What is Direct Tax Code (DTC)? Benefits & Key Features

The Income Tax Act of 1961 is the act that governs the direct taxation system in India. Since its introduction, the act has been amended regularly time and again with changes and new additions. However, the regular updation has made the act voluminous, cumbersome and complex.

To address the inefficiencies and make the direct taxation system more streamlined, the government of India conceptualised the Direct Tax Code (DTC). The introduction of the DTC is expected to overhaul and simplify the existing tax structure. However, the framework is still in the pipeline and has gone through numerous drafts and revisions.

After many delays, the government of India is aiming to introduce the Direct Tax Code in 2025, possibly during the Union Budget 2025 presentation. In this article, we will explore the DTC framework in detail and understand its benefits over the current system, including the key changes that it is planning to introduce.

What is the Direct Tax Code?

The Direct Tax Code (DTC) is a proposed taxation framework with the aim to replace the existing Income Tax Act of 1961. The legislative framework is designed to consolidate and simplify the direct tax laws in India to make them easily understandable and equitable for taxpayers.

The DTC also seeks to rectify the various inefficiencies in the current direct taxation system by providing clearer definitions of various provisions and elevating the Indian tax laws to the global standard. Also Read More About What is Direct Tax?

Also Read More About What is Direct Tax?

What are the Benefits of the Direct Tax Code?

Now that you are aware of what the Direct Tax Code is, let us look at the various benefits it is likely to bring about when introduced.

Simplification of Tax Laws

By consolidating multiple provisions under a unified framework and eliminating redundant laws, the Direct Tax Code would simplify the tax laws. The simplification is likely to make it easier for both individuals and businesses to understand the provisions and comply with the various requirements.

Enhanced Transparency and Compliance

Unlike the current Income Tax Act of 1961, the DTC aims to clearly define tax provisions to minimise ambiguities and increase transparency. The enhanced transparency in the direct tax system combined with a reduction in taxes is expected to encourage voluntary compliance and reduce instances of tax evasion significantly.

Increased Economic Growth

A streamlined direct taxation system is the need of the hour for a developing country like India. Businesses, especially micro, small and medium-sized enterprises, are finding the current taxation system to be complex and burdensome.

The introduction of the Direct Tax Code is expected to reduce the compliance burden on businesses. This would, in turn, allow them to focus on growth and expansion. Furthermore, the DTC’s emphasis on reducing tax disputes and ensuring quicker resolutions is likely to further enhance the ease of doing business in India and promote economic growth in the long run.

Broaden the Tax Base

In addition to simplifying the tax framework and reducing compliance-related issues, the Direct Tax Code also aims to bring more individuals and entities under the tax net. By broadening the tax base, the framework can increase revenue collection without imposing excessive rates on existing taxpayers.

Key Changes Expected in the Direct Tax Code

The Direct Tax Code is likely to introduce several significant changes to the current taxation framework. Here is a quick overview of some of the major changes that can be expected when the tax code is introduced.

Changes in Residential Status Norms

As per the Income Tax Act of 1961, taxpayers are classified into three different residential statuses depending on how long they stay in India. Resident-ordinarily-resident (ROR), resident but not ordinarily resident (RNOR) and non-resident (NR) are the three residential status categories.

Due to multiple categories, determining tax obligations based on residential status was a complex process, especially for taxpayers who work abroad or frequently move between countries. The Direct Tax Code aims to streamline the residential status categorisation by removing the resident but not ordinarily resident (RNOR) segment. The change in residential status is expected to eliminate confusion and make it easier for taxpayers to comply.

Removal of Previous Year and Assessment Year

The concepts of the previous year and assessment year have long confused taxpayers. According to the provisions of the Income Tax Act of 1961, the previous year is the year in which income is generated and the assessment year is the year in which the income generated in the previous year is assessed and taxed. However, many taxpayers often confuse both terms, leading to issues when filing income tax returns.

The eliminate confusion in the minds of taxpayers, the Direct Tax Code proposes to remove the concepts of the previous year and assessment year entirely. Instead, taxpayers would only have to focus on the financial year when filing tax returns. This change is expected to make return filing more straightforward and seamless.

Changes in Capital Gains

Capital gains are profits from the sale of a capital asset like land, building, property or shares. As per the Income Tax Act of 1961, capital gains are taxed independently at special rates. The DTC, on the other hand, proposes to include capital gains as part of the regular income and tax it at the slab rate. While this could potentially increase the tax burden for certain individuals, especially those in the higher tax slabs, it will make tax planning and compliance a lot simpler.

Uniformity in Tax Rates for Companies

The Income Tax Act of 1961 specifies different rates of tax for domestic and foreign companies. The Direct Tax Code, however, is expected to bring about uniformity in the way domestic, multinational and foreign companies are taxed by specifying a single rate of tax. Such a move is likely to reduce the tax burden for foreign companies and make India an attractive destination for foreign direct investment (FDI).

Removal of Deductions and Exemptions

The Direct Tax Code is likely to reduce the number of deductions and exemptions available to taxpayers. The primary objective of this exercise is to simplify the tax filing process, which is currently complex due to an extensive range of deductions. By removing unnecessary, rarely-used and unused deductions and exemptions, the DTC aims to reduce tax evasion and make direct taxation more equitable.

Changes to Tax Audit Rules

According to the provisions of the Income Tax Act of 1961, individuals and businesses with turnovers exceeding a certain limit must get a tax audit done. At present, tax audits can only be carried out by professional chartered accountants (CA).

The Direct Tax Code proposes expanding the eligibility to conduct tax audits to include other qualified professionals like company secretaries (CS) and cost and management accountants (CMA). By enabling other professionals to conduct tax audits, the DTC could ensure that more businesses comply with the tax laws.

Wider Implementation of TDS and TCS Norms

The norms surrounding Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) are only applicable to certain types of income under the Income Tax Act of 1961. The Direct Tax Code, meanwhile, is planning to widen the net by including most forms of income under the TDS and TCS provisions.

By ensuring that the tax is collected at the time of income generation, the government can significantly lower the instances of tax evasion. Furthermore, the change also ensures a more steady stream of revenue instead of at the year’s end.

Reduced Complexity

Currently, the Income Tax Act of 1961 contains as many as 298 sections with several sub-sections, schedules and clauses. The extensive nature of the act only increases the complexity and ambiguity.

The Direct Tax Code is expected to drastically reduce the number of sections and sub-sections in the act by consolidating multiple provisions and eliminating unnecessary or redundant portions. By simplifying the structure, the DTC aims to make the direct taxation framework more accessible, less daunting, and easier to navigate.

Conclusion

With this, you must now know what DTC is and the various benefits it is likely to offer to taxpayers. The Direct Tax Code is a major step in the right direction for a fast-developing economy like India. The proposed framework would simplify the existing direct taxation system and make it more efficient by eliminating shortcomings.