What Is Direct Tax Code And How It Is Different From Income Tax Act, 1961

A set of new tax laws called the Direct Tax Code is likely to simplify compliance for taxpayers soon. Finance Minister Nirmala Sitharaman's speech last Budget hinted at this new tax law when she said the goal was to simplify the income tax laws and cut the Income Tax Act, 1961's page-count by as much as 60 per cent. However, contradicting reports that it may be part of the Budget announcements on February 1, sources have told NDTV that it will be introduced separately.

What Is Direct Tax Code?

The Direct Tax Code (DTC) is a proposed reform to the Income Tax Act, 1961. It will serve as a simplified set of tax laws that will streamline and standardise the process, making it user-friendly for all taxpayers.

The DTC's main goal is to make it easier for everyone to file their tax returns. Seeking more people to contribute to its tax revenue, the government believes easing the process may encourage their participation.

How Is It Different?

The Direct Tax Code is aimed at simplifying the tax laws and reduce the page count as numerous amendments over the years have made the Income Tax Act, 1961 complicated. The 1961 law has 23 chapters and 298 sections. It is believed the DTC will bring a drastic cut to this.

The biggest change may be the scrapping of the concept of financial year (FY) and accounting year (AY), which often led to confusion. It may also introduce taxes, applicable at 5% rate, on income from LIC policies, which was not taxed under the 1961 law.

Under the 1961 law, tax audits could only be performed by Chartered Accountants, but the DTC may allow company secretaries and cost management accountants to handle this job.

Taxes on dividend income, which exists at slab rates, may be standardised at 15%. For high earners too, the tax rate may be standardised at 35% in place of the variable surcharge imposed in addition to the 30% tax slab.

For capital gains, differences in taxation on different asset classes may also be removed.

The DTC may not provide the option of choosing between two tax regimes. Deductions and exemptions too may be reduced - on the lines of the new regime.

The new tax code will focus on enhancing digital compliance as compared to the 1961 Act in which traditional compliance are still prevalent.