Understanding the Direct Tax Code 2025

India’s tax system is set to undergo a significant transformation with the introduction of the Direct Tax Code (DTC) 2025. Designed to replace the Income Tax Act of 1961, the DTC seeks to simplify and update the country's tax structure. After many delays, the government has announced that the Direct Tax Code will come into effect from April 2025, marking a new fiscal era for both businesses and individuals in the country.

Why the Need for the Direct Tax Code?

The current Income Tax Act was enacted in 1961, and while it has been amended multiple times, it has not kept pace with the rapidly evolving economic environment. The increasing complexity of tax laws, the need for more clarity on international taxation, and the demand for a simplified tax structure have all contributed to the call for a new Direct Tax Code.

The primary goals of the DTC 2025 are to:

Simplify tax laws and make them more comprehensible for individuals and businesses.

Expand the tax base by bringing more individuals and entities into the tax net.

Ensure better compliance with anti-evasion measures.

Improve the ease of doing business in India by making the tax regime more investor-friendly.

Major Changes in Direct Tax Code 2025

Simplified Tax Structure

•          The Direct Tax Code 2025 proposes a simpler and more rationalized tax structure by reducing the complexities in tax calculations. This includes a streamlined set of income tax slabs, aimed at making the tax system more understandable for individuals and businesses alike.

•          Personal Income Tax Slabs may undergo restructuring, potentially offering more favourable rates for middle-income groups while expanding the tax base.

Reduction in Corporate Tax Rates

•          A key focus of the DTC is to further reduce the corporate tax rates to make India more competitive globally. This change is intended to boost business growth, attract foreign investment, and encourage companies to set up operations in India.

•          The Code aims to rationalize the treatment of profits across sectors, especially for start-ups and MSMEs, by offering targeted tax benefits and exemptions.

Changes in Capital Gains Taxation:

Capital gains are treated as normal income under the DTC 2025, so you may pay greater taxes on them.

TDS and TCS on Most Income:

The new system will apply Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) to practically all types of income, hence increasing monthly tax payments.

Broader Tax Base and Fewer Exemptions

One of the most significant insights into the DTC 2025 is the focus on increasing the tax base by reducing the amount of exemptions and deductions available. While this may appear to increase tax liability, it is designed to simplify compliance and limit the opportunity for tax avoidance.

•          The Code aims to remove outdated exemptions and focus on a smaller set of targeted tax reliefs, making tax filing more straightforward.

Increased Focus on Wealth and Estate Taxes

•          The DTC 2025 is expected to consider the reintroduction of wealth tax or inheritance tax, aimed at addressing inequality and ensuring high-net-worth individuals (HNIs) contribute equitably to tax revenues.

•          The estate duty or inheritance tax, if introduced, could impact wealth transfers, particularly for HNIs, and encourage efficient estate planning and redistribution of wealth.

Focus on Environmental and Social Responsibility

•          The DTC includes provisions to promote environmentally sustainable practices, offering tax benefits to companies investing in green technology or contributing to corporate social responsibility (CSR) activities.

•          Certain tax deductions may be introduced for businesses and individuals contributing to the sustainability agenda, such as investing in renewable energy, reducing carbon footprints, or social impact programs.

Tax Audit Changes:

The DTC 2025 may allow CS and CMA experts to undertake tax audits previously reserved for Chartered Accountants.

Dividend Distribution and MAT Revisions:

Dividend Taxation: A reform of the Dividend Distribution Tax (DDT) a transition to taxing dividends at the shareholder level is expected to conform with global tax standards.

MAT (Minimum Alternate Tax): Potential changes to the MAT regime that would aid businesses in their early stages of growth or experiencing financial difficulties.

CONTACT US 

AIAT INSTITUTE

Address: AIAT Institute, 15 Bhande Plot Umred Road Nagpur.

