Direct Tax Code (Revised)

1.1 The Income Tax Act was passed in 1961 and has been amended every year through


the Finance Acts. The Act deals with income tax. Dividend Distribution Tax was included in

the Act by inserting Chapter XIID with effect from June 1, 1997. Fringe Benefit Tax was

included in the Act by inserting Chapter XIIH with effect from April 1, 2006. Wealth Tax is

administered through the Wealth Tax Act, 1957.
 
1.2 Tax administrators, chartered accountants and tax payers have raised concerns


about the complex structure of the Income Tax Act. In particular, the numerous amendments

have rendered the Act incomprehensible to the average tax payer. Besides, there have been

frequent policy changes due to changing economic environment, complexity in the market,

increasing sophistication of commerce, development of information technology and attempts

to minimize tax avoidance. The problem has been further compounded by a multitude of

judgements (very often, conflicting) rendered by the courts at different levels.
 
1.3 Any complex tax legislation increases the cost of compliance as well as


administration. Given that the cost of compliance is essentially regressive in nature, this

undermines the equity of the tax system. Similarly, high cost of administration is wasteful.
 
1.4 Over the last twenty five years, the marginal tax rates have been steadily lowered


and the rate structure rationalized to reflect the best international practices. Any further

rationalization of the tax rates may not be feasible without corresponding increase in the tax

base. Broadening of the base is important to enhance revenue productivity of the tax

system and to improve its horizontal equity.