New tax Bill: No-deductions, low-rate regime should ease compliance

Although direct tax collections have been increasing year-over-year (YoY), around 73 per cent of outstanding tax demands raised by the Income Tax Department are under dispute, per a report by the Comptroller and Auditor General of India (CAG) released in January 2024.

Also read | Tax relief or economic mirage? The middle-class dilemma

Further, around 97 per cent of the total outstanding demand is considered “difficult to recover” by the Income Tax Department.

The proposed tax code aims to tackle this issue by making the legislativelanguage clearer and more transparent, leaving less room for interpretation. It is expected to revise over 60 per cent of the current statute, offering fewer exemptions, reducing overlaps, and providing a more streamlined and structured content layout.

Also read | Income-tax | Direct Tax Code should bring overhaul, not cosmetic changes

Simpler tax regime

The old tax regime under the current Income-tax Act has multiple exemptions and deductions. But under the proposed slabs, the taxpayer pays less tax compared to the old tax regime without needing to claim deductions. It is evident that the government is moving towards a simpler tax regime with fewer deductions.

As highlighted in the Finance Minister’s speech, the old tax rates have been left unchanged, making the new slabs more attractive and likely the default choice for most taxpayers.

Also read: No income tax up to Rs 12 lakh: Know the revised slabs under new regime

At present, there are multiple rates and methods for calculating tax on capital gains, which can be confusing. For example, if an individual sells long-term shares, they do not receive the indexation benefit and are taxed at a rate of 12.5 per cent, whereas the tax rate for short-term assets is 20 per cent. Furthermore, different time limits are prescribed to determine whether an asset is considered long-term or short-term.

Ease of compliance

These varying provisions complicate compliance for taxpayers. Instead, a single tax rate could be introduced, simplifying the process and reducing the need to navigate multiple provisions.

Direct tax collections roughly accounted for 56 per cent of total tax collections during 2023-24. Of this, 90 per cent come through voluntary compliance. This simply means that ease of compliance is an important factor for taxpayers.

Income tax return forms should be made simpler, especially in cases where income is covered by either advance tax or TDS. If the entire tax is deducted in the financial year itself by way of TDS, taxpayers should be able to file their returns in a more convenient manner, possibly through an SMS or a mobile app.

Watch | Decoding who wins and who loses in Modi 3.0's first major budget

TDS complicates things

This is all the more important in the context that people earning less than Rs 12 lakh are not required to pay taxes (if they do not have special incomes like capital gains) but must still file returns if their income exceeds Rs 4 lakh, per the new budget announcements.

Around 80 per cent of the returns filed last year declared an income of less than Rs 10 lakh, which means that with the increased rebate, many more taxpayers will fall within this range.

There should be a provision for a single-page return filing with simple disclosures. The bill is expected to be designed to make it easier for individual taxpayers to calculate, pay taxes, and file their tax returns.

Also read: Govt to extend time limit for filing updated returns for any assessment yr: FM

TDS is seen as a mechanism to monitor tax evasion practices, but it often makes the system more difficult to comply with.

Need for relaxations

For instance, an individual who buys a house or flat is required to deduct 1 per cent TDS even if she/he is purchasing it with taxed money. At present, the buyer must remit the TDS through the income tax portal, generate a specified form, and submit it to the seller.

This process is complicated and time-consuming, making it difficult for individual taxpayers to comply with these requirements. Relaxations should be given, at least for individual taxpayers.

While revamping the current law is a positive step, it presents a challenge given that the existing law has been in place for many decades. Over time, a substantial body of case law has developed, providing clarity on ambiguous issues.

Replacing the Act could lead to increased litigation if new ambiguities arise in the tax code. Therefore, careful and deliberate efforts must be made to ensure the new law is both simple and clear to avoid such complications.