Introduction to Direct Taxes

Nimesh Patodi 2015B3PS0822G

Sahil Mantri 2015B3A10377G
Ajay Maan 2015B3A30375G
Shreesh Keskar 2015B3A70477G
What are
Direct Taxes?
Direct Taxes

• Direct taxes are those which are paid directly to the

government by the taxpayer.
• These taxes are not paid deducted and paid on behalf of
the taxpayer.
• It’s imposed on the people and organizations directly by the
government.
• This tax liability has to be paid by the taxpayer in question
and cannot be transferred to any other entity for payment.
Why do we need
Taxes?
Why are Taxes Levied?

• The reason for levy of taxes is that they constitute the

prime basic source of revenue to the government.
• Revenue so raised is utilised for meeting the expenses of
government like defence, provision of education,
health-care, infrastructure facilities like roads, dams, etc.
Types of Taxes
 Direct Taxes

Types of
Direct Taxes

Capital Gains
Income Tax Corporate Tax Wealth Tax*
Tax

* Wealth Tax has been abolished w.e.f. April 2016

Income Tax
• It is charged directly on the income of a person.
• No tax for individuals with income less than ₹2.5lakh.
• The different heads of income under which income tax is chargeable
are:
• Income from house and property.
• Income from business or profession.
• Income from salaries.
• Income in the form of capital gains.
• Income from other sources.
• Taxable income = (total income) – (applicable deductions and
exemptions)
 Corporate Tax
• Levied on companies who exist as separate entities from their
shareholders.
• Foreign companies are taxed on income that arises, or is deemed to
arise, in India.
• It is charged on royalties, interest, gains from sale of capital assets
located in India, fees for technical services and dividends.
• Include Taxes such as,
• Minimum Alternate Tax(MAT) @ 19.05%
• Fringe Benefit Tax(FBT)
• Dividend Distribution Tax(DDT) @ 16.995%
• Securities Transaction Tax(STT)
Source: Ministry of Finance, GoI
 Wealth Tax
• Wealth tax is charged on the benefits derived from property ownership.
• The same property will be taxed every year on its current market value.
• Wealth tax is charged whether the property in earning an income or not.
• The tax is levied on the individuals, HUFs, and companies alike.
• However, “working assets” such as stocks in the market, gold deposit
bonds, commercial properties are not chargeable under Wealth Tax.
• Net wealth = (All assets) – (all debt)
• Wealth tax is charged at 1% of the amount by which the net wealth
exceeds Rs.15,00,000 (15 lakhs).
• Wealth tax has been abolished (with effect from April 1, 2016 for wealth
held as on March 31, 2016)

Source: Ministry of Finance, GoI

Why was Wealth Tax abolished?
• Focus on more governance and less government.
• Simplification of tax procedures
• Incurs high collection costs but provides low yield
• Increase the revenue collection
• Additional administrative burden
• Tax compliance and widening the tax base
• Additional reporting
• No leakage
• Low Awareness
Capital Gains Tax
• Taxed on the income derived from the sale of assets or investments.
• Capital investments cover homes, farms, businesses, works of art,
etc.
• Categorized as
• short-term gains (gains on assets sold within 36 months of acquisition) and,
• long-term gains (gains on assets sold after 36 months of acquisition and holding).

• Capital gains = (money received from sale) – (cost of capital

investment)
 Capital Gains Tax
• Short term capital gains are taxed as per the normal income tax slab
rates.
• Long term capital gains are taxed at 20% if computed with the
benefit of indexation.
• Long term capital gains are taxed at 10% if computed without the
benefit of indexation.

Source: Ministry of Finance, GoI

Direct Tax
Scenario of India
Historical Tax Rates
Number of Taxpayers
Revenues from Direct Taxes
Growth in Direct Taxes
%Share in Total Taxes
Cost of Collection of Direct Taxes
State wise tax collection breakup
State wise tax collection per capita
Direct Taxes to GDP
Tax Buoyancy factor
History of Taxes in India
 BRIEF HISTORY OF INCOME TAX IN INDIA
• In India , tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained
by the Government on account of the Military Mutiny of 1857.
• Thereafter ,several amendments were made in it from time to time. At last, in 1886, a separate Income tax act
was passed.
• In 1918, a new income tax was passed and again it was replaced by another new act which was passed in
1922.This Act remained in force up to the assessment year 1961-62 with numerous amendments.
• The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. 1956.In
consultation with the Ministry of Law finally the Income Tax Act,1961 was passed.
• The Income Tax Act 1961 has been brought into force with 1 April 1962.It applies to the whole of India and
Sikkim(including Jammu and Kashmir)

