To replace the existing Income Tax Act, 1961, the government is soon coming out with a new Direct Tax Code. A task force entrusted with the preparation of the tax code is likely to submit its report to the finance ministry today.

The new direct tax code will try to make personal income tax rates more ‘progressive’ by giving relief to people in the 5% and 20% slabs. It is also aimed at reforming the complex income tax laws into simpler tax codes with reduced rates, fewer exemptions, and tax slabs.

The existing direct tax law, which deals with personal income tax, corporate tax and other levies such as the capital gains tax, has undergone numerous changes over the years.

The previous government, too, had proposed a direct tax code with sweeping changes. Although it was never passed by Parliament, the current government has incorporated almost all the new ideas suggested in the code, including lowering the corporate tax rate, phasing out tax exemptions, the General Anti-Avoidance Rules and the place of effective management (POEM) rules that determine the residence status of corporations. New business models, the digital economy and measures taken by other countries to check offshoring are also among the reasons that prompted the move for a new tax code.

In September, Prime Minister Narendra Modi told tax officials that the old law needs changes. The idea is to rewrite it in line with the economic needs of the country and to keep pace with evolving global best practices. One key consideration is to ensure that the economy becomes more tax-compliant to generate enough revenue.

The new direct tax code will try to bring more assesses into the tax net, make the system more equitable for different classes of taxpayers, make businesses more competitive by lowering the corporate tax rate and phase out the remaining tax exemptions that lead to litigation. It will also redefine key concepts such as income and scope of taxation.