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Companies will need to undertake a comprehensive revamp of their internal systems, including enterprise resource planning (ERP), payroll structures, and tax processes, to align with the expanded disclosure obligations under the new Income Tax Act and Rules, Khaitan & Co Partner (Direct Tax) Shaily Gupta told ANI today.
"They need to reconfigure ERP for payment systems to align with revamped TDS and TCS provisions, revise internal SOPs, assess the need to update agreements, and restructure payroll to pass on the benefits of revised employee tax rules. Overall, this calls for significant preparatory work. Companies should also prioritise cross-functional alignment and training to minimise the risk of misreporting and consequent tax inquiries," Gupta said. She emphasised that while the new Income Tax Act has been positioned as a simplification exercise, the real impact lies in the changes to rules and attendant compliance requirements. According to her, taxpayers and consultants must look beyond the stated intent of simplification and focus on how these changes affect compliance and reporting. "So I highlighted the intent and impact of the changes in the new income tax act. While we've always been discussing the simplicity of the new act, what everyone needs to understand is the impact of changes in the rules and, more importantly, the changes that have been introduced through the new income tax forms," she said. Gupta noted that the transition to the new law is already visible on the ground, particularly in the form of increased queries from clients who are implementing the changes in real time. She pointed out that one of the biggest areas of concern is the migration of systems, especially in relation to tax deduction at source (TDS) and payroll restructuring. "We have a lot of questions coming from clients because they are effectively implementing the new law on the ground. Maximum questions right now relate to payroll restructuring," she said. She added that companies are simultaneously evaluating the impact of labour codes and income tax changes to make compensation structures both compliant and tax-efficient. "Companies want to factor in the impact of wage code impact assessments while also making structures tax-friendly. So we expect a lot of change and implementation in the compensation structures within the companies from June, which is the time required to transition to these changes," Gupta said. Highlighting structural challenges, Gupta said that while the law may appear simpler, navigating it could be more complex in the initial stages. The legislation is now divided into the main Act, rules to be read with Schedules and Tables appended thereto, requiring users to interpret provisions across multiple layers. "The navigation has become relatively difficult. People will take time to understand the structure of the new Act as the entire legislature is now divided into the main Act, separate rules with tables and schedules appended thereto. One will have to read an interplay between the three of them," she explained. On policy changes, Gupta clarified that there has been no major policy shift in the core tax framework, but certain rules--particularly those related to employee taxation--have been revised, including updated thresholds that account for inflation. She also said that the debate between the old and new tax regimes is far from over. Despite the government's push for migration to the new regime, taxpayers will still need to evaluate which option is more beneficial based on revised exemptions and thresholds. On compliance, Gupta flagged stricter disclosure requirements under the new law, warning that filings will be final and cannot be revised easily. "Whatever transactions they undertake in the ongoing year that get reported in the next year, they will not have an option to retract. All the filings, the disclosures will be sacrosanct," she said. She advised taxpayers to maintain detailed and contemporaneous records, including agreements and invoices, for at least six years and three months, in line with the period during which tax authorities can initiate inquiries. On the broader tax landscape, Gupta said there are no immediate expectations of further corporate tax cuts, noting that the government has already rationalised rates and introduced targeted incentives, including for sectors such as data centres. She also pointed out that while the new law itself does not introduce major investor-friendly provisions, recent developments outside the statute--such as treaty clarifications and General Anti-Avoidance Rules (GAAR) relief for pre-2017 investments--send a positive signal to the international investor community. (ANI)
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