DIRECT TAXATION CODE: CHALLENGES AND BARRIERS THERETO

1. INTRODUCTION TO DIRECT TAXATION

Taxes, forming majority part of the governments revenue, come in different varieties, but are
broadly classified on the grounds of who collects the taxes from the tax payer.
Direct Taxes - Taxes that are directly paid to the government by the taxpayer are known as
Direct Taxes. These are taxes applied on individuals and organizations directly by the
government e.g. income tax, corporation tax, wealth tax etc., whereby the burden of tax
remains on the entity on which the tax is imposed.
Indirect Taxes Taxes that are applied on the manufacture or sale of goods and services,
which are initially paid to the government by an intermediary, who then adds the amount of
the tax paid to the value of the goods / services and passes on the total amount to the end user.
Thus, in case of Indirect Taxes, the burden shifts from the entity on whom the tax is imposed
to another entity who must pay the tax. Examples of these are sales tax, service tax, excise
duty etc.1

Investopedia defines a Direct Tax as one that is paid directly by an individual or an

organization to the imposing entity, i.e. the authority that imposes the tax concerned. A
taxpayer pays direct taxes to the government for a variety of reasons and purposes, including
personal and real property tax, income taxes or taxes on other assets. Direct Taxes differ from
Indirect Taxes in that the latter are levied on one entity, the seller for instance, and paid by
another entity, for example sales tax paid by the buyer in a retail setting.2
The concept of Direct Tax can have 2 possible interpretations one from the Colloquial point
of view and the other is from the U.S. Constitutional point of view. Certain taxes may fall
under the ambit of Direct Taxes in the Colloquial sense but may actually belong to the Indirect
Tax category as per the Constitutional sense.3

1 https://in.finance.yahoo.com/news/basics-explained--what-are-directand-indirect-taxes-064840748.html
2 http://www.investopedia.com/terms/d/directtax.asp
3 http://www.economywatch.com/budget/india/direct-taxes.html

Direct tax: Colloquial point of view - From the Colloquial point of view, a direct tax is the
charge levied directly to the taxpayers by the government. Examples include corporate taxes,
income taxes and transfer taxes. The transfer taxes include estate tax and gift tax.
Direct tax: U.S. constitutional law - According to the U.S. constitutional law, a direct tax is
the charge on property by reason of it's ownership.
Direct tax in India
In India, all the direct tax related matters are taken care by the Central Board of Direct Taxes
(CBDT), which is a significant division of the Department of Revenue, Ministry of Finance,
Government of India. CBDT is functioning under the Central Board of Revenue Act 1963.
CBDT is responsible for formulating and enforcing direct taxes in India. One of the vital
functions of CBDT is to administer direct taxes law followed by Income Tax Department.
The tax system in India is primarily demarcated under the control of Central and State
Government. The Central Government is primarily responsible for imposing taxes on income,
custom duties, central excise and service tax. The State Government is responsible for levying
taxes like State Excise, stamp duty, VAT (Value Added Tax), land revenue and professional tax.
The local bodies are also authorized to impose tax on properties, octroi and many more.4
The impact of Direct Tax has a directly proportional relationship with the rate at which the tax
is levied since that is what determines the final amount of taxes collected. This implies that a
very high rate of taxation motivates people to evade taxation as they will try to find ways to
reduce their burden. An even worse situation is when only a small part of the population
becomes eligible to pay tax. On the other hand, a lower rate of tax incentivizes self
compliance, whereby people become willing to comply with the system, thereby leading to an
increase in the number of tax-payers, which in turn leads to a higher collection of taxes.5

4 Ibid.
5 https://in.finance.yahoo.com/photos/five-things-to-know-about-directtaxes-1361767757-slideshow/five-things-to-know-about-direct-taxesphoto-262991341.html

