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It may be another missed year for Direct Tax Code
December, 26th 2011

The other day, there was this news item that said frustrated by government inaction, India's billionaires are thinking of shifting base to other locations. On the same day, there were news items about various powerful people being opposed to the food rights bill as well as even more powerful people who are opposed to those who are so opposed. Or something like that, anyway.

I guess it's OK for the billionaires to be doing their business from wherever they like and I definitely think that all Indians should (at least) have enough to eat. However, it would be nice if someone were paying a little more attention to those of us who are between the two extremes. We've heard a lot about the 'big-ticket' reforms that are not moving, but how about the simplest ones that will affect how people save their money and pay their taxes three months from now.

I'm talking, of course, about the new Direct Tax Code (DTC). The DTC was supposed to come into effect from April 1, 2012. However, it seems now that the law will not be passed in time to meet that deadline. This means a year's delay at least. This is the second such delay.

To the people who are somewhere between the billionaire layer and the food security layer, the DTC is of huge and immediate practical importance. I think the DTC is in a different class from the rest of things that the Parliament is not doing because it is already affecting people's actions.

For at least a year now, financial advisors have been facing questions about how savings and investment patterns will have to be changed because of the DTC. With a very few exceptions, the DTC changes or makes irrelevant practically every popular tax-saving options that people use. For example, ELSS mutual funds, National Savings Certificates ( NSC) and ULIPs will no longer be the easy and automatic tax-savings options that they are now.

Tax-payers as well as sellers of tax-saving instruments have been facing questions for a long time about what happens to these investments. The most widespread worry is what happens to investments whose lock-in period crosses the point of time when the DTC will come into affect. Will an ELSS investment made this year actually be exempt from tax? Given the sheer number of people who are going around asking this question, one can judge the level of anxiety that a new tax law can cause.

Tax-saving patterns will change drastically when the DTC comes into affect. Broadly, the DTC tends to higher limits and a much smaller menu from which tax-saving investments have to be chosen. The lock-ins are also longer. For example, the shortest lock-in that was available was three years for ELSS, which will be gone. The NPS, which will be the only tax-saver in which money could go into equity, will be locked in till the retirement age.

These are very deep changes in savings patterns that we have spent our entire lives with. Unfortunately, while the new law is simpler than the existing one, it is not as simple as what was promised in the first draft of the DTC. It will take time, not just for tax-payers but also accountants and tax lawyers and even tax officials, to fully understand the implications of the new system.

There will be the inevitable cycle of cases, appeals and clarifications. All this is going to take time and effort. And for the middle-class individuals, without much spare resources or time, it's going to be hard work. Fortunately, for most middle-class people, the DTC would probably have meant a lower tax outgo. The sooner that begins, the better it is.

Come to think of it, perhaps that's the real reason that the government has so readily postponed the DTC without a fight. This is not quite the time that it would want a revenue-negative bill to become the law.

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