• Notification Date: 23-04-2024
• Notification No: N/A

Direct Tax Code to Replace Income Tax Act and Revamp Capital Gains, TDS Provisions

Official sources have indicated that if re-elected, the Narendra Modi government plans to prioritize the implementation of the long-pending Direct Taxes Code (DTC). Discussions are already underway within the finance ministry regarding this matter, as it has been included in the agenda for the prospective Modi 3.0 government following directives from the Prime Minister, according to sources who requested anonymity.  

The objective behind this move is to further simplify the regulations governing direct taxes and align them more closely with global standards. The groundwork for this overhaul would be based on the draft prepared by a task force back in 2019. Key proposals under consideration include restructuring the capital gains tax regime and addressing various challenges related to tax deducted at source (TDS). Originally proposed during the UPA I government, the DTC saw a draft Bill presented in August 2009 and tabled in Parliament in 2010.  

Despite revisions in 2012 and 2014 following review by the Standing Committee, the Bill lapsed with the dissolution of the 15th Lok Sabha. The subsequent Modi 1.0 and 2.0 administrations have taken steps to ease compliance, reduce exemptions, and adjust tax rates, such as the 2019 reduction in corporate income tax rates to 22%, bringing them in line with rates in Southeast Asia, the US, and the UK. However, there are remaining areas for reform, particularly concerning capital gains taxation and simplification of tax laws. Experts argue that the revamped DTC should focus on simplification, rationalizing tax rates for capital gains and TDS, strengthening dispute resolution mechanisms, and streamlining personal income tax rules.  

Sudhir Kapadia, Partner at EY India Tax & Regulatory Services, emphasized the need for simplification, noting the complexity arising from numerous amendments to the Income Tax Act over the years. The alignment of the exemption-free personal income tax, introduced in FY20 and reinforced in FY24, with the task force’s proposed slab structure and reliefs for incomes up to Rs 55 lakh/year, also requires attention. Analysts highlight the need for the DTC to simplify the capital gains tax regime and rationalize tax rates and holding periods across asset classes, given the current complexities and variations. The discussion also encompasses the unwieldy nature of the TDS regime, with 33 sections addressing 36 different payment types to residents, each with varying TDS rates.  

Suggestions include adopting a more streamlined approach with three TDS slabs based on the nature of payments, which could benefit both taxpayers and the government. The forthcoming revamp of direct taxes aligns with Modi Government’s directive for ministries and departments to outline action plans for the first 100 days of the Modi 3.0 government, aiming to meet economic goals and position India as a developed nation by 2047.