2. FEATURES OF THE DIRECT TAXATION CODE

Background:
The first draft of the Bill for Direct Taxation Code was released for public comments and
discussion by the Government of India on the 12 th of August, 2009, thereby making the year a
landmark one in the history of taxation in India on account of the first step towards much
needed tax reforms in India. Post discussions and comments received from various
stakeholders, the Govt released a revised discussion paper in the August of 2010. This
established a Standing Committee on Finance (SCF) especially for the purpose of looking into
the viability of DTC and the transition from the archaic Income Tax thereto, the report of
which was submitted to the Parliament in March 2012.
FEATURES:
The Direct Taxation Code was proposed to amend and consolidate all the laws relating to
direct taxes in India, mainly referring to income tax, fringe benefit tax, wealth tax, dividend
distribution tax, etc, with a view to establish a direct taxation system that is not only
economically efficient but also effective and equitable. The main purpose sought to be
achieved in terms of practicality was to incentivize and facilitate voluntary compliance and
help increase the tax-GDP ratio. Another objective is to reduce the scope for disputes and,
thus, minimize litigation. As it has been drafted keeping in mind not only the most well
accepted principles of taxation but also the best international practices, it will provide stability
to the tax regime, and help ultimately pave the way for an efficient and unified taxpayer
reporting system.
The salient features of the code are6:

Single Code for direct taxes: The DTC aims to bring all the laws related to direct
taxes under a single Code. Also, it aims to unify all compliance procedures therein.

Use of simple language: With rapid globalization and progression in the economy, the
strength in numbers of taxpayers has increased and is expected to increase manifolds.
A major share of these taxpayers are small, moderate tax payers, for whom it becomes
very essential that the cost of compliance be low so as to facilitate voluntary

6 http://www.archive.india.gov.in/business/taxation/direct_tax.php

compliance. This, the DTC seeks to do, inter alia, by keeping the language of the
provisions simple and lucid with a view to convey, with clarity, the scope, intent and
ambit of each provision thereof. The manner in which the Code has been drafted
clearly reflects that - Each sub-section consists of only point that is meant to be
conveyed through a single short sentence, as far as possible, all directions and
mandates, have been conveyed in active voice to the maximum extent possible.
Similarly, provisos and explanations have been done away with since they are
cumbersome and beyond the understanding of laymen taxpayers. The various
conditions with respect to certain provisions have also been kept to a minimum.
Another innovative mechanism to lay out provisions has been used in the form of
formulae and tables, keeping in mind the fact that a law on direct taxes is essentially a
commercial law.

Reducing the scope for litigation: An attempt has been made, at every point possible,
to avoid ambiguity in the language of the provisions which invariably lead to the rise
of rival interpretations. The objective is that the tax administrator and the tax payer
are ad idem on the provisions of the law and the assessment results in a finality to the
tax liability of the tax payer.7 For the furtherance of this aim, the Central
Government/Board has been conferred with the power to avoid long-drawn litigation
mainly on procedural grounds.

Flexibility: The Code has been structured in a way that it is capable of assimilating
and accommodating the changes that frequently come about in a growing economy
such as that of India while not resorting to unnecessarily frequent amendments. Thus,
Thus, as far as possible, only those provisions which are either general or essential in
nature have been included in the form of sections in the statute, while further detailing
has been included in the rules/schedules.

Ensure that the law can be reflected in a Form: Most of the taxpayers, being ether of
the small or moderate paying capacity, the tax law is as it is reflected in the Form,
which is why the DTC has been structured so as to be able to be logically reproduced
in a Form.

Consolidation of provisions: To facilitate a better and in-depth of understanding of

the current tax regime and its various legislations, the DTC has consolidated the

7 Ibid.

different provisions relating to definitions, incentives, procedures, rates of tax, etc. and
has further looked into rearranging them in such a way that they are streamlined to be
consistent with the general scheme of all provisions.

