Q What is the main reason for proposing the Direct Tax Code (DTC) in India?+

A The primary reason for the proposed DTC is to simplify and modernize India’s direct tax system, which has become complex due to numerous amendments and layered provisions in the Income Tax Act, 1961. The DTC aims to reduce compliance burdens, eliminate ambiguities, and align India’s tax regime with global best practices.

Q How does the structure of the Direct Tax Code (DTC) compare to the Income Tax Act, 1961?+

A The DTC is designed to be significantly simpler in structure. It proposes to have around 23 chapters and 16 schedules, compared to the Income Tax Act, 1961, which has 52 chapters and 14 schedules. The DTC also aims to use plain and user-friendly language, unlike the technical and legalistic language of the current act.

Q What is the concept of the "Tax Year" under the DTC, and how does it differ from the current system?+

A The DTC proposes a unified “Tax Year” of 12 months, replacing the current dual system of “Previous Year” (the year in which income is earned) and “Assessment Year” (the year in which income is assessed and taxed) under the Income Tax Act, 1961. This aims to simplify compliance and align financial reporting with the tax year.

Q How are personal income tax rates expected to change under the DTC compared to the Income Tax Act, 1961?+

A The DTC proposes to have broader income tax slabs with potentially lower tax rates, especially for middle-income taxpayers. For example, the article suggests a 10% rate for the ₹5 lakh – ₹10 lakh income bracket and a 20% rate for income above ₹10 lakh, compared to the current 20% and 30% rates respectively. The aim is to reduce the effective tax burden for many individuals.

Q What are the proposed changes to corporate tax rates under the DTC?+

A The DTC proposes a flat corporate income tax rate of 25%. While the current base rate under the Income Tax Act varies between 25-30%, the effective tax rate often increases with surcharges and cess. The DTC might introduce a higher rate (e.g., 35% as mentioned for income above ₹10 crore) but with a focus on fewer exemptions for simplification.

Q How will capital gains be taxed under the DTC compared to the Income Tax Act, 1961?+

A The DTC aims for a uniform treatment of capital gains, eliminating the distinction between short-term and long-term capital gains. Capital gains under the DTC are proposed to be taxed at the normal income tax rates applicable to the taxpayer. However, it also suggests providing an indexed cost for all capital gains, and largely removing the specific exemptions currently available under the Income Tax Act (like Sections 54 and 54EC).

Q What changes are expected in terms of tax exemptions and deductions under the DTC?+

A The DTC intends to significantly reduce the number of tax exemptions and deductions currently available under the Income Tax Act (like those under Sections 80C and 80D). The goal is to broaden the tax base, simplify tax computation, and increase transparency by having fewer deductions to navigate.

Q How will dividends be taxed under the DTC compared to the Dividend Distribution Tax (DDT) regime under the Income Tax Act?+

A The DTC proposes to remove the Dividend Distribution Tax (DDT), which was a 15% tax paid by companies on distributed dividends. Under the DTC, dividends will be taxed in the hands of the recipient at a rate of 15%, ensuring that dividends are taxed only once.

Q What improvements are expected in the assessment and dispute resolution processes under the DTC?+

A The DTC aims to make the assessment process more digital and efficient, reducing the reliance on manual scrutiny that often leads to delays and litigation under the Income Tax Act. It also proposes the introduction of Alternate Dispute Resolution (ADR) mechanisms to resolve tax disputes faster and reduce the backlog of cases.

Q How is the DTC expected to impact tax compliance for individuals and businesses?+

A The DTC is designed to simplify tax compliance through clearer language, fewer forms, and enhanced digitalization of processes like e-filing and digital assessments. This is expected to reduce the compliance burden and the need for extensive professional assistance for taxpayers compared to the current complex system.

Q Will the implementation of the DTC have any limitations or challenges?+

A Yes, the article points out potential limitations such as the challenges of transitioning to the new rules for taxpayers and tax professionals, the possibility of some taxpayers facing a higher tax burden due to the removal of certain exemptions, and the need for robust technology and adequate training for a smooth implementation.

Q When is the Direct Tax Code (DTC) expected to be enacted and come into effect?+

A Presently it is in a bill form, expected to pass in parliament and become Act before 2026.

Regulatory Updates: GST, Tax, Company Law & Compliance

Stay informed with the latest regulatory updates and legal changes in India, including developments in Income Tax, GST, the Companies Act, and other statutory frameworks. This section features real-time insights on government notifications, circulars, and procedural updates. In addition to legal updates, we also share practical “how-to” guides designed for user convenience—covering compliance processes like form submissions, e-filings, and regulatory filings under various laws. Whether you’re a professional, business owner, or individual taxpayer, our regularly updated articles help you stay compliant and well-informed with ease.

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