India needs a modern income tax law that is easy to enforce, fair to all and relevant to the current economic context. The Income Tax Act of 1961 has become somewhat outdated, and complicated with amendments and modifications introduced over the years. If recent media reports that the government is planning to rewrite the income tax law are true, it shall be considered a welcome development. It is, however, imperative to ask if this the right time to contemplate such a move and what should be the principles guiding any changes to the income tax system.
This is not the first time an overhaul of India’s direct tax regime is proposed. In the late 1990s, the Planning Commission set up a taskforce to review the income tax system and a comprehensive report was presented to the government. Years later, another high-level panel under Vijay Kelkar, who was then adviser to the finance ministry in the government of Prime Minister Atal Bihari Vajpayee, suggested several radical measures to reform the tax system. Not much action followed either of the reports. In 2009, when Manmohan Singh was the prime minister, the UPA government proposed a Direct Taxes Code that would sharply cut tax rates, remove exemptions and offer a transparent and predictable income tax regime. The plan, however, failed to take off.
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