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Tax reforms remain a mirage

india Updated: Feb 22, 2010 21:56 IST
Dhirendra Kumar

People have different ways of dealing with their tax-related problems. Last Thursday, a small plane crashed into a building in the city of Austin in Texas, USA. After the expected panic about terrorism died down, it turned out the building housed the offices of the Internal Revenue Service (IRS), the US equivalent of our income tax department, and the pilot’s suicide note said he was taking revenge for 30 years of harassment by the IRS.

I doubt whether we’ll ever see anything like this in India, but the tax law that is the root of many of our frustrations seems immune to change.

The long-awaited simplification and rationalisation of India’s direct tax system is not as imminent as we’ve been led to believe, and that’s not good news. The Direct Tax Code is in trouble. In the corridors of power in Delhi, ‘everyone’ knows this.

The latest indication came a few days ago when a BJP delegation met the finance minister to protest against some measures in the DTC. The FM’s response was, among other things, to assure them that the DTC is just a draft and there would be no implementation at least till 2011-12.

This isn’t anything different from what was supposed to be the case, but the whole tone in which the DTC is being talked about has changed.

Earlier, the general view was that there may be minor problems with it but it was a huge step in the right direction. Now, that has changed to the view that it may be a step forward in the right direction but there are huge problems with it. If we know how things work in the government, the inevitable result will be delay.

It is true that from a narrow savings and investments perspective, there are certain problems with the DTC draft. Taxation of long-term capital gains tax, the elimination of ELSS exemptions will be hard to swallow. Moreover, the switch to EET taxation will hit retirement savings hard. The idea of paying tax on withdrawing PF money is not easy to accept. The real benefit of the new code comes in the simplification of the law. The tax code document is readable and understandable, and more importantly, one can instantly appreciate the logic of everything that it contains. One may not agree with everything but at least there is a clear thread of systematic thought running through the draft Direct Tax Code. While the fiscal gap, stimulus withdrawal and inflation is taking up all the pre-budget mindshare, the tax code could end up being put in cold storage.