India is rewriting its direct tax law to make it simpler, more sophisticated and less prone to disputes. A draft of the proposed new direct tax code (DTC) is expected to be ready by the end of this week. Mint takes a look at what the new code will strive to achieve.

What is DTC?

Personal and corporate income, including capital gains, is taxed in India as per the principles laid out in the Income Tax Act, 1961, largely based on a 1922 law by the same name. Numerous amendments over five decades, as well as the influence of case laws, often made it difficult to interpret the rules. Given businesses take into account regulatory risks and predictability in law enforcement while making their investment decisions, Prime Minister Narendra Modi had said during his previous term that the income tax law required to be rewritten in line with the economic needs of the country, and to keep pace with global best practices.

Why is it important?

To keep abreast of technological disruptions and corporate best practices, businesses worldwide have adopted new service delivery models. The advent of a digital economy has prompted corporations to remotely offer services even in regions where they are not physically present. Also, despite being a country of more than 1.3 billion people, there are only 74 million effective taxpayers in India, as per the last count. An overhaul of the tax law will make it more effective, simpler, easy to comprehend and, at the same time, help widen the tax base in a country where compliance has been low.

Are there any challenges?

Some experts say upsetting settled jurisprudence, especially on fundamental principles of income and taxation, could be a challenge, shortly after a disruptive roll-out of the new indirect tax system, GST, in 2017.

Is any pushback likely?

DTC will seek to plug legal loopholes to check abuse of the tax breaks given to specific classes of taxpayers, and widen the tax base. This could entail stronger checks and balances around politically sensitive tax breaks such as tax exemption to farmers and religious and charitable trusts. The Modi government may experiment with an inheritance or estate tax. People aware of the government’s plans said this was considered during budget discussions, but not taken up as a surcharge hike on income tax outgo of those earning over ?2 crore was agreed upon.

What do firms expect?

Businesses are looking forward to a tax regime that does not distract them from operations and is easier to follow. They also expect certainty in tax policy. One key area where businesses expect reforms is dispute settlement. “Tax litigation often continues for years. We hope DTC will have a provision to address quick settlement of disputes. One is also hoping for a lower tax regime," said Deloitte India partner Neeru Ahuja. Last week, the Central Board of Direct Taxes liberalized norms for filing appeals against lower court decisions so as to reduce litigation.