• Other Major amendments :

o Taxation laws Amendment Act, 1984,
o Direct Taxes Amendment Act,1987,
o Direct Taxes Law(Amendment)Acts of 1988 and 1989,
o Direct Tax Law (Second amendment)Act,1992 and1993,
 Wealth
tax
Income-tax is levied on the income of the taxpayer, whereas wealth tax is levied on the
wealth of the taxpayer. Wealth tax is governed by Wealth Tax Act, 1957.
∙ Levied on:
Wealth-tax is levied on following persons only:
o an individual;
o a Hindu undivided family (HUF); and
o a company.
Persons other than individuals, Hindu Undivided Families (HUFs) and companies
are not liable to pay wealth tax

Wealth tax is levied on the net wealth owned by a person on the valuation date, i.e., 31st
March of every year.
Wealth-tax is levied at 1% on the net wealth in excess of Rs. 30,00,000.
 ∙ Revenue from wealth tax over the time vs the burden on
administration (GRAPH)-table from budget 2012-2013

• In 1992-93, wealth tax collection was ₹468 crore, it dropped to ₹78 crore in 1996-97 after
removing financial assets from the wealth tax net, and since has grown to about ₹950 crore
in 2014-15. That’s a miniscule fraction of the ₹2.7 lakh crore collected by way of taxes on
income on non-corporates in 2014-15.

• Rs.788.67 crore and Rs.844.12 crore were collected as wealth tax in 2011-12 and 2012-13
respectively. And For the financial year 2013-14, total wealth tax collection was Rs.1,008
crore.
 Reasons for abolishment of wealth tax in
India
• Incurs high collection costs but provides low yield: The cost of collecting the tax is much
higher compared to the low yield. Also, wealth tax does not form a major chunk of collection of
direct taxes in India (Rs.788.67 crore and Rs.844.12 crore were collected as wealth tax in 2011-12
and 2012-13 respectively).

• Additional administrative burden: Taxpayers had to value their assets as per the Wealth Tax
Rules to compute their net wealth. For certain assets such as jewellery, taxpayers had to obtain
a valuation report from a registered valuer. Assets like Jeweleries, unaccounted assets etc. are
not easily traced.

• Simplification of tax procedures: According to experts, Indian tax laws are, by and large, very
complex and therefore, prone to litigations. Government wants to simplify procedures for
easier tracking and enhance transparency.

• Tax compliance and widening the tax base: Government wants to bring more persons under
its tax net given that individuals who file income tax returns outnumber those who file wealth
tax returns. In 2011-12, the number of wealth tax assessees in India stood at 1.15 lakhs. Many of
the assessees in the country are only dimly aware of the existence of the wealth tax.
 wealth tax Abolishment

The government abolished wealth tax as announced in the budget 2015.

• The government decided to increase the surcharge levied on the ‘super rich’ class by 2%
to 12%. Super rich are persons with incomes of Rs.1 crore or higher and companies that
earn Rs.10 crores or higher.

• The abolition was a move to do away with high costs of collection and also to simplify the
existing tax structure thereby discouraging tax evasion.

• Increase the revenue collection: By abolishing the wealth tax and replacing it with
additional surcharge, government can collect up to Rs. 9000 crore in a fiscal year, opined
the finance minister in his budget speech.
Double Taxation
Double taxation is a taxation principle referring to income taxes paid twice on the same source of
earned income.

