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Direct taxes code is a good starting point
October, 29th 2015

An expert panel to review the nearly five-and-a-half-decade-old Income-Tax (I-T) Act to avoid disputes and improve the ease of doing business is welcome. As India rapidly globalises, it provides an opportunity to orchestrate domestic tax policies to keep pace with global business, and also to support enterprise. Already, as part of its drive to end base erosion and profit shifting (BEPS), India has joined the global pact on automatic tax information sharing. It also plans to adopt the OECD’s set of rules to end aggressive tax planning by multinational companies. These companies will be taxed in countries where the economic activity takes place and where value is created, implying that MNCs have to pay their share of taxes in the markets where they make profits. Ending BEPS will allow India to lower tax rates. So, the domestic law should be in sync with the global rules. The drafting must be clear. Investors need clarity, stability and certainty in tax laws to avoid disputes.

A good starting point would be the Direct Taxes Code proposed by former finance minister P Chidambaram to replace the cumbersome I-T law with a clean new law, and to embody the principle of keeping tax rates low and removing exemptions. The goal should be to double the current tax/GDP ratio of 16% (combined states and Centre) to close in on the average for OECD members. As India opens up further, import duty rates will come down. The mainstay of tax collections will be a goods and services tax (GST) and tax on the incomes of companies and individuals. India’s tax treaties will need to be renegotiated and a treaty override provision would be appropriate.
Recommendations such as the exempt-exempt-tax (EET) method for savings should also be accepted as the principle — that no saving asset would be taxed, but only income from the asset would be taxed — is sound. Low direct tax rates will complement the adoption of GST that will create a unified base of potential taxpayers that can be tapped into. Together, they will usher in equity in the country’s tax policy.

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