This Act is an Act to levy, administer, collect and recover tax on income in India. It came into force from 1 April 1962. The Income Tax Act, 1961 is the statute to introduce income tax in India. The Government of India came up with a draft law called the “Direct Tax Code” with the aim of replacing the Income Tax Act, 1961 and the Wealth Tax Act, 1957.
The Income Tax Act has provided separate provisions with respect to taxation of income received in advance as well as income in respect of which the amount has not yet been received. One also has to keep track of his TDS deducted at the time. However, the bill was later scrapped due to repeal of the Wealth Tax Act.
If we talk about tax reforms in the recent past, the integration of state and central indirect taxes into GST under indirect tax reform has abolished entry tax and central sales tax (CST). GST is an indirect tax which was introduced to replace many other indirect taxes like VAT, Service Tax, Purchase Tax, Excise Duty etc.
To boost growth and investment, the government has brought in a historic tax reform through the Taxation Laws (Amendment) Ordinance 2019, which provides for a concessional tax regime of 22% for all existing ones. Local companies from FY 2019-20 if they do not avail any specified exemption or incentive.
In order to attract investment in the manufacturing sector, the Taxation Laws (Amendment) Ordinance 2019 has reduced the tax rate for newly manufacturing domestic companies to 15%, if such company does not avail any specified exemptions or incentives. In order to provide relief to companies that continue to pay exemption/deduction and tax under MAT, the rate of MAT has also been reduced from 18.5% to 15%. Also providing complete relief from payment of income tax to persons earning taxable income up to Rs.5 lakh. Under the Finance Act, 2019, an individual taxpayer is exempted from taxable income up to Rs.5 lakh.
Slabs of 10%, 20% and 30% in personal income tax – have remained broadly the same over the last 20 years. Also, there is a need to rationalize exemptions and rethink incentives on savings (such as small savings schemes like PPF) Simplifying corporate tax rate structure and phasing out exemptions: The difference in effective corporate tax rate across sectors is wide. For example, in 2014-15, the effective tax rates for cement manufacturers, consulting services firms and banking services firms were 9%, 16% and 35%, respectively.
The broader tax base will help in tackling the problem of potential revenue loss due to lower tax rates and simplified tax structure.
Prolonged tax litigation in India has not only burdened the Indian judiciary but also damaged the exchequer. The tendency of tax authorities to initiate action without the necessary justification or assessment to reduce government tax litigation is therefore reflected by the low success rate (30%) of appeals.
A balance has now been established between direct and indirect taxes. The contribution of direct taxes to Indian revenue has come down from 60% in 2010-11 to 52% in 2017-18. The increasing share of indirect taxes in revenue is worrying as indirect taxes are regressive which hurt the poor more. Now there is clarity in cross-border transactions as well. Till now, the source rule of taxation for non-residents was tied to physical presence (permanent establishment), which has led to protracted litigation, base erosion and profit transfer.