• It can occur when income is taxed at both the corporate level and personal level.
• Double taxation also occurs in international trade when the same income is taxed in two
different countries
Double Taxation of Corporations and Shareholders

Double taxation often occurs because corporations are considered separate legal entities from
their shareholders. As such, corporations pay taxes on their annual earnings, just like
individuals. When corporations pay out dividends to shareholders, those dividend payments
incur income-tax liabilities for the shareholders who receive them, even though the earnings
that provided the cash to pay the dividends were already taxed at the corporate level.
 Tax avoidance
Tax avoidance is an exercise in which the assesse legally tries to defeat the basic intention of
the law, by taking advantage of the shortcomings in the legislature. It refers to finding out new
methods or tools to avoid the payment of taxes which are within the limits of the law.
• Businesses avoid taxes by taking all legitimate deductions and by sheltering income from
taxes by setting up employee retirement plans
• Taking legitimate tax deductions to minimize business expenses and thus lower your
business tax bill. 
• Setting up a tax deferral plan such as an IRA, SEP-IRA, or 401(k) plan to delay taxes until a
later date. 
• Taking tax credits for spending money for legitimate purposes, like taking a Work
Opportunity Tax Credit for hiring workers in your business.
Tax Evasion

tax evasion is a practice of reducing tax liability through illegal means, i.e. by suppressing
income or inflating expenses or by showing lower income. Such illegal practices can be
deliberate concealment of income, manipulation in accounts, disclosure of unreal expenses
for deductions, showing personal expenditure as business expenses, overstatement of tax
credit or exemptions suppression of profits and capital gains, etc. This will result in the
disclosure of income which is not the actual income earned by the entity

Tax Evasion is a criminal activity for which the assessee is subject to punishment under the
law. It involves acts like:

• Deliberate misrepresentation of material facts.

• Hiding relevant documents.
• Not maintaining complete records of all the transactions.
• Making false statements
 DIFFERENCE BETWEEN TAX AVOIDANCE AND EVASION

Basis for Comparison Tax Avoidance Tax Evasion

Minimization of tax liability, by taking

Reducing tax liability by using illegal
Meaning such means which do not violate the
ways is known as Tax Evasion.
tax rules, is Tax Avoidance.

What is it? Hedging of tax Concealment of tax

Immoral in nature, which involves Illegal and objectionable, both in script

Attributes
bending the law without breaking it. and moral.

Taking unfair advantage of the Deliberate manipulations in accounts

Concept
shortcomings in the tax laws. resulting in fraud.
Use of such means that are forbidden
Legal implication Use of Justified means
by law

Happened when Before the occurrence of tax liability. After tax liability arises.

Type of act Legal Criminal

Consequences Deferment of tax liability Penalty or imprisonment
To reduce tax liability by applying the To reduce tax liability by exercising
Objective
script of law. unfair means.
 TAX PLANNING
Tax planning is the analysis of one’s financial situation from a tax efficiency point of view so
as to plan one’s finances in the most optimized manner. Tax planning allows a taxpayer to
make the best use of the various tax exemptions, deductions and benefits to minimize their
tax liability over a financial year. Tax planning is a legal way of reducing income tax liabilities,
however caution has to be maintained to ensure that the taxpayer isn’t knowingly indulging
in tax evasion or tax avoidance.
• In India, there are a number of tax saving options for all taxpayers. These options allow for
a wide range of exemptions and deductions that help in limiting the overall tax liability.
The deductions are available from Sections 80C through to 80U and can be claimed by
eligible taxpayers. There are various other sections under the Income Tax Act, 1961 that
can reduce your tax liabilities such as exemptions and tax credits.
• Corporate tax planning is a means of reducing tax liabilities on a registered company. The
common ways to do this includes taking deductions on business transport, health
insurance of employees, office expenses, retirement planning, child care, charitable
contributions etc.
The primary objectives of your tax planning should be the following:
• Reduction in overall tax liability
• Economic stability
• Growth of economy
• Litigation minimization
• Productive investment.
DIRECT TAX TERMS
• AD VALOREM TAX -- A tax on goods or
property expressed as a percentage of the
sales price or assessed value
• TAX HAVENS OUTSIDE INDIA

• Offshore wealth held by Indians in tax havens has

surged nearly 90% + since 2007 to $62.9 billion (about
Rs 4 lakh crore) in 2015. That's about 3.1% of the
country's GDP in 2015.
• Over 53% of this Indian wealth is now held closer home
in Asian tax havens like Hong Kong, Macau, Singapore,
Bahrain and Malaysia. Swiss banks hold 31% of Indian
wealth, down from around 58% in 2007.
• Total offshore wealth in the world was $8.6 trillion,
which is about 11.6% of world GDP. This data was
estimated by the economist Gabriel Zucman of UCLA
and his colleagues of the Norwegian University of Life
Sciences and Niels Johannesen of the University of
Copenhagen. However, data related to non-financial
assets such as art or real estate is not included in these
figures.
• These estimates for India show that the black money is
still in the system, but has changed its path.
• The shift from the contrary Switzerland can be seen
due to the recent Panama Paper Leaks that have
exposed several tax havens as well.
Definition
▶ Personal Income Tax (PIT) is a direct tax levied on income of a person, as distinct
from the tax paid on the earnings of a firm.
▶ A person liable to PIT has to compute his tax liability, file tax return and pay tax, if
any, accordingly per financial year.
▶ In India, the Personal Income Tax Rate is a tax collected from individuals and is
imposed on different sources of income like labour, pensions, interest and
dividends.
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Merits and Demerits of Direct Taxes
 Merits of Direct Taxes
1) EQUITABLE
2) ECONOMICAL
3) CERTAINTY
4) PRODUCTIVITY
5) CONSCIOUSNESS OF DUTY AND CIVIC SENSE
6) ELASTIC
7) ANTI INFLATIONARY
8) AFFECTS SAVINGS AND INVESTMENTS
 EQUITABLE
The burden of direct taxes can’t be shifted, and an equitable sacrifice of income and wealth can be achieved
from all sections of society through progressive taxation.
a) ABILITY TO PAY:
❖ Idea of Social Justice
❖ Horizontal and Vertical Equity
❖ Income tax, wealth tax, etc.
❖ Special Exemptions based on different criteria
b) CANON OF EQUALITY:
❖ Taxes based on notion of equality
❖ The rich should pay more taxes, while the poor shouldn’t.
❖ Must be applicable to certain categories and income-groups
❖ Reduce income inequalities and bring about adequate social & economic justice
❖ They can serve as an important fiscal weapon of reducing the gap of inequalities in income and wealth.
 ECONOMICAL
a) HONORARY TAX COLLECTION AT SOURCE: Income tax and most
other forms of direct taxation are done at source with the help of
TDS (Tax Deduction at Source) and are hence not a problem for the
government to collect.
b) CANON OF ECONOMY: Direct taxes like income tax etc. being
collected annually in lump-sum, the administrative cost of such
collection will be minimum as compared to the indirect taxes like
sales tax, excise duties, etc. which are collected at short intervals
(usually quarterly) and thus involve a high cost of collection.
c) MINIMIZES CHANCES OF TAX EVASION
d) SYSTEM OF CHECKS AND BALANCES
 CERTAINITY
a) CANON OF CERTAINTY: Compared to indirect taxes, direct taxes
are more exact and precise in estimating the revenue. Further, in
direct taxes, the tax-payer knows how much he has to pay and the
State can estimate the yields correctly. There is certainty on both
sides.
b) MINIMIZES CORRUPTION ON THE PART OF COLLECTING
OFFICIALS.
c) EFFECTIVE FISCAL ADMINISTRATION: The Government can also
estimate the tax revenue from direct taxes with a fair accuracy due
to pre-decided tax rates. Accordingly, the Government can make
adjustments in its income and expenditure.
 PRODUCTIVITY
a) Direct taxes are very productive in the sense that as the
working population and community grows, so do the
returns from direct taxation.
b) Revenue from direct taxes increases or decrease
automatically with the change in the national income or
wealth of the country.
 CONSCIOUSNESS OF DUTY AND
CIVIC SENSE
a) RESPONSIBLE CITIZEN: When people consciously pay their taxes, they can claim the
right to know how their money is being spent by the government. In the case of a direct
tax, a person knows that he is paying a tax, he feels conscious of his rights. He claims the
right to know how the Government uses his money and approves or criticizes it. Civic
sense is thus developed. He behaves as a responsible citizen.
b) CREATES SOCIAL AWARENESS: Since you have to pay a certain sum of money to the
government, you expect something back as well. Moreover, you tend to feel more
socially aware and responsible, as it is your money that is spent all around you. Direct tax
has been proven to be a positive contributing factor in lesser crimes, littering and
damaging public goods. 
c) EDUCATIVE: Direct taxes have an educative value as they create a civic sense among the
tax-payers. Citizens realize their duty to pay taxes and because of the direct burden of
taxes they become conscious and keep vigil on how the public income is spent by the
government in a democratic country.
 ELASTIC
a) CANON OF ELASTICITY: If the State suddenly stands in need of more funds in an
emergency, direct taxes can well serve the purpose. The yield from income tax or death
duties can be easily increased by raising their rate. People cannot stop dying for fear of
paying death duties.
❖ It is elastic in the sense that the government can change rate of taxes according to its
needs. Whenever income or wealth rises, the government takes appropriate measures to
increase the rates of direct taxes to raise its revenue.

