Preserve Code's integrity while amending direct tax law
October, 30th 2009
As suggested amendments to the draft direct tax code keep pouring in from industry, individual taxpayers, and even the tax department, the government must bear in mind the integrity of the final Bill that emerges from the process of consultation.
Many of its provisions that kicked up much controversy and angst particularly among corporates would be diluted, and these include the 2% minimum alternate tax (MAT) on gross assets.
Provisions affecting individual taxpayers such as taxation of savings and perks (housing provided to civil servants is a prime candidate), may also undergo some dilution.
The CBDT has suggested amendments to provisions relating to capital gains, double tax avoidance agreements (DTAA), general anti-avoidance rule (GAAR) as well as taxation of charitable organisation and foreign companies operations in India. Some of these instances such as DTAA may only require some clarification, and not really changes, to address concerns about the changes in the tax environment.
In any case, the explicit objective of the direct taxes code to provide a stable tax regime in the medium to long term is welcome. Frequent changes in tax laws, in any commercial law, for that matter, affect long term planning of businesses as well as optimum use of the assets.
The governments decision to put out a discussion paper before finalising sweeping changes to the direct taxes law is welcome. Consultations with stakeholders must precede finalisation of any Bill. It will, without doubt, delay the process of amending extant laws or putting in place new ones.
But some delay is preferable to frequent amendments. In the case of tax laws, sweeping changes to original proposals would upset revenue growth projections, and therefore the revenue departments aversion to take on board changes suggested by stakeholders is understandable.
The government can expand the tax base only by reducing exemptions and checking avoidance and evasion. And compliance will improve only if the tax laws are simple, tax rates moderate and compliance costs low.
The revenue department would be better advised to take a holistic view of the demands of stakeholders and ensure the new tax code is fair to all, including, of course, to the exchequer.