Budget 2023-24: Proposals on Direct Taxes Code that can benefit taxpayers

The ruling BJP government has made significant reforms in indirect taxes. On the basis of the experience during the past few years, it is expected that it will similarly initiate reforms in direct taxes in Union Budget 2023-24.

In 2017, the Union government had set up an expert committee to draft a new Direct Taxes Code (DTC) and its report was submitted to Finance Minister Nirmala Sitharaman in August 2019. The report, though not yet made public, is believed to have made several recommendations that aim at reducing the tax complications for individuals and corporates. It reviews existing tax brackets, examines the issue of uniformity of tax structure for domestic and foreign companies, among other things.

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To simplify the direct tax structure and consolidate all direct taxes in India, the government first introduced the Draft Direct Tax Codes in 2009, and then a Revised Discussion Paper (RDP) was introduced in the year 2010. The Draft was introduced in Parliament and subsequently it was referred to the Standing Committee on Ministry of Finance to discuss it with various stakeholders. The Committee submitted its report in 2012. Considering the recommendations of the Committee, the government released a ‘revised’ version of the DTC in 2014. However, it lapsed when the BJP-led government came to power.

For the uninitiated, direct tax is a tax that an individual or a company is required to pay to the government on his or the company’s total income earned income during any financial year. Direct tax includes income tax, corporation tax, securities transaction tax, property tax, gift tax, inheritance tax, etc.

The following proposals on Direct Taxes Code, if implemented, can provide relief to Individuals and corporates:

Simplify Individual Tax Structure: The tax slabs for individuals have mostly remained the same for over many years with limited benefits in the form of a rebate, standard reduction, etc. The expectations are that the budget would significantly increase the current limits for these slabs. It may retain NIL tax up to Rs 5 lakh, impose 10% up to Rs 10 lakh, 20% up to Rs 20 lakh, and 30% in excess of Rs 20 lakh. These slabs will significantly reduce the tax liabilities for individuals. At present, there is NIL tax up to Rs 5 lakhs; 10 % between Rs 5 lakh and Rs 7.5 lakh; 15% between Rs 7.5 lakh and Rs 10 lakh; 20% between Rs 10 lakh and Rs 12.50 lakh and 25% between Rs 12.50 lakh and Rs 15 lakh.

Highest tax rates for individuals in countries like China, Germany, France, UK, Europe, etc. crosses 45% which, as compared to India, is on a higher side. Although there are countries like Singapore, Canada, USA, Thailand, etc. where these rates are lower than India.

Uniform Corporate Tax: Currently, the corporate tax rates for foreign companies operating in India are 60% higher than the rates which apply to domestic companies (Domestic companies: 25.17% & foreign companies: 40% + surcharge + cess). These rates have been amongst the highest in the world. There have been discussions to eliminate this disparity.

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Abolition of Tax on Dividends to Investors: The corporates distribute dividends to its shareholders from profits post-tax. The government has been charging taxes on these profits distributed by corporates to their shareholders. Earlier, the onus was on corporates to pay these taxes as Dividend Distribution Tax. Currently, DDT stands abolished but the corporates are required to deduct tax @ 10% under Section 194 (in case the total amount to a shareholder exceeds Rs 5,000).

Increase exemption limits of Long-term Capital Gains (LTCG): Currently, the profits from the sale of listed equity shares and units of equity-oriented mutual funds are taxable and are subject to Long-term capital gains (LTCG) provided the profits exceed Rs. One lakh/annum. Additionally, these transactions are also subject to Securities Transaction tax (STT). The government may not withdraw the STT but the retail investors are expecting an increase in non-taxable limit from Rs 1 lakh to Rs 2 lakh.

With urban salaried jobs going up, revised tax slabs and increased incentives will improve the spending power of consumers which, in turn, will lead to increased demand and higher economic growth. Higher surplus in-hand also increases the motivation of employees and productivity. Since this will be the last opportunity to bring changes through the budget as elections are due next year the government should ensure a growth-oriented budget and offer as many incentives as possible to individuals and corporates.

(The writer is director and co-founder, Teamlease Regtech)