The proposed direct tax code is far-reaching in its implications. For corporates, it reduces tax rates and introduces newer tax concepts in international transactions, changes the basis of computing the taxability of business income, provides expenditure-based incentives and discontinues profit-based incentives.
The significant thing is that the proposed tax code aims for consolidation and amendment in laws relating to all direct taxes (income tax, dividend distribution tax, fringe benefit tax and wealth tax), besides establishing a system that facilitates voluntary compliance in tax payments. Also, when the scope is reduced for disputes and minimization of litigation, the tax system as a whole becomes effective and efficient.
For instance, the taxation rate has been reduced to 25 per cent for corporate taxes, doing away with the additional cess or surcharge. In minimum alternate tax (MAT) the taxability approach is proposed to be changed from “book profits” to “value of gross assets”.
In providing a cushion for losses to be adjusted against taxes, the code says business losses can be carried forward for an unlimited period. This is a positive step as the business losses could be eligible to set off against incomes for a longer period.
In business income, the basis of computation of business income is proposed to be changed from “business profits approach” to “income expense model.” More clarity would be required for computation of gross earnings and deductible expenses.
The tax code aims at widening the base of taxation through discontinuation of incentives, reducing threshold limit for companies under transfer pricing etc while reducing the taxation rates. In transfer pricing, the law is new for Indians and needs more clarifications.
The new code will also recast the powers of the Central Board of Direct Taxes, and induce more transparency in decision-making.