Budget 2025: Central Government May Bring Direct Tax Code, Says Report; How It Can Impact Taxpayers?

Direct Tax Code (DTC) could be on the cards with the second budget scheduled to be tabled by Finance Nirmala Sitharaman on February 1, for Prime Minister Narendra Modi’s third term, as per a report by news daily Business Standard. The DTC is expected to fix India’s complex tax structure, making it more user-friendly, intuitive, and easy to understand.

The Income Tax Department has received over 6,500 recommendations from stakeholders for simplifying the Act. The restructure will be led by a committee under the Central Board of Direct Taxes (CBDT). This new update is expected to omit the obsolete provisions and reduce compliance burdens. The update may consist of fewer chapters and sections, thus cutting down the Act’s existing 298 sections and 23 chapters drastically, the Business Standard report.

Additionally, the Budget 2025 session is also expected to launch a new income tax bill which can simplify the current I-T law, making it easier to understand, along with reducing the number of pages by 60 per cent.

"The new income tax law will be introduced in Parliament's budget session. It will be a new law and not an amendment to the existing Act. Currently, the draft law is being vetted by the law ministry and it is likely to be brought in Parliament in the second half of the Budget session," a source told PTI.

Additionally, Sitharaman had proposed a comprehensive review of the Income-tax Act, 1961 in Budget 2024. She had said the review would make the tax law "concise, lucid, easy to read and understand.” 

The Direct Tax Code is supposed to be an update in the current Income Tax system by the Indian Government to simplify and standardise the current nitty-gritty of the Income Tax Laws. Speaking on what changes are expected in the DTC, CA Naveen Wadhwa, Vice President, of the Research and Advisory Division at Taxmann, a tax consultancy firm said, “We don’t have any specific information about the changes being made to the new Income Tax Act. However, I can provide you with the background on why it is being introduced.”

“One primary goal is to reduce the length of the current Income Tax Act, which is extremely bulky. There are a few main reasons. First, certain provisions are outdated but haven’t been removed. Second, some deductions have expired, with some sections becoming outdated years ago, yet they are still part of the Act,” he opined.

“Lastly, continuous additions every year during the Union Budget, such as new clauses, provisos, and explanations, have made the Act increasingly complex and difficult to comprehend. For example, Section 10, Clause 20C, contains more than 20 provisos and explanations. Unless you’re a tax professional with significant experience, it’s nearly impossible to correlate these provisos and explanations. Simplification is needed to make it more accessible and user-friendly,” Wadhwa reasoned.

Speaking on the impact of the possible introduction of DTC on taxpayers, Washwa said, “Since most individual taxpayers have already shifted to the new tax regime, I don’t think it will have a significant impact on many taxpayers. If the government continues to increase the exemption limits under the new tax regime, taxpayers will naturally compare their liabilities under the old and new systems and opt for whichever is lower.”

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