The government is unlikely to replace the Income Tax Act with the direct tax code, and will only incorporate select suggestions from the draft law to avoid creating more uncertainty for businesses amid an economic slowdown.

Some suggestions in the draft legislation, submitted to finance minister Nirmala Sitharaman on 19 August, will find their way into the Income Tax Act, 1961 through amendments in the next budget session of Parliament, said a person privy to the discussions in the government.

This will make the law modern and capable of dealing with new business models by incorporating global best practices without creating any uncertainty among businesses, the person said on condition of anonymity.

The idea of replacing the close to six-decade-old law is less appealing to the government now as this would involve unsettling well-established jurisprudence, which could create uncertainty for businesses that are grappling with a deep economic downturn. The finance ministry has not made public the report of the expert panel. The panel has proposed significant relief for taxpayers, including an across-the-board 25% tax rate for both local and foreign companies, and changes in personal income tax slabs, Mint reported on 19 August.

While the new ideas proposed in the report may be adopted in the Income Tax Act, replacing it with a new statute for the sake of simplification was not an easy task, the person said.

Besides, a lot of sub-rules, exemptions and carve-outs included in the law that have arguably made the Act complex are meant to take care of specific needs of industries and sections of people. “If the law is made too simple, it may become inequitable too," said the person. “Besides, even if you make the law simple, it will not stay so for long in a dynamic economy," added the person.

Tax experts said the timing of policy changes is vital as businesses may not prefer to have radical changes in law to coincide with economic uncertainty. “Better the devil you know than the unknown one. Taxpayers now know how to navigate the current law," said a tax expert, who did not wish to be identified.

The Manmohan Singh-led government had attempted to introduce a new direct tax code at the beginning of this decade, but eventually almost all of its proposals including the General Anti Avoidance Rules were incorporated in the Income Tax Act itself.

The finance ministry’s idea is to calibrate the existing Income Tax Act in the light of insights from the comprehensive review made by the expert panel so that it is capable of dealing with the latest trends in movement of capital and profits across borders.

A second person privy to the discussions in the government, who also spoke on condition of anonymity, said one of the priorities of the Narendra Modi-led government is to moderate certain existing anti-abuse provisions that may have hurt the taxpayer more than intended.

On the other hand, changes in tax rates have been a continuous process, executed through annual Finance Acts. The second Finance Act of 2019 passed as part of the full budget for the current fiscal has already taken forward the Modi administration’s agenda of making taxation more progressive, with the tax incidence going up with rising income levels.

The government raised the surcharge levied on income tax outgo of individuals with earnings more than ?2 crore, in two slabs. That has led to those earning in the range of ?2-5 crore paying 39% tax on income exceeding ?2 crore and those earning more than ?5 crore paying 42.7% on the income exceeding ?5 crore.