Decoding the direct tax law –Several lessons learnt from GST

After overhauling indirect taxes, the Modi government has set sight on country's Direct Tax law. A task force for redrafting the Indian Income Tax Act, 1961, was recently set up by the government to bring it in tune with the current economic needs and realities.

The task force, which will submit its report to the government within six months, would draft direct tax laws in line with tax laws prevalent in other countries, incorporating international best practices, and keeping in mind the economic needs of the country.

In an interview to Zee Media Digital, Chetan Chandak, Head of Tax research, H&R Block India shares his view on Direct Taxes, its impact and implications of overhauling it.

What are Direct Taxes?

These are such taxes which the assessee pays directly to the government. This liability cannot be transferred to any other taxpayer. It is directly imposed by the tax authority.

Please elaborate the tax structure on various types of Direct Taxes.

There are the different types of direct taxes in the country –Income tax, wealth tax, corporate tax, capital gain tax.

Personal income tax: This is a tax levied on individual taxpayers who earns income under any of the five heads of income i.e. salary, house property, business/profession, capital gains or other sources. Tax is required to be paid on the gross income minus the exemptions and deductions allowed under the IT Act. This tax is differentiated from the tax paid on income earned by businesses and companies of which the individuals are a part of. E.g. in an incorporated firm owners will pay taxes on firm’s income and separately on their income on salary and dividends.

Corporate tax: This tax is levied on business income earned by companies, be it Indian or foreign one. Companies whose income either comes from India or is deemed to arise in India have to pay this tax in India. Corporate tax is charged on company’s incomes from all the sources which includes business profits, royalties, technical services fees, gains arising from the sale of assets based in India or income earned as interest.

Wealth tax: Wealth tax was a tax levied on the wealth of the assessee be it individual, HUF, Company. It was levied on the net value of the property owned by the taxpayer after deducting the related liabilities. The logic behind imposition of wealth tax was essentially taxing the super-rich who were capable of making higher contribution to the taxes. Wealth tax was payable @1 percent on wealth of over Rs 30 lakh p. a. and it was not dependent on the income generated by property. Certain assets viz. shares, securities, mutual funds and bank deposits, business inventory were generally exempt from wealth tax. However, wealth tax has been abolished w.e.f. April 1, 2016 for wealth held as on March 31, 2016.

Capital gains tax: When you sell your investments or assets, you generate income and such income is chargeable to tax called capital gains tax. You can calculate capital gains by subtracting the purchase value from the sale value of the asset sold. Based on the time period for which the asset is held, this tax is classified as short term or long term. For capital gains to be considered long term, the holding period should be 36 months. However, in case of immovable property and foreign shares, the holding period needs to be only 24 months for the income to be considered as long term capital gain.

How do they impact you?

Taxes are expenses in addition to the other expenses that we undergo. Our real income always reduces because of taxes and hence any increase in the tax rates are bound to impacts us. Although there is a scope for tax planning / saving in direct taxes, you cannot do so in indirect taxes.

Should the government overhaul the 50 year old direct taxes or will it be a better idea to fine-tuning the existing law?

The direct tax laws are pretty old. Although the government makes various amendments in the tax laws every year, they need a complete overhaul because the socio-economic structure of the nation has changed drastically in the last 50 years. Continuous addition, subtraction and modification of laws have made them complicated for common civilians. Their simplification is the key to ensure full compliance of laws.
However, any attempt to overhaul the direct tax laws must focus on reduction of tax burden, widening of tax base, ensuring accountability of tax officers, minimizing human intervention and enabling digitisation of processes as much as possible.

Given that the government has just rolled out GST, how will the overhaul in Direct Taxes impact the country's taxation system?

There have been talks about the introduction of direct tax code and with the implementation of GST, the expectation for DTC are ripe again. DTC aims at not simplifying the financial lives of Indians but even reduce their tax outgo.

However, several lessons can be learnt from GST. Designing GST and its implementation were herculean tasks and therefore certain hiccups occurred during the process. Undoubtedly, introduction of GST has been a revolutionary step but various issues related to it post implementation still need to be resolved.

So, to eliminate such a scenario with direct taxes, proper planning needs to be done and the changes need to be implemented in a phased manner. However, such issues are less likely with direct taxes as the central body governing it (CBDT) is much more experienced and mature than GSTN.
Several of its processes are already digital and tax rates are also uniform across the nation while distribution of taxes is complicated in case of indirect tax laws as various states have their own tax laws governing some of the indirect taxes. So, overhauling direct tax laws will be a comparatively easier task for the government.