Direct taxes code seeks to unify tax reporting system

The Direct Taxes Code unveiled by finance minister Pranab Mukherjee in Parliament today, seeks to bring all the direct taxes under a single code and compliance procedures unified. This will eventually pave the way for a single unified taxpayer reporting system.

The code seeks to consolidate and amend the law relating to all direct taxes, that is, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. It also aims at reducing the scope for disputes and minimise litigation.

The code seeks to adopt a comprehensive definition of income, which would in general include all accruals and receipts of revenue and capital nature unless otherwise specified. Exemptions, if any, have been made on the consideration of positive externalities, encouraging human development and reducing risk, equity, and reducing compliance and administrative burden.

Further, on account of the assignment of the taxing powers under the Constitution to the states, agricultural income has been excluded from the scope of this code. Some exceptions, which are essentially in the nature of deferrals, have also been provided in the code with a view to mitigating the problem of liquidity.

Income and consumption

The new code also suggests consumption as an alternative basis of calculating income since both income and consumption are generally accepted as the best indicators of ability to pay. Traditionally, income has been taken as a test of ability to pay (or index of potential welfare), and direct taxation has been mainly based on income. Consumption can also represent the ability to pay and has been used as an indicator.