Phone: 9604121000

Website: www.aiatindia.com

Question & Answer

1. When will the Direct Tax Code 2025 come into effect?

a) January 2025

b) April 2025

c) October 2025

d) April 2026

Answer: b) April 2025

2. Which law will the Direct Tax Code 2025 replace?

a) Income Tax Act of 1991

b) Wealth Tax Act of 1975

c) Income Tax Act of 1961

d) Tax Evasion Act of 1980

Answer: c) Income Tax Act of 1961

3. What is one of the primary goals of the Direct Tax Code 2025?

a) Increase exemptions for high-income individuals

b) Introduce a flat tax rate for all income groups

c) Simplify tax laws and make them more comprehensible

d) Eliminate all tax deductions

Answer: c) Simplify tax laws and make them more comprehensible

4. How does the Direct Tax Code 2025 aim to broaden the tax base?

a) By increasing the number of tax exemptions available

b) By reducing exemptions and deductions

c) By lowering corporate tax rates for all businesses

d) By offering more exemptions for foreign investors

Answer: b) By reducing exemptions and deductions

5. What is the impact of the Direct Tax Code 2025 on corporate tax rates?

a) Corporate tax rates will remain the same

b) Corporate tax rates will increase significantly

c) Corporate tax rates will be reduced to attract foreign investment

d) Corporate tax rates will only apply to multinational corporations

Answer: c) Corporate tax rates will be reduced to attract foreign investment

6. Under the Direct Tax Code 2025, how will capital gains be treated?

a) As normal income and taxed at higher rates

b) As a separate category with no tax liability

c) Subject to only TDS

d) Exempt from taxation for individuals

Answer: a) As normal income and taxed at higher rates

7. Which of the following taxes might be reintroduced under the Direct Tax Code 2025?

a) Goods and Services Tax

b) Sales Tax

c) Inheritance Tax or Wealth Tax

d) Service Tax

Answer: c) Inheritance Tax or Wealth Tax

8. What change is proposed for the taxation of dividends under the Direct Tax Code 2025?

a) Dividends will be taxed only at the corporate level

b) Dividends will be exempt from tax entirely

c) Dividend Distribution Tax will be reformed, and dividends will be taxed at the shareholder level

d) Dividends will not be taxed under the new code

Answer: c) Dividend Distribution Tax will be reformed, and dividends will be taxed at the shareholder level

9. How does the Direct Tax Code 2025 promote environmental sustainability?

a) By providing no incentives for companies

b) By offering tax benefits to companies investing in green technology

c) By introducing penalties for high carbon emissions

d) By making environmental taxes mandatory for all businesses

Answer: b) By offering tax benefits to companies investing in green technology

10. What change is proposed regarding tax audits under the Direct Tax Code 2025?

a) Tax audits will be abolished for all businesses

b) Only international companies will be required to perform tax audits

c) Company Secretaries (CS) and Cost and Management Accountants (CMA) may be allowed to undertake tax audits previously reserved for Chartered Accountants

d) Tax audits will be mandatory for all taxpayers, regardless of income

Answer: c) Company Secretaries (CS) and Cost and Management Accountants (CMA) may be allowed to undertake tax audits previously reserved for Chartered Accountants

 

How to set Payroll in Tally Prime?

Setting up Payroll in Tally Prime is essential for businesses to manage employee salaries, wages, bonuses, and deductions efficiently. Tally Prime offers comprehensive payroll management features that allow you to automate payroll processing, maintain employee records, and generate statutory reports. Here's a step-by-step guide to setting up payroll in Tally Prime. Tally Prime provides various tools that allow you to implement and process payroll. The Payroll Info. menu allows you to construct various payroll masters required to compute employee earnings and deductions.

Step 1: Enable Payroll Feature in Tally Prime

Before you start setting up payroll, you need to enable the payroll feature in Tally Prime.

Login to Gateway of Tally > F11: Features > F1: Accounting Features.

Under 'Maintain Payroll', select 'Yes'.

Press 'Enter' to save the changes.

Step 2: Create Payroll Masters

Once the payroll feature is enabled, you need to create payroll masters, which include Employee Groups, Employee Masters, Pay Heads, and Salary Details.

2.1. Create Employee Groups

Employee Groups help in categorizing employees based on departments, roles, or any other criteria.

Login to Gateway of Tally > Masters > Payroll Masters > Employee Groups > Create.

Enter the Group Name, for example, 'Sales', 'HR', etc.

Define the Under Group. If it’s the primary group, select 'Primary'.

Press 'Enter' to save.

2.2. Create Employee Masters

Employee Masters store individual employee details.

Go to Employees > Create under Masters > Payroll Masters > Employees > Gateway of Tally.

Enter the Employee Name, Employee Code, and select the Employee Group.

Provide additional details like Date of Birth, Gender, and Date of Joining.

Specify Statutory details if required (e.g., PF Account No., PAN, etc.).

Press 'Enter' to save the employee details.

2.3. Create Pay Heads

Pay Heads define the various components of an employee’s salary, such as Basic Salary, HRA, Provident Fund, etc.

Go to Masters > Payroll Masters > Pay Heads > Create in the Gateway of Tally.

Enter the Pay Head Name (e.g., Basic Salary, HRA, etc.).

Specify whether it’s an 'Earnings for Employees' or a 'Deductions from Employees'.

Define the Calculation Type (e.g., As Computed Value, On Attendance, etc.).

Specify the Calculation Period (Monthly, Weekly, etc.) and Rounding method if needed.

For statutory pay heads like PF, ESI, etc., provide the relevant statutory details.

Press 'Enter' to save the Pay Head.

Step 3: Define Salary Details

Now that you have created the Payroll Masters, you need to define salary details for each employee.

Login to Gateway of Tally > Masters > Payroll Masters > Salary Details > Create.

Select the Employee Name.