a) BUOYANCY EFFECT OF TAXES: The direct taxes are relatively elastic. With an increase
in income and wealth of individuals and companies, the yield from direct taxes will also
increase automatically.
 ANTI - INFLATIONARY

a) TARGET THE DEMAND SIDE: If the government wants to decrease the inflation rate by
decreasing the demand of the product, direct taxes are increased. As a result, the rich
class of people that usually spend a lot of their money on buying different products and
services will now have constrained spending capacity (reduced disposable income). This,
in turn, reduces the consumption of products and services, and hence, the inflation rate.

b) AUTOMATIC STABILIZERS: The amount of tax revenue rises when economic growth
takes place and declines when national income declines. In this way, it
removes ‘inflationary heat’ as well as ‘depressionary impact’ from the economy.
 AFFECTS SAVINGS AND
INVESTMENTS
a) Direct taxes directly affect the level of savings and
investment – for an individual and for the overall economy
as well. These direct taxes, therefore, can be used to affect
the overall ratio of savings in an economy – by decreasing
or increasing the tax rate.
b) When a direct tax is decreased, the person has been left
with more money to save, and hence, the investment level
of the economy is increased and vice versa.
c) This technique is used to create more investment
opportunities and employment in an economy.
 DEMERITS OF DIRECT TAXES
1) TAX EVASION
2) INCONVENIENT
3) PEOPLE’S INDIFFERENCE
4) LACK OF POPULARITY & SOCIAL CONFLICT
5) DAMPENS CAPITAL FORMATION AND INVESTMENT OPPORTUNITY
6) DISINCENTIVE TO WORK AND SAVE
7) ARBITRARY
8) NARROW COVERAGE
9) SECTORAL IMBALANCE
 TAX EVASION
a) A direct tax is also liable to evasion specially when the rate of taxes becomes high or tax
structure becomes unduly complicated. This system of taxation thus leads people to
evade taxes. Tax evasion then leads to the emergence of a parallel economy of black
income.
b) The immediate effect of black money is the accentuation of the degree of inequality in
the distribution of income. Further, black income fuels inflation.
c) Thus, ‘a direct tax creates civic consciousness’ is not true. A conscious citizen is not
expected to evade taxes he can avoid tax in a legal way.
d) In India, there is good amount of tax evasion. The tax evasion is due to high tax rates,
documentation and formalities, poor and corrupt tax administration.
e) It is easier for the businessmen to evade direct taxes. They invariable suppress correct
information about their incomes by manipulating their accounts and evade tax on it.
 INCONVENIENT
a) CANON OF CONVENIENCE: In order to submit the tax, a person has to undergo several
formalities and procedures which is very time-consuming procedure.
❖ As it is paid in lump-­sum, it becomes inconvenient to the taxpayers particularly when they
experience liquidity crises.
❖ Further, a taxpayer is supposed to provide various data relating to his income or wealth for
the satisfaction of the tax-levying authority.
b) COST FACTOR: Because of complexities involved in the Indian Income Tax Act,
taxpayers are virtually compelled to take the services of tax consultants.
❖ Further every one who is required to pay a direct tax has to furnish appropriate evidence
in support of the statement of his income & wealth & for this he has to maintain his
accounts in proper form. Thus, direct tax system is also expensive to the taxpayers.
 PEOPLE’S INDIFFERENCE
a) Another dis­advantage of a direct tax is that it does not develop the civic sense of those
who do not pay such taxes. In the case of income tax, people with incomes below a
certain level are not liable to pay tax. In a low-income country like India, the majority of
the people are not required to pay income tax.
b) When a man directly bears the burden of a tax, he tries to know how the government
spends that money. Those who are not directly affected by the burden of taxation
remain indifferent as to the way the public expenditure is incurred.
 LACK OF POPULARITY & SOCIAL
CONFLICTS
a) First, such taxes are not very popular, because the people have to bear the burden of
such taxes directly. That is why, when the rate of a direct tax is raised, most people
express their resentment against the government.
b) For instance, when the rate of personal income tax or corporate profit tax is raised,
criticism from those affected be­comes very strong.
c) Since not everybody has to pay direct taxes, it is often responsible for creating social
conflict amongst societies.
d) It also leads to crimes, social injustice and a sense of inferiority among different groups
of people.
 DAMPENS CAPITAL FORMATION AND
INVESTMENT OPPORTUNITY
a) It is usually the elite class that invests their money and form capital
within an economy. Since direct taxes – in accordance with the
canon of equality – are specifically applied on the elite class of
people, it significantly limits the capital formation and investment
opportunities in an economy. This, in turn, leads to higher
unemployment and lower growth of economy.
b) The direct taxes can affect savings and investment. Due to taxes, the
net income of the people gets reduced. This in turn reduces savings.
Reduction in savings results in low investment. The low investment
affects capital formation in the country.
 DISINCENTIVE TO WORK AND
SAVE
a) As a taxpayer, you know that the harder you work and generate more income, the more
you will have to pay in direct taxes – usually, at an exponential rate, as it is in certain
countries. This goes with the canon of equality that people with more money should be
paying more taxes.
b) Therefore, it dramatically affects your ability to work and motivation to excel. Direct
taxes have been a chief cause of hurting the job performances.
c) If tax burden is high, people's consumption level gets adversely affected. High taxes also
discourage people from working harder in order to earn and save more.
d) Many business ventures are not undertaken on the ground that a large part of the
income earned will have to be given to the government in the form of taxes.
 ARBITRARY
a) DIFFICULTY IN MEASURING ABILITY TO PAY: It is difficult to measure the ability to pay of each and
every taxpayer since ability to pay taxes is not governed alone by income or wealth of an individual.
❖ A highly salaried person with a large number of dependents may not have higher ability to pay taxes
compared to a middle income salaried person having no or one or two dependents. Consequently, the rate
of direct taxes becomes - to some extent arbitrary.
b) NATURE OF GOVERNMENT: Tax and Politics go hand in hand. A leftist government may impose a high
rate of taxes while a ‘rightist’ government may levy a low rate of taxes.
c) ILLOGICAL BASIS: Critics point out that there cannot be any objective basis for determining tax rates
of direct taxes.
❖ Also, the exemption limits in the case of personal income tax, wealth tax, etc., are determined in an
arbitrary manner. A precise degree of progression in taxation is also difficult to achieve. Therefore direct
taxes may not always fulfill the canon of equality.
 NARROW COVERAGE
a) In India, there is a narrow coverage of direct taxes. It is
estimated that only three percent of the population pay
personal income tax.
b) Due to low coverage, the government does not get enough
funds for public expenditure.
c) Estate duty & wealth tax are equally narrow based and thus
revenue proceeds from these taxes are invariably small.
 SECTORAL IMBALANCE
a) In India, there is Sectoral imbalance as far as direct taxes
are concerned.
b) Certain sectors like the corporate sector is heavily taxed,
whereas, the agriculture sector is 100% tax free.
c) Even the large rich farmers are exempted from payment of
personal income tax.
Scope of Improvement
 Scope of Improvement

Two major ways to improve the Direct Tax revenues:

• Improve the Tax Base.
• Improve the Tax Compliance.
• Most of the Indian population lives in rural parts and they do agriculture as
their occupation, and India does not tax income from agriculture.
• Nearly 85 percent of the economy is outside the tax net.

