The Direct Taxes Code Bill, 2010. The direct taxation of the income of individuals,companiesand other entities is governed by the Income Tax Act, 1961. The Direct Taxes Code seeks to consolidate the law relating to direct taxes. The Bill will replace the Income Tax Act, 1961, and the Wealth Tax Act, 1957.

Content of India’s DTC 2009

The DTC will be a comprehensive exercise for reforming the direct tax system and will therefore provide the benefit of taking a holistic view. TheDirect Taxes Code, 2009version, is designed on best international practice and sound principles of tax policy, it will provide stability and eliminate uncertainty; and the need for making frequent amendments in the tax law will therefore minimise. Removal of exemptions will have three consequences: (i) higher tax-GDP ratio; (ii) enhanced GDP growth, since tax exemptions and deductions distort allocative efficiency; and (iii) improve equity (both horizontal and vertical), by reducing compliance costs, enabling lower administrative burdens, and discouraging corruption. The DTC will allow for a reduction in corporate tax rates thereby, significantly improving the Internal Rate of Return (IRR) of projects. This should provide an impetus to higher investment and growth. The biggest beneficiary of the DTC will be the financial sector; higher benefits in terms of higher internal accruals will result in lower costs of capital for the borrower, simplify the tax laws and reduce both compliance and administrative costs. Further, the provisions relating to penalty and prosecution which have been rationalised to provide effective deterrence, would create a pro-compliance environment. Eventually, it will demonstrate the ability of the Government to undertake swift and hard decisions on tax reform.