the existing six and a half decades’ old Income Tax Act 1961 and other Direct Tax Laws is welcome and it is a crucial step towards creating a modern, efficient, and transparent tax system in India. By simplifying tax laws, reducing rates, and aligning with international standards, the DTC can strengthen the economy and improve compliance. To be truly effective, the Government must address challenges related to implementation and digital taxation while promoting taxpayer awareness and using technology to enhance enforcement.The proposal to allow CMAs and CSs to conduct tax audits alongside CAs is time honoured, reflecting the evolving professional landscape in the country attributed with almost 20% population of the world. It promotes fair competition, provides businesses with more options, and ensures the efficient use of qualified professionals, ultimately leading to a more robust and inclusive tax and compliance management system. Enacting the DTC is expected to align India’s tax framework with global standards, improve corporate competitiveness, broaden the tax base, and ensure better revenue collection. The urgency of implementing the long pending DTC cannot be overstated, as it is vital for strengthening India’s fiscal position and maintaining global competitiveness.
(The author is an Independent Researcher, Educationist and a Management Scientist)
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