The current income tax law (Income Tax Act, 1961) is due for an overhaul. A task force has been set up to assist the Government in drafting a new direct tax code. The report of the task force is due by the end of May 2019, at the same time the new Government would assume office in India.
Suggestions/ changes made in the report are likely to be incorporated in the full-fledged budget to be presented in July 2019 for the financial year 2019-20.
The task force is considering the merits of inclusion of inheritance tax as part of the new direct tax code. An inheritance tax in the form of Estate duty levied earlier was abolished in 1985. There are apprehensions among the high net worth individuals (HNI) that the estate duty or inheritance tax may be reintroduced by the Government to boost their tax revenues.
Inheritance tax or Estate duty was levied on the total value of the assets inherited by a person from a deceased after the death. An inheritance tax if levied would erode the asset base bequeathed to a successor. It has resulted in many business families settling their family assets through family trusts and laying down rules for running of business and transfer of assets. The settlement has been aimed at insulating the asset base from the levy of inheritance tax.
Considering the merits of inheritance tax, the levy of inheritance tax may prove ineffective as compared to levy of tax on the income from the assets. The Income Tax Authorities may find it difficult to assess the wealth inherited as against the assessment of income from such assets and levy of tax on the same.
While the case for levy of inheritance tax is weak on merits, the Government could consider reducing the overall corporate tax rate to 25% for all the corporates from the existing 30%.
Currently, only corporates with a turnover up to Rs. 250 crores are entitled to a lower tax rate of 25%. The case for across the board reduction in the corporate tax rate would be in line with the phasing out of the tax incentives currently allowed to various Special Economic Zones (SEZ), Export Oriented Units (EOU), Software Technology Parks (STP), infrastructure companies etc. The incentives are estimated to be phased out by the financial year 2023-24.
The preceding Direct Tax Code bill of 2010 lapsed in the year 2014 with a change in the elected Government. The new Government elected in the year 2014 had initially constituted a six-member task force in November 2017 to revamp the Income Tax Act, 1961. The task force was later reconstituted in November 2018.
The task force has invited suggestions and feedback from the public at large to draft new direct tax code in consonance with the economic needs of the country. The report of the task force is due by the end of May 2019.