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The new Direct Tax code: What is it and how does it help?

Dec 04, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

Tax planning for most will take a new turn as the first draft of the new Direct Tax code comes to completion. It proposes a standard 25 percent corporate tax rate.

How does the new Direct Tax code help? - Aegon Life

With private and government entities still trying to even out the edges of the biggest tax overhaul in Indian history, the GST, central government has set up a task force to formulate another such event that will change tax planning forever. The government, last November, formed a task force to draft a new direct tax code to replace the existing law that is the Income Tax Act, which has been in effect since 1961.

Catching up

India’s finest taxman, Arbind Modi, spearheads the task force. He had originally proposed the same, led by former finance minister P Chidambaram in the year 2009 but the bill underwent too many changes and was subsequently dropped by the Parliament.

Prime Minister Narendra Modi, during the annual conference of tax officers in September, voiced his plans while noting that the previous law was drafted more than 50 years ago and needs to be redrafted. The November set up of the six-member ‘task force’ is set to review the Income Tax Act, 1961, and has drafted a new Direct Tax Law in consonance with the country’s current economic climate. The draft has considered measures to ensure that the economy becomes more tax-compliant so as to generate enough revenue.

What can we expect?

The fiscal year of 2014 saw a rise in the number of income tax returns filed in India by 80 percent. The highest personal tax slab for the same set upon 30 percent for such individuals. Currently, income up to Rs 2.5 lakh per annum is exempt from tax for individuals. The NDA government, post their majority win in 2014, has already implemented general anti-avoidance rules (GAAR). Finance Minister, Arun Jaitley had promised to lower corporate tax rates to 25 per cent in 5 years, back in 2016.

The new draft of the direct tax code will make good on the Finance Minister’s plan to lower the corporate tax rate from 30% to 25% for all firms gradually, with improvement in revenue collection. From 2018-19, the 25% tax rate is available to all firms with sales less than Rs 250 crore.

Who’s to benefit?

The people in the 5% and 20% tax slabs could expect some relief in their tax planning from the new direct tax code as it aims at making personal income tax rates more ‘progressive’. Girish Vanvari, founder of advisory firm Transaction Square and member of the taskforce assigned in the creation of the draft believes that the new tax code has a threefold focus which includes levying an appropriate tax system for the digital economy, reducing frivolous litigation and making the corporate tax rate more competitive.

The draft suggests that since the highest personal tax slab of 30% for individuals in India is considered among the lowest in the world, it will remain at the current level as is. Relief to small taxpayers could prove to be a rewarding move for the ruling National Democratic Alliance government during the oncoming general elections in 2019.

Why now?

In most advanced economies, tax rates are aimed higher towards individuals as compared to business enterprises to promote investments and job creation. The Centre’s vision for the country’s entrepreneurial class looks eager to adopting this policy trend. This is currently a priority in nations such as the United States and the United Kingdom. Just last December, the US enacted a Tax Cuts and Jobs Act, slashing away the country’s corporate tax rate from 35% to 21%. A month later, Apple Inc. said it would invest $30 billion to expand its US base operations.

Overall, tax planning for small businesses and low-income earners will be much easier in the days following the new direct tax code that the government intends to implement. While this might be the case, ensure you invest in the right plan and grow your money in ULIPs plans such as iInvest Insurance Plan that helps in maximizing your investment along with a cover to secure your family’s financial needs.

Corporate competition is also expected to rise. Evasive tax planning by businesses will have their loopholes closed and compliance is set to improve along with revenue collection. The impact of the new direct tax code is expected to increase the ratio of gross tax to GDP from 10.9% in the fiscal year 2018 – 19 by enhancing tax compliance. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

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