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Existing tax laws objecting to new code, says Chidambaram
November, 13th 2009

Union Home Minister P Chidambaram, the prime author of the new direct tax code, has said the industry is making a mistake by comparing the proposed tax code with the existing income-tax law which has undergone thousands of amendments in recent years and is full of ambiguities.

Chidambaram, who along with Finance Minister Pranab Mukherjee recently released the direct tax code, said it was not surprising that businesses which had been the biggest gainers of all ambiguities and anomalies of the present tax laws were the ones raising objections to various provisions of the direct tax code.

It is unfortunate that all those who are arguing for tinkering with the tax code are the ones who are benefiting from the present tax system, Chidambaram, former Finance Minister, told The Financial Express.

All exemptions and anomalies in the tax laws and provisions have, over the years, rendered our tax system so ineffective that the government is unable to collect the taxes that are due. The corporate sector pays an effective tax rate of 19% and not the real tax rate of 30%-plus. PSUs still pay at a higher effective rate of 28%, he said.

So, all those who are asking for amendments to the direct tax code are the businesses who fear their effective tax rate will go up from the present 19% and move closer to 30%, he added. But that is precisely the idea of a new tax code which removes all anomalies and exemptions and creates a transparent system.

He said he would advise the Finance Ministry to encourage businesses to debate first the principles outlined in the direct tax codes narrative chapters before going into the tax provisions, which are an outcome of those principles. It must be read as if it is a brand new tax code for a newly-formed country without referring to the existing income-tax law, which is so full of ambiguities that it can only be termed as the Income-Tax Litigation Act.

It will, therefore, be a big mistake to compare the new direct tax code with the old law. Going into details of the tax code, Chidambaram said, We have laid down in Para 10.4 the principles underlying capital gains tax. Why and how capital gains must be treated differently from regular income and so on. Para 10.5 talks about how such gains and losses must be included in total income. So, it is the principles that must be debated and not the tax rate provided in the new code. That can come later.

In regard to the contentious minimum alternate tax that is now proposed to be levied on the gross assets of a company, Chidambaram strongly defended the principle of asset-based taxation followed in many countries. For instance, an asset-based tax will discourage companies from buying wasteful assets like expensive real estate properties or luxury aircraft, which may not enhance shareholder returns. Can you quarrel with that principle? he asked. An asset-based tax would also discourage real estate companies from keeping land banks for too long without constructing on them.

Similarly, another issue on which large corporate houses have represented to the Finance Minister is the feasibility of a flat 15% tax on all trusts that are non-religious. Many corporate houses hold shares in group companies through charitable trusts which earn dividends. The new code seeks to simply tax the annual income net of expenditure for these trusts at 15%.

Chidambaram has argued this simple tax will hugely reduce compliance costs. The tax department runs large machinery which processes returns from trusts. The department goes into the definition of a charitable trust and how the incomes are to be computed, accumulated or carried over for subsequent years. All this will be unnecessary once you have a simple tax based on income net of expenditure. Pay the tax and be done with it, he added.

Implying that corporates must show some vision rather than get caught in the nitty-gritty of tax provisions affecting them, Chidambaram said it was a great opportunity to have a simple income-tax regime where the majority (over 97%) of all individual taxpayers will be in the 10% bracket. This will create its own growth dynamic.

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