India’s proposed new tax code seeks to simplify the tax system and ease compliance for taxpayers. According to a report by the Comptroller and Auditor General of India (CAG) released in January 2024, around 73% of outstanding tax demands raised by the Income Tax Department are under dispute. Additionally, 97% of the total outstanding tax demand is considered “difficult to recover.”
The new tax code aims to address these issues by making the legislative language clearer and more transparent, reducing room for interpretation. It is expected to revise over 60% of the current statute, offering fewer exemptions, reducing overlaps, and providing a more streamlined structure.
The old tax regime under the current Income-tax Act includes multiple exemptions and deductions. However, the proposed tax slabs will allow taxpayers to pay less tax without needing to claim deductions. The Finance Minister highlighted that the old tax rates remain unchanged, making the new slabs more attractive for most taxpayers.
Currently, there are multiple rates and methods for calculating tax on capital gains, which can be confusing. For example, long-term share sales are taxed at 12.5% without indexation benefits, while short-term assets are taxed at 20%. Different time limits also apply to determine whether an asset is long-term or short-term.
These complexities make compliance difficult for taxpayers. Instead, a single tax rate could simplify the process and reduce the need to navigate multiple provisions. Direct tax collections accounted for 56% of total tax collections in 2023-24, with 90% coming from voluntary compliance. This highlights the importance of ease of compliance for taxpayers.
Income tax return forms should be simplified, especially for cases where income is covered by advance tax or Tax Deducted at Source (TDS). If the entire tax is deducted through TDS in the financial year, taxpayers should be able to file their returns more conveniently, possibly through SMS or a mobile app.
Under the new budget, people earning less than Rs 12 lakh are exempt from taxes unless they have special incomes like capital gains. However, they must still file returns if their income exceeds Rs 4 lakh. Around 80% of returns filed last year declared an income of less than Rs 10 lakh. With the increased rebate, more taxpayers will fall into this range.
There should be provisions for a single-page return filing with simple disclosures. The new bill is expected to make it easier for individual taxpayers to calculate, pay taxes, and file their returns.
TDS is intended to monitor tax evasion but often complicates compliance. For example, individuals buying a house must deduct 1% TDS even if they are using taxed money. The current process of remitting TDS through the income tax portal and submitting forms is complicated and time-consuming. Relaxations should be considered, especially for individual taxpayers.
While revamping the current law is a positive step, it presents challenges given the existing law has been in place for decades. A substantial body of case law has developed over time, providing clarity on ambiguous issues. Replacing the Act could lead to increased litigation if new ambiguities arise in the tax code. Therefore, efforts must be made to ensure the new law is both simple and clear to avoid complications.
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