Overhauling India’s Direct Tax Code

For decades India’s tax laws have gotten more complicated and the government’s take of overall GDP has generally meandered upwards.  Unlike in the United States, income tax contributes a relatively small portion of the overall revenue collections. The vast majority of Indians fall below the threshold for income tax payments. Tens of millions of micro-businesses more get by with under-reporting cash income.  But still, the burden of the 1961 Direct Tax Code on those who do pay the income tax is considerable.

The rules have been modified over 6,000 times in the last 49 years. A veritable army of ITOs (Income Tax Officers) exercise considerable discretion and power over those companies and individuals who do file and pay taxes. Therefore when the current Union (federal) Government of Dr. Manmohan Singh announced plans to overhaul/ simplify the laws, it was greeted with great interest and curiosity.

In move toward openness and dialog the government also shared a draft version of the new law with the public and invited comments. They received thousands of comments and several have been incorporated into an updated draft released last week with time to comment until June 30.

There are eleven major  issues addressed by the revised Direct  Tax Code paper. These include Minimum Alternate Tax (MAT) for companies; tax treatment of savings, taxation of capital gains; taxation of non-profit organisations; taxation of existing units in Special Economic Zones (SEZs); wealth tax; and Double Taxation Avoidance Agreement (DTAA) in connection with Indian law.  Each one of these is a complex area.

The finance ministry  expects to present the final DTC to the India’s  lower house of Parliament during the forthcoming “monsoon session”.