Direct Tax Code (DTC), 2025 vs Income Tax Act, 1961 which is better?

Determining whether the Direct Tax Code (DTC) or the Income Tax Act, 1961 (ITA 1961) is “better” depends on the perspective from which you view the taxation system. Both frameworks have their own merits and drawbacks, and the preference largely depends on the goals of simplifying tax processes, promoting fairness, encouraging compliance, and achieving economic objectives. Here’s a comparison to assess which might be considered “better” from different viewpoints:

1. Simplicity and Ease of Compliance

• Income Tax Act, 1961:
  • Complexity: The ITA is often considered complex due to the large number of exemptions, deductions, and special provisions. Taxpayers need to navigate various sections, forms, and documents, making compliance a challenge for many.
  • Frequent Amendments: The Act is regularly amended, which can create confusion among taxpayers, especially when new provisions are introduced in the annual Finance Act.
• Direct Tax Code (DTC):
  • Simplicity: The DTC was designed to simplify the tax system by eliminating many exemptions and deductions, reducing tax slabs, and providing a more straightforward process for compliance.
  • Standardized Deductions: DTC proposed replacing numerous exemptions with a single standard deduction, making it easier for taxpayers to calculate their tax liabilities.
  • User-Friendly: The DTC aimed to reduce the complexity by simplifying tax categories and making the tax structure more transparent.

Which is better?
The DTC would be considered better from a simplicity and ease of compliance perspective, as it was designed to streamline and reduce complexity in the system.

2. Tax Rates and Structure

• Income Tax Act, 1961:
  • Multiple Tax Slabs: The ITA has several tax slabs for individuals, which can result in a more complex filing process, especially when taxpayers qualify for multiple deductions and exemptions.
  • Frequent Changes: Tax rates often change, and new deductions are added, making it difficult for taxpayers to keep up.
• Direct Tax Code (DTC):
  • Lower and Fewer Slabs: The DTC proposed a simpler, lower tax rate structure with fewer tax slabs for individuals and businesses. This makes the system easier to understand and more efficient in terms of tax collection.
  • Broader Tax Base: By reducing exemptions, the DTC aimed to broaden the tax base, ensuring more people and entities paid taxes.

Which is better?
The DTC is generally considered better in terms of fairness and simplification, as it proposed lower tax rates with fewer slabs and would help in taxing a wider section of the population.

3. Equity and Fairness

• Income Tax Act, 1961:
  • Exemptions and Deductions: The ITA includes various exemptions and deductions (like for home loans, HRA, and savings). While these may be beneficial for some, they can also create an inequitable system, where individuals with access to these deductions pay lower taxes than those who do not qualify.
  • Tax Planning: People with better tax planning resources can take advantage of deductions, which sometimes leads to inefficiency in the tax system.
• Direct Tax Code (DTC):
  • Reduced Exemptions: The DTC proposed a more uniform tax system by eliminating or reducing exemptions and deductions, which could make the system fairer, as everyone would be subject to the same basic tax rate.
  • Broader Base, Fewer Loopholes: By removing the numerous deductions and exemptions, the DTC aimed to reduce the scope for tax avoidance, making the system more equitable.

Which is better?
The DTC would likely be considered better for equity, as its approach of reducing exemptions and deductions would level the playing field and reduce the potential for tax avoidance.

4. Corporate Taxation

• Income Tax Act, 1961:
  • Detailed Provisions: The ITA includes many detailed provisions for corporate taxation, with special rules for different kinds of businesses, deductions, and exemptions. It can be complex for businesses to navigate.
  • Incentives: The ITA provides various incentives for businesses, such as deductions for research and development, startups, and special economic zones.
• Direct Tax Code (DTC):
  • Simplified Structure: The DTC proposed lowering corporate tax rates and simplifying business taxation. It aimed to make the tax system more competitive globally, which could be beneficial for foreign investment and ease of doing business.
  • Fewer Incentives: The DTC suggested limiting specific tax incentives and deductions, focusing more on a simpler tax rate.

Which is better?
DTC could be seen as better for corporate tax due to its proposal to lower rates, simplify compliance, and encourage ease of doing business.

5. Capital Gains Tax

• Income Tax Act, 1961:
  • Separate Tax for Short-Term and Long-Term Gains: The ITA distinguishes between short-term and long-term capital gains with different tax rates. This system can be seen as complex and difficult for taxpayers to navigate.
• Direct Tax Code (DTC):
  • Unified Tax Treatment: The DTC proposed simplifying capital gains taxation by unifying the tax rate, which would reduce the complexity and bring more consistency in tax treatment.

Which is better?
The DTC would likely be considered better for capital gains tax, as it proposed simplifying the rules with a single tax rate, making it easier for taxpayers to understand.

6. Implementation and Flexibility

• Income Tax Act, 1961:
  • Well-established System: The ITA has been in force for decades and is understood by tax professionals, businesses, and individuals. However, its complexity leads to high compliance costs and challenges.
  • Amendments: The ITA is frequently amended, sometimes leading to uncertainty and complexity.
• Direct Tax Code (DTC):
  • Potential for Modernization: The DTC would bring India’s tax laws more in line with modern global standards, improving efficiency, transparency, and ease of compliance. However, it is still not implemented.

Which is better?
The DTC might be seen as better in the long-term due to its potential for modernization and simplification, though its lack of implementation so far means it remains a theoretical framework.

Conclusion:

• For simplicity, fairness, and modernizing the tax system, the Direct Tax Code (DTC) would likely be considered better, as it aims to reduce complexity, broaden the tax base, and provide a more equitable and streamlined system.
• For practicality and stability, the Income Tax Act, 1961 is better at the moment, as it is a well-established law, though it suffers from complexity and numerous amendments.

Ultimately, the DTC would be the more “future-ready” system if implemented, but the Income Tax Act, 1961 remains the governing law today and is familiar to taxpayers and professionals alike.