Elimination of regulatory functions: traditionally, the taxing statute has also been
used as a regulatory tool. However, with regulatory authorities being established in
various sectors of the economy, the regulatory function of the taxing statute has been
withdrawn. This has significantly contributed to the simplification exercise.

Providing stability: at present, the rates of taxes are stipulated in the Finance Act of
the relevant year. Therefore, there is a certain degree of uncertainty and instability in
the prevailing rates of taxes. Under the Code, all rates of taxes are proposed to be
prescribed in the First to the Fourth Schedule to the Code itself thereby obviating the
need for an annual Finance Bill. The changes in the rates, if any, will be done through
appropriate amendments to the Schedule brought before Parliament in the form of an
Amendment Bill.

Let us further look into the provisions of DTC 2010 through to DTC 2013, amendments et al.
Provisions of the bill: Some of the key initiatives the Bill seeks to introduce are:
1.
2.
3.
4.

General Anti Avoidance Rules (GAAR)

Minimum Alternate Tax (MAT)
Modified version of Wealth Tax
A new approach to identifying residence for taxation purposes in case of foreign
operations.

In the Budget of 2015, the Finance Minister withdrew DTC 2013, suggesting that it was a
dated bill and some of its provisions had already been incorporated in the Income Tax Act,
while most others were incorporated in the Budget itself. Some of these provisions have
been listed below, which have either been modified or done away with entirely.
General Anti Avoidance Rules: The main aim of GAAR is to prevent foreign companies
from escaping taxation in India by exploiting loopholes in our taxing system. Foreign
companies use innovative and creative accounting maneuvers to avoid taxation by transferring
wealth and profits earned in India to other, low tax-regime countries (called tax havens),
which ends up costing the government dearly. GAAR allows tax authorities to question
suspect overseas fund transfers and amend the companys taxable income accordingly, if
necessary. The rule, which was earlier expected to be introduced in 2016, has now been

deferred to 2017 on account of concerns over its language objective of making Indias
investment environment welcoming for foreign companies. Even then, it will only apply to
investments made in financial year 2017 and beyond, as opposed to also being applied
retrospectively.
Minimum alternate tax (MAT): The provisions of DTC provided for gains by foreign
investors, including those of FIIs, FDIs, and NRIs, at a minimum rate of 18.5%, provided that
if their tax liability were to fall below this. However, this years Budget provides a complete
MAT relief to FIIs while staying quiet about other categories of overseas investors.
Wealth tax: This is a provision of the Income Tax Act that provides for incremental taxation
of super-rich individuals, Hindu families and corporations, so as to bring in circulation
excess wealth that has been lying unused with them. DTC 2013 altered the provisions related
to wealth tax by increasing the threshold for charging wealth tax from Rs 30 lakh to Rs 50
crore, while simultaneously decreasing the tax rate to be charged to 0.25% from 1%. It also
widened the base of assets for wealth tax to be charged on by including certain financial
assets such as shares to it. In the Budget, wealth tax has been replaced by a surcharge.
According to this, instead of ascertaining a threshold based on net worth, an incremental
charge of 12% (as against 10% earlier) has been levied on an annual income of over Rs 1
crore.
Identifying tax residence: According to Indian tax laws, a company can be considered a tax
resident of India and its global revenues taxed here, if its significant control and management
were based in India during a financial year. This rule allowed Indian companies to set up
small subsidiaries in tax havens and vest superficial control of their international operations in
them. Through this, they avoided paying taxes on overseas operations and only paid taxes on
Indian operations. DTC 2013 proposed the introduction of the place of effective management
(POEM) rule to prevent such exploitation. Under POEM, a companys global income will be
eligible for taxation in India if its effective management and control was situated in India at
any time during a year instead of throughout the year. The proposal has been incorporated in
this years Budget.8
Highlights of Direct Tax code
1. Removal of most of the tax saving schemes: DTC removes most of the categories of
exempted income. Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term
8 https://in.finance.yahoo.com/news/direct-tax-code-to-be-cancelled--whatit-means-100718457.html

