The new direct tax code that’s in the pipeline, explained

By Prarthana Mitra

Giving concrete shape to the government’s agenda to lower the corporate tax rate, the draft for the new direct tax code will affix it at 25% for all businesses sources close to the development told media outlets. Likely to be ready by July, the new direct tax code will offer further relief to individual income taxpayers and small businesses.

Here’s what happened

Since the 2014 fiscal year, the number of income tax returns filed in India has risen to 80% with the highest personal tax slab being 30% for individuals. The centre is reluctant to introduce any changes to it, citing that our personal tax rate is one of the lowest in the world.

In most advanced economies, individuals are taxed at a higher rate than business corporations to promote investments and job creation. The Centre’s vision for the country’s entrepreneurial class thus looks at adopting this policy trend which has turned into a priority in nations such as the United States and the United Kingdom. The idea is to make businesses more competitive with a lower corporate tax rate and to attract more direct investment, both foreign and domestic.

With a vision to bring tax rates to an equilibrium without squandering the recent gains in revenue growth and tax base, the proposed tax rate cuts will be incremental over a period of time as compliance and revenue collections grow.

The lowered tax rate was first offered to companies generating an annual revenue of less than Rs. 50 crore, as apportioned in the 2017-18 budget. In the following year, it was extended to businesses with annual sales up to Rs. 250 crore, with a view to eventually extend to all enterprises so they can all share the privileges of this tax slab equally.

Why you should care

Girish Vanvari, founder of advisory firm Transaction Square said in an interview with LiveMint that he believes the new tax code has a threefold focus which includes, taxation of the digital economy, reducing frivolous litigation and making the corporate tax rate more competitive.

Small businesses and low-income earners stand to benefit the most from the new direct tax code that the government is working on. The new direct tax code also seeks to curb tax evasion and improve compliance. This will, in turn, increase the ratio of direct tax to GDP from 5.9% in the fiscal year 2018 to a projected 6.1% in the current fiscal year—to at least 9% over the next three to four years.

Prarthana Mitra is a staff writer at Qrius