Data Source: http://www.business-standard.com/article/economy-policy/non-farm-activities-contribute-two-third-income-in-rural-areas-paper-117111501410_1.html

 To Improve Tax Compliance
1. Flat tax system: Surjit Bhalla, a member of PMEAC, in an article co-authored with
Arvind Virmani this January, advocated for flat tax system at 12%, saying it would be
appealing even for a tax-shy Indian and estimated that the compliance rate will increase
by eight percentage points to 33%.
2. Minimal corruption: According to Surjit Bhalla, efforts on institutional reforms for
minimising corruption and policy reforms for encouraging voluntary compliance are
very important.
3. A better administration: Dinesh Kanabar, CEO at Dhruva Advisors told CNBC-TV18 that
India’s Direct Tax system needs administrative changes to improve compliance. “A
better administration, where matters can be dissolved without going through a 20-year
cycle.
4. Consistency with EODB: Dinesh Kanabar said that whatever changes are proposed as
the new Direct Tax law, it should be consistent with the Ease of Doing Business,
otherwise it may backfire.
5. Changes proposed in DTC: Some economists argue that the changes proposed in the
DTC should be brought back as it proposed simpler tax code and did away with
unnecessary exemptions and created space for lower tax rates.

Source: http://www.financialexpress.com/economy/income-tax-law-5-much-needed-changes-modis-task-force-should-consider-to-improve-compliance/943753/
 Lowering Rate and Narrowing Spread
• In order to make the direct tax system more ef­fective, it is
necessary to reduce the tax rate so that there is less tax evasion and
avoidance.
• There is also the need to narrow the spread between the lowest
rate and maximum mar­ginal rate (the rate of the highest slab).
• To neu­tralise the fall in revenue due to lowering of the rates of
taxation it will be necessary to withdraw some of the tax incentives.
• In other words, there is need to provide minimum tax incentives.

Source: 1991 Tax Reforms Committee under the Chairmanship of Raja J. Chelliah
 Targeted Relaxation
• Minimum Alternate Tax (MAT) on SEZ profits
• Post withdrawal, activities in development of SEZ and units in SEZ has considerably slowed down.
• Reinstating the exemption will immensely boost non-resident investors in manufacturing goods in
an SEZ providing fillip to the “Make in India” campaign.
• Foreign technology and relaxation in tax compliances/litigation procedure
• Foreign technology plays a very vital role in overall development of a developing country such as India.
• However, the cost of using the said technology is very high, in view of which, the same is not effectively
used in India.
• Therefore, in order to reduce cost of technology, the rate of withholding tax on royalty payments should be
reduced to zero.
• This would reduce cost to the Indian arm and also eliminate hassles in compliances faced by foreign
technology providers.
• Toll manufacturing
• In order to encourage the growth of India as a manufacturing hub, the domestic tax provisions should
exempt foreign principals from creating a taxable presence in India in case of toll manufacturing
arrangement with Indian manufacturers.be reduced to zero.

Source: Ernst & Young Report: “Enabling India through effective Tax reforms (Dec-2017)
 Link Tax deductions to Inflation
• Some of the tax deductions have remained unchanged for nearly
two decades.
• The government could consider adjusting these deductions to
inflation and removing the ones which are redundant.
• This can be done for individual taxpayers.
• In the US, personal tax deductions are inflation adjusted every year.
• While corporate tax rates could be linked to encouraging
investment and flow of capital.
• Or tax-free regime to encourage startups or specific sectors such as
fintech.

Source: https://blog.cleartax.in/4-suggestions-make-indias-tax-structure-world-class/
 Increase share of Direct Taxes
• The share of direct taxes in total collections has been seeing a
downward trend.
• Since direct taxes play an important role in ensuring equality, they
should form a larger portion of total tax collections.
• Indirect taxes are consumption based and impact everyone equally,
India must focus on raising the share of direct taxes like the US and
UK.
• This can be done with a play of tax rates (between direct and
indirect taxes) and widening of base.

Source: Rao, Govinda. (2005). Tax system reform in India: Achievements and challenges ahead. Journal of Asian Economics. 16. 993-1011.
10.1016/j.asieco.2005.10.003.
 Reform Income Tax Department
• Government must continue its efforts to bring more people under
the tax net.
• The tax department has gone digital in a big way.
• E-verification and e-notices were introduced in the recent past and
this eases hardships taxpayers face during filing.
• This ecosystem should continue to thrive.
• While India has just 20 people engaged in analytics in the tax
department, the UK has 400. There is a great need for capacity
building in this area.

Source: https://blog.cleartax.in/4-suggestions-make-indias-tax-structure-world-class/
Any Questions?
Thank You