deposits, NSC (National Savings certificates), Long term infrastructures bonds, house loan
principal repayment, stamp duty and registration fees on purchase of house property will
loose tax benefits.
2. New tax saving schemes: Tax saving based investment limit remains 100,000 but another
50,000 has been added just for pure life insurance (Sum insured is atleast 20 times the
premium paid) , health insurance, mediclaims policies and tuition fees of children. But the
one lakh investment can now only be done in provident fund, superannuation fund, gratuity
fund and new pension scheme (NPS).
3. Tax slabs: The income tax rates and slabs have been modified. The proposed rates and
slabs are as follows:
Annual Income
Up-to INR 200,000 (for senior citizens 250,000)
Between INR 200,000 to 500,000
Between INR 500,000 to 1,000,000
Above INR 1,000,000
Men and women are treated same now

Tax Slab
Nil
10%
20%
30%

4. Home loan interest: Exemption will remain same as 1.5 lakhs per year for interest on
housing loan for self-occupied property.
5. Short and long term gains: Only half of Short-term capital gains will be taxed. e.g. if you
gains

50,000,

add

25,000

to

your

taxable

income.

Long term capital gains (From equities and equity mutual funds, on which STT has been paid)
are still exempted from income tax.
6. EEE and EET: As per changes on 15th June, 2010, Tax exemption at all three stages
(EEE) savings, accretions and withdrawalsto be allowed for provident funds (GPF, EPF
and PPF), NPS (new pension scheme administered by PFRDA), Retirement benefits (gratuity,
leave encashment, etc), pure life insurance products & annuity schemes. Earlier DTC wanted
to tax withdrawals.
7. Education Cess: Surcharge and education cess are abolished.
8. Income arising from House Property: Deductions for Rent and Maintenance would be
reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented
house is deductible from rent.
Before DTC, if you own more than one property, there was provision for taxing notional rent
even if the second house was not put to rent. But, under the Direct Tax Code 2010 , such a
concept has been abolished.
9. LTA (Leave travel allowance): Tax exemption on LTA is abolished.

10. Education loan: Tax exemption on Education loan to continue.

11. Corporate tax: Corporate tax reduced from 34% to 30% including education cess and
surcharge.
12. Taxation of Capital gains from property sale : For sale within one year, gain is to be
added to taxable salary.
For long term gain (after one year of purchase), instead of flat rate of 20% of gain after
indexation benefit, new concept has been introduced. Now gain after indexation will be added
to

taxable

income

and

taxed

at

per

the

tax

slab.

Base date for cost of acquisition has been changed to 1st April, 2000 instead of earlier 1st
April, 1981.
14. Medical reimbursement : Max limit for medical reimbursements has been increased to
50,000 per year from current 15,000 limit.
15. Tax on dividends: Equity mutual fund will attract 5% dividend distribution tax (DDT).
DDT has been removed from debt and non-equity based mutual funds but now dividends on
non-equity funds will be taxable in investors hand as per his slab rates. There will also be a
TDS 0f 10% (20% in case of NRI and companies) if dividend is more than 10,000 Rs for
non-equity funds.
15. News for NRIs : As per the current laws, a NRI is liable to pay tax on global income if he
is in India for a period more than 182 days in a financial year. But in new bill, this duration
has been changed to just 60 days.
An NRI will be deemed as resident only if he has also resided in India for 365 days or more in
the preceding four financial years, together with 60 days in any of these fiscal years. Even if
an NRI becomes a resident in any financial year, his global income does not immediately
become liable to tax in India. Global income would become taxable only if the person also
stayed in India for nine out of 10 precedent years, or 730 days in the preceding seven years.
This is very unfair to Seafarers. To avoid any income tax, an Indian sailor employed with a
foreign ship will have to stay maximum for 60 days in India.9

9 http://www.pankajbatra.com/india/new-direct-tax-code-dtc-highlights/