Expect Alignment Of Income Tax Act With Task Force Recommendations

The government had in November 2017 constituted a task force to draft new direct tax laws in consonance with economic needs of the country. After many extensions of its term, the task force finally submitted its report to the Finance Ministry in August 2019. Though the report of the task force has not been made public but some of the recommendations have already been implemented, such as income tax units for e-assessments and reduction in corporate tax rates.

The concept of income tax units was introduced through the e-assessment scheme. A National E-Assessment Centre and regional e-assessment centres were set up by the Central Board of Direct Taxes (CBDT) to facilitate the conduct of e-assessment proceedings. The National E-Assessment Centre is responsible to conduct proceedings in a centralised manner, whereas regional e-assessment centres are responsible to conduct proceedings in the cadre controlling region of a Principal Chief Commissioner of Income Tax. The board has also set up four separate units - assessment units, verification units, technical units and review units, which are responsible to facilitate the conduct of e-assessment.

In an unprecedented move, the corporate tax rates was reduced by the government through the Taxation Law (Amendment) Act, 2019. For the Assessment Year 2020-21, the government has introduced two new tax concessional regimes in case of domestic companies whereby tax rates have been reduced to 15 per cent and 22 per cent in case of domestic manufacturing companies and other domestic companies, respectively.

Finance Minister Nirmala Sitharaman will be presenting the Union Budget 2020-21 in Parliament on February 1. It is expected that some key and necessary recommendations of the task force may be implemented by the government through the upcoming Budget.

Recommendations that could be implemented in the upcoming Budget:

No more Dividend Distribution Tax (DDT)

The task force has suggested the abolishment of Dividend Distribution Tax (DDT), which is required to be paid by the domestic companies distributing dividends to their shareholders. It has been recommended that instead of levying DDT on companies, the tax should be levied in the hands of shareholders. The task force claims that this step will provide an enormous boost to foreign direct investment (FDI).

Currently, dividend income is exempt under Section 10(34), however, such exemption is allowed partially if a resident shareholder receives dividend in excess of Rs 10 lakh. According to provisions of Section 115BBDA, dividend income in excess of Rs. 10 lakh is chargeable to tax at the rate of 10 per cent. If DDT is abolished in the upcoming Budget, the dividend shall be taxable in the hands of the shareholder under the head 'profits and gains from business or profession' or 'income from other sources', as the case may be, at the applicable tax rate.

Tax Immunity Scheme

The government may consider bringing a Tax Immunity Scheme for direct taxes in the upcoming Budget. This scheme would allow taxpayers to declare additional income of previous assessment years or years into litigations without any levy penalty or prosecution. It was one of the recommendation proposed by the task force in its report.

The government in the Union Budget 2019 had launched a similar scheme to resolve all disputes relating to erstwhile Service Tax and Central Excise Acts. The Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 was introduced wherein a one-time window was provided to eligible persons to declare their tax dues and pay the same in accordance with the provisions. This scheme attracted substantial attention and received a positive response from the taxpayers.

Reduced tax rates for all taxpayers

Through the Taxation Laws (Amendment) Act, 2019, the government has introduced two new tax concessional regimes in case of domestic companies whereby tax rates have been reduced to 15 per cent and 22 per cent in case of manufacturing companies and non-manufacturing companies, respectively. However, all other business entities, such as partnership firm and LLPs, are still taxable at a flat rate of 30 per cent.

The task force has in its report recommended a reduction in tax rates for all business entities. Thus, it is expected that the government might consider extending the benefit of the reduced tax rate to other business entities as well.

Further, for the individual taxpayers, the existing Income Tax Act, provides for a levy of 5 per cent tax on income ranging between Rs. 2.5 lakh and Rs 5 lakh, 20 per cent on Rs. 5 lakh-Rs 10 lakhs, and 30 per cent on income above Rs 10 lakh. The task force has also recommended introduction of a new slab for those earning up to Rs 50 lakh so as to grant relief to individual taxpayers.

Settlement through mediation

There is a substantial pendency of appeals of the Income Tax Department before various appellate forums. In order to reduce such pendency, the board recently revised the monetary limits for filing of departmental appeals. Tribunals and courts following such revised monetary limits dismissed numerous pending appeals in 2019.

In order to curb litigations, one of the suggestions of the task force was to introduce the concept of mediation under the Income Tax Act. This is a new and unique concept which, if introduced, will help in solving the undue income tax litigations. Through mediation, a taxpayer will be able to opt for negotiated settlement before the income tax officers after receiving the draft assessment order. This negotiation will be assisted by mediators.

(CA Rahul Singh is Manager at Taxmann)

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