Income Tax Simplification Gains Momentum: Feedback Process and Potential Reforms

In a significant move to streamline the tax system, the government is set to initiate a feedback process involving the private sector and tax experts to simplify the Income Tax Act. This initiative aims to make India's tax laws more straightforward and less prone to litigation.

Feedback Process and Industry Input

The Central Board of Direct Taxes (CBDT) has formed an internal committee to review the six-decade-old tax law. The committee's objective is to make the law more concise and easier to understand. A new feature on the Income Tax portal will be developed by the first week of October, allowing stakeholders to offer suggestions on various sections of the Income Tax Act.

Finance Minister Nirmala Sitharaman announced in the 2024-25 Budget that this review would be completed in six months, with the revised Income Tax Act potentially being introduced in the Budget session of Parliament early next year. The first draft of the amended Act is expected to incorporate suggestions from the industry.

Proposed Reforms and Simplifications

The proposed reforms include simplifying the language of the tax law and removing outdated clauses, which could reduce the number of pages in the Act by about 100. This simplification is expected to mitigate litigation and ease compliance burdens for taxpayers.

Other potential reforms include eliminating itemized deductions, credits, and preferential tax rates, and introducing a new refundable personal credit. For instance, one plan suggests a refundable personal credit of $1,000 per family member and a new refundable work incentive credit based on individual earnings. These changes could significantly reduce the complexity of tax filing and make it more progressive.

Additionally, raising the standard deduction and implementing a value-added tax (VAT) could further simplify the tax system. These measures could allow the Treasury to pre-populate tax forms for most taxpayers, as is done in many countries, thereby eliminating a major source of hassle and saving taxpayers time and money.

Impact on Tax Compliance and Public Support

Simplifying the tax code is expected to improve tax compliance rates by reducing the complexity that often leads to confusion and evasion. Clearer and simpler tax rules can help taxpayers understand the law better, thereby increasing compliance and reducing the tax gap.

Moreover, simpler taxes are likely to generate more public support, as the current complexity of the tax system is a significant source of frustration for many taxpayers. By addressing these issues, policymakers can tangibly improve the lives of their constituents and enhance the overall efficiency of the tax system.