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The Indian government's plan to introduce a significantly simplified income tax code, the Direct Tax Code (DTC), has experienced a setback. Initially expected to be unveiled alongside the Union Budget 2025 presented by Finance Minister Nirmala Sitharaman, sources have confirmed to NDTV that the DTC will instead be introduced separately. This decision marks a departure from earlier reports suggesting its inclusion in the budget speech. The announcement comes as a surprise, given the considerable anticipation surrounding the DTC and its potential to streamline India's complex tax system. The delay, however, doesn't negate the government's commitment to reforming the existing system, a system currently embodied in the unwieldy 1961 Income Tax Act.
The current Income Tax Act of 1961, a sprawling document encompassing 23 chapters and 298 sections, governs the imposition of direct taxes, including personal and corporate income tax, as well as taxes on securities transactions, gifts, and wealth. The government's stated aim is to drastically reduce the act's complexity, specifically targeting a reduction of 60 percent in the number of pages. This ambitious goal underscores the government's intention to make the tax code more accessible and easier to navigate for individual taxpayers. The extensive length and intricacy of the current act have long been criticized for hindering compliance and contributing to tax-related confusion among both individuals and businesses. The hope is that a streamlined DTC will alleviate these issues.
The proposed changes within the DTC are far-reaching and promise a significant overhaul of the tax system. Among the most anticipated changes is the elimination of the distinction between the financial year (FY) and the assessment year (AY). This move alone would simplify the accounting and tax filing processes considerably. Furthermore, substantial adjustments are expected to the taxation of investment returns. Currently exempt income from mutual funds and Life Insurance Corporation of India (LIC) investments may be subject to a five percent tax under the new code. A similar flat tax rate of 15 percent is also being considered for dividends. While these changes aim to increase revenue, their effects on investors and the broader economy need further careful consideration and analysis. The government must ensure these modifications strike a balance between increased revenue and the preservation of investor confidence.
The development of the DTC has been a meticulous process, involving several stages of consultation and review. Prior to the Finance Minister's announcement of the I-T Act overhaul, the Central Board of Direct Taxes (CBDT) established an internal committee with 22 specialized sub-committees to evaluate various aspects of the existing law. This internal review was followed by a public consultation, extending invitations to stakeholders and subject experts to provide their feedback and recommendations. The government received around 7,000 submissions by January, showcasing a level of public engagement rarely seen in such large-scale tax reforms. The substantial input gathered during this phase underscores the government’s commitment to a comprehensive and inclusive reform process. The thorough review and public consultation demonstrate an effort to address concerns and suggestions before implementing the final version of the DTC.
The delay in introducing the DTC as part of Budget 2025 does not necessarily signify a significant setback for the initiative. The government’s commitment to simplifying the tax code remains firm. The separate introduction of the DTC might provide more time for thorough deliberation and refinement, ensuring the new code adequately addresses the concerns of various stakeholders. The government's decision to introduce the DTC separately will allow for more focused debate and discussion in Parliament, facilitating a more informed and comprehensive legislative process. The government will likely seek feedback during the parliamentary sessions before its implementation.
The success of the DTC hinges on its ability to achieve its stated goals of simplification and increased ease of compliance. Its effectiveness will be evaluated not only by its success in reducing the volume of the legislation but also by its ability to improve taxpayer experience and reduce tax-related disputes. Further clarity on the implementation timeline and specifics of the proposed changes is eagerly awaited. If successful, the DTC will serve as a landmark achievement in Indian tax reform, significantly impacting individuals, businesses, and the overall economic landscape of the nation. However, careful monitoring and assessment of its impact will be crucial to ensure it achieves its desired objectives without unintended consequences.
Source: Is There New, 'Simpler' Income Tax Act In Budget 2025? What Sources Said