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No Direct Taxes Code in Budget
February, 12th 2010

The Direct Taxes Code 2009 is now on the back burner. The Union finance ministry has veered round to the view that its bold move to reform direct taxes should be subjected to further scrutiny. Contrary to earlier expectations, therefore, the Direct Taxes Code 2009 will not be presented to Parliament as a Bill along with the Union Budget for 20010-11on February 26.

No fresh date has as yet been finalised for the completion of scrutiny of the Code, raising doubts on whether the legislative exercise will have to be put off at least till the monsoon session of Parliament.

A senior government official told Business Standard that there were several complications in the Direct Taxes Code 2009 in its current form and it can be presented to Parliament only after these were resolved through more consultation. The new tax provisions included in the draft document were originally planned to become effective from April 2011.

Much of the work on the Direct Taxes Code was completed by the time P Chidambaram left the finance ministry in early December 2008. Pranab Mukherjee, who succeeded Chidambaram as finance minister, told Parliament in July 2009 that a draft Bill would be presented by the end of August and that the Bill would be placed before Parliament in the winter session. The first target was achieved, but not the second, dampening hopes of a major simplification and rationalisation of tax rates and rules for individuals as well as corporations.

The Direct Taxes Code was to have replaced the Income Tax Act by consolidating and amending income tax provisions for all categories of people and institutions. In its current form it would have taxed retirement savings, done away with tax exemptions and brought under the tax purview a number of entities including trusts that pay no tax at the moment.
The thrust of the new code was to promote efficiency and equity, Chidambaram had said, by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base.

However, the draft Direct Taxes Code had provoked strong reactions from different quarters. It also sparked off debate on what an ideal tax structure should be in a developing country like India. One of the major oppositions to the Bill came from officers of the Indian Revenue Service, who administer the tax system in the country. They were opposed to many provisions in the draft bill that sought to truncate the many powers currently enjoyed by the Central Board of Direct Taxes (CBDT) and the tax collection bureaucracy.

Industry and trade representatives also came forward with several major suggestions for plugging what they thought were loopholes in the draft Direct Taxes Code. The finance ministrys decision to place the Code on the back burner seems to have been prompted also by these representations.

The deferral of the Direct Taxes Code is also being viewed by industry as one more instance of how Mukherjee has looked afresh at several proposals and initiatives of his predecessor. In his first Budget in the United Progressive Alliance government in July 2009, Mukherjee had substantially diluted the fringe benefit tax, a controversial fiscal measure introduced by Chidambaram in his 2005 Budget.

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