Define the Effective Date for the salary structure.

Add the Pay Heads (e.g., Basic Salary, HRA, etc.) and specify the amounts or percentage values.

If there are deductions, specify the deduction amounts.

Press 'Enter' to save the salary structure.

Step 4: Process Payroll

After setting up the payroll masters and salary details, you can process the payroll for employees.

Login to Gateway of Tally > Transactions > Payroll Vouchers > F2: Date.

Select the Voucher Date.

In the Payroll Voucher screen, select 'Payroll Auto Fill' from the right-hand side options.

Choose the Payroll Auto Fill option based on your requirement (e.g., Salary Auto Fill).

Select the Employee Category and other criteria like the month for which payroll is to be processed.

The system will automatically fill in the salary details based on the predefined salary structures.

Review the payroll details, and press 'Enter' to accept.

Save the Payroll Voucher.

Step 5: Generate Payroll Reports

Tally Prime allows you to generate various payroll-related reports, such as Pay Slips, Salary Statements, and Statutory Reports.

Go to Display > Payroll Reports in the Tally Gateway.

Select the report you want to view, such as Pay Slip, Attendance Sheet, or Salary Register.

Specify the period and other criteria.

The report will be generated based on the payroll data processed.

You can print or export the report as required.

Step 6: Statutory Compliance

Tally Prime also helps with handling statutory payroll compliance, such as Provident Fund (PF), Employee State Insurance (ESI), and Professional Tax (PT). Ensure that all statutory Pay Heads are correctly configured, and the relevant details are entered in the employee masters.

To generate statutory reports, go to Gateway of Tally > Display > Payroll Reports > Statutory Reports.

Select the appropriate report like PF Contribution, ESI Contribution, etc.

Ensure that all statutory deductions and contributions are accurate and up-to-date.

CONTACT US 

AIAT INSTITUTE

Address: AIAT Institute, 15 Bhande Plot Umred Road Nagpur

Phone: 9604121000

Website: www.aiatindia.com

Question & Answer

1. Which option do you need to enable to activate the payroll feature in Tally Prime?
A. F2: Features
B. F11: Features > F1: Accounting Features
C. F12: Configure
D. F10: Audit Features

Answer: B. F11: Features > F1: Accounting Features

2. In which menu do you create Employee Groups in Tally Prime?

A. Masters > Payroll Masters > Employee Groups

B. Gateway of Tally > Transactions > Employee Groups

C. F11: Features > Employee Groups

D. Payroll Vouchers > Employee Groups

Answer: A. Masters > Payroll Masters > Employee Groups

3. What information is typically stored in Employee Masters in Tally Prime?

A. Employee Salary and Department

B. Employee Name, Code, and Group

C. Employee Code, Department, and Attendance

D. Employee Bank Details and Tax Information

Answer: B. Employee Name, Code, and Group

4. What is the purpose of Pay Heads in payroll setup in Tally Prime?

A. To categorize employees into groups

B. To manage payroll vouchers

C. To define components of salary like Basic Salary, HRA, etc.

D. To process payroll automatically

Answer: C. To define components of salary like Basic Salary, HRA, etc.

5. What type of calculation can be assigned to Pay Heads in Tally Prime?

A. Manual Entry

B. On Attendance or As Computed Value

C. Weekly or Monthly

D. Employee Category

Answer: B. On Attendance or As Computed Value

6. When defining salary details for an employee, what is the first step after selecting the employee name?

A. Enter the employee’s address

B. Add Pay Heads and amounts

C. Define the Effective Date for the salary structure

D. Specify the employee’s PF and ESI details

Answer: C. Define the Effective Date for the salary structure

7. Which option is used to process payroll in Tally Prime after salary structures have been defined?

A. Transactions > Accounting Vouchers

B. Gateway of Tally > Transactions > Payroll Vouchers

C. Masters > Payroll Vouchers

D. Display > Payroll Reports

Answer: B. Gateway of Tally > Transactions > Payroll Vouchers

8. What is the role of the ‘Payroll Auto Fill’ feature in Tally Prime?

A. It categorizes employees based on roles

B. It processes salary automatically for multiple employees

C. It generates payroll reports

D. It helps in managing employee attendance

Answer: B. It processes salary automatically for multiple employees

9. Which report is NOT part of the Payroll Reports in Tally Prime?

A. Pay Slip

B. Salary Register

C. PF Contribution

D. Profit and Loss Statement

Answer: D. Profit and Loss Statement

10. How can you generate statutory payroll reports like PF Contribution and ESI Contribution in Tally Prime?

A. Display > Payroll Reports > Statutory Reports

B. Gateway of Tally > Transactions > Statutory Vouchers

C. F11: Features > Accounting Features > Statutory Reports

D. Masters > Statutory Masters > Payroll Statutory Reports

Answer: A. Display > Payroll Reports > Statutory Reports