The Indian government has proposed significant changes to its tax code, which is to be amended by the revised discussion paper due to be submitted, following extensive consultations, to Parliament soon. In this article we discuss the background to the tax code, the proposed changes and what they mean for the India-based business.

The existing Income Tax Act of India was enacted in 1961. It replaced the first Income Tax Act of 1922. Thus, historically, the first Income Tax Act was operational for almost 40 years and the existing one has been in place for almost 48 years. Little change has been made during this time – up until the current proposals.

Over the years, India’s tax laws have become more complicated and difficult to administer or even understand. Litigation is at an all time high in the country with tribunals and courts swamped with tax disputes being challenged by the taxpayers and the tax department. The present Income Tax Act contains more than 400 sections and even more sub‐sections, provisos and explanations. For the general tax payer, it is virtually impossible to decipher the act.

The Indian government is seeking to initiate radical tax reforms by proposing to enact a new Direct Tax Code which will replace the existing Income Tax Act and come into effect on April 1, 2011 (for the fiscal year 2011‐12). The Direct Taxes Code Bill was placed by the Finance Minister for public debate and discussion on August 12, 2009. The code seeks to combine the law relating to all direct taxes (income tax and wealth tax) under one roof. The proposed DTC has been designed with the objective of simplification of the provisions of tax laws by having a fresh look at the provisions of the act. After taking into consideration the representations received on the proposed provisions of the DTC, the government has now proposed to modify the DTC and issued a revised discussion paper to this effect on June 15.

The Direct Tax Code seeks to take a fresh look at the taxation of all heads and sources of income. In the existing Income Tax Act, the entire mechanism of taxation revolves around various heads of income under which there would be different sources of income. T

India Briefing provides a graphical description of the new tax code, available at www.india-briefing.com.