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Direct Tax Code a significant reform?

delhi Updated: Sep 04, 2010 14:59 IST

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The first version of Direct Tax Code (DTC) which was released for public debate in August 2009 had raised great hopes. The Bill that has now been introduced in Parliament drowned most of them.

Surely, DTC itself makes a difference. It has given an opportunity to the tax payer to be consulted, will ensure a longer life to the tax structure and along with GST, will make February 28 a non-event. Tax structure will be stable and therefore predictable.

The original proposal was to raise the highest income slab to 25,00,000 rupees at which the highest tax rate of 30 per cent becomes applicable. That has been brought down to 10,00,000 rupees. Rates are the same -- income slab at all levels have been slashed. India's own experience has established that lower tax liability invites better tax compliance and increases tax revenue.

The government has raised the exemption limit which will benefit the lower and middle classes. Further, EEE will make tax system investor friendly though the amount of investment (provident fund and life insurance) is limited to 150,000 rupees.

The corporate sector will pay a uniform 30 percent tax. With a lower tax the government would have lost revenue at least in the next two or three years. But the originally proposed 25 percent tax would have made all the difference to the development climate.

Corporate growth would have jumped and with that taxable profits. It is precisely the reduction in tax rates that has made corporate tax the highest revenue yielding tax in recent years.

Both domestic companies and foreign companies will pay the same rate of tax, with branches of foreign companies paying an additional 15 per cent. Dividend distribution tax continues though it implies double taxation of profits. Mutual Funds will however pay only 5 per cent on distributed dividends.

The DTC Bill has made a rational change in MAT. Originally the tax was suggested to be based on assets of the company. That would have been highly unfair to capital incentive industries. The DTC Bill has reverted back to income base with increase in tax rate to 20 per cent. The income based concessions to industries in SEZs will continue till 2014 prolonging revenue loss.

The original proposal of withdrawing STT has been abandoned bringing back the present position. Long term capital gains from equity will continue to be exempt from tax.

Taken together, there is not much of reform in the content of the DTC Bill. It carries forward the present tax structure with a few changes mostly in respect of personal taxation. Even so, it has been estimated by the Ministry that in 2012-13 when the Code becomes effective there would be a notional loss of 531 billion rupees or about 1 per cent in the total revenue from direct taxes.

Apparently, the government has been driven by short term revenue considerations and reversed all major changes in the tax structure. The only benefit of DTC is that the tax system will be stable and free from the annual tampering by the finance ministers.