8.2. The Direct Taxes Code Bill, 2010

Though, the Direct Taxes Code Bill, 2000 has lapsed in the Parliament, such a legislation is desirable. Presently, the taxation of the income of individuals, companies and other entities is governed by the Income Tax Act, 1961. The Act specifies the entities to be taxed, the kinds of incomes subject to tax (or exempt from tax), and the tax rates to be imposed on them. It lays out a system by which taxes are to be assessed and collected and specifies a procedure by which disputes with tax authorities are to be addressed. The process of taxing the wealth of individuals and other entities is governed by the Wealth Tax Act, 1957. Changes to income and wealth tax (including tax rates) are introduced in Parliament in the form of an annual Finance Bill which amends the Income Tax Act and the Wealth Tax Act.

The Direct Taxes Code Bill seeks to consolidate and simplify the language and structure of the direct tax laws. The Bill will replace the Income Tax Act, 1961 and the Wealth Tax Act, 1957. The Draft Code proposes a number of changes in the way income is taxed under the Income Tax Act. The Discussion Paper released with the Draft Code states the following reasons for introducing the Draft Code:

1. Widening of the tax base by (a) removing exemptions, (b) reducing ambiguities in the law, and (c) preventing tax evasion which leads to erosion of the tax base;

2. Remove deductions and exemptions as these reduce efficiency and distort economic behaviour.

To implement these principles, a number of changes were made to the existing tax rates, available deductions and exemptions, and tax administration in the Draft Code. Key features of the bill are: