The task force submitted its draft report to Finance Minister Nirmala Sitharaman last week which recommended various changes to try to simplify tax law provisions, improve certainty and predictability of the law and reduce litigation.
The panel also said “to make India a more tax compliant, the panel has also said on reworking the personal income tax rates”.
It has also suggested to abolishing the dividend distribution tax, the idea behind removal of DDT is to remove the cascading impact of taxation and the panel favours no preferential treatment for any class of investor.
The panel wants to maintain neutrality and favours no differential treatment for any class of financial investor hence Long Term Capital Gains Tax should stay while we decided to retain STT as it helps in better tracking of transactions.
Hence, the Long Term Capital Gains Tax and Securities Transaction Tax will be continuing to levy.
The STT is a direct tax payable on the value of taxable securities transactions done through a stock exchange. It is levied at 0.1% of turnover for delivery-based equity transactions, while for intra-day transactions, the STT for purchase is nil and for sale is 0.025% of the turnover.
If we talk about the DDT, then Dividends paid by a domestic company are subject to Dividend distribution tax at 15% of the aggregate dividend declared distributed or paid. The DDT payable is required to be grossed up. The effective rate is 20.3576%, including a 12% surcharge and a 3% education cess.
Similarly, market participants in a meeting with Finance Minister Nirmala Sitharaman two weeks ago had also highlighted that dividends are taxed thrice in the form of corporate tax, dividend distribution tax and finally at the investor level.
Such types of cascading effects are making Indian capital market quite unattractive globally.
Hence, the panel favours removal of dividend distribution tax and replacing it with a classical system of taxation under which dividend receipts is declared as normal income.
Besides the investor’s taxation, the panel has also suggested ideas for rationalizing the personal income tax slabs.
It has recommended three tax brackets of 5 per cent, 10 per cent and 20 per cent against the prevailing structure of 5 per cent, 20 per cent and 30 per cent.
The government will have to take a view on it. It will impact the government coffers for 2-3 years but ease in filing, simplicity in taxation, removal of ambiguous language, minimizing exemptions and a mediation panel for dispute resolution will help in boosting tax compliance.
The high-level government task force on direct taxes, which was appointed to review the existing 58-year-old Income Tax Act has proposed a new draft law that could reduce the taxation burden for several companies and individuals taxpayers. The government is yet to take a call on the adoption of key recommendations.