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DTC review would allay taxpayers fears
March, 30th 2010

Central Board of Direct Taxes (CBDT) chairman SSN Moorthy spoke to FEs Tanu Pandey and KG Narendranath on tax policy issues and the ongoing review of the draft Direct Taxes Code. Excerpts from the exclusive interview:

A shift towards investment-linked incentives has been one of the basic tenets in the direct tax proposals in the last two Budgets. The draft Direct Taxes Code (DTC) promises to move further in this direction. What exactly is the trigger for this policy shift?

Profit-linked incentives are inherently inefficient and can lead to distortions. This is a fact acknowledged by all major tax jurisdictions in the world over the years. It is rather easy to camouflage profits. Even as large-scale shifting of profits for the purpose of tax avoidance takes place, monitoring such events has become a growing challenge to tax authorities. As opposed to this, investment figures are readily available and easy to verify.

You must have noted that we have taken some very specific measures against the untenable practice of profit-shifting for tax purposes. In this Budget (2010-11), we tried to end the practice of showing depressed profits from taxable activities, and artificial shifting of profits to exempt activities. The policy of allowing deductions on capital expenditure is also in sync with this policy (of investment-linked incentives). Investment-linked incentives are apt for an emerging economy India.

But the proposal to hike the MAT (minimum alternate tax) rate to 18% might not be in line with this policy, as it could affect the cash flows of infrastructure companies that need to invest aggressively.

The decision to hike MAT was to promote inter se equity among taxpayers. The idea was to bring the MAT rate closer to the effective corporation tax rate, so that there is no serious gap (between the two rates). MAT anyway is a tool to help reduce or nullify your tax liability, when you need to make heavy investments. It may be true that all the Budget measures are not consistent with the principle of investment-linked incentives, but the broad direction is clear.

Taxpayers have expressed many fears over the draft DTC. The proposed EET (exempt-exempt-tax) method for taxation of savings is cause for concern for individual taxpayers, while the proposal to impose MAT on gross assets (as opposed to book profits now) is worrisome to corporate India. Similarly, the draft code also says capital gains including that from listed securities would be taxed at par irrespective of the period of holding.

We are in the process of modifying the DTC draft. Although I cannot comment on the specific proposals, I would make one thing clear. All these DTC draft proposals that you have mentioned are being reviewed. The revised DTC draft, which would be ready in a couple of months, would reflect

major conceptual changes in all these proposals. It will be a document, which contains workable solutions to the issues expressed by various stakeholders. We're sure that taxpayers would be a relieved lot once the new draft is issued.

One view is that the differential treatment between short-term and long-term capital gains and the exceptionally lenient view on the gains from one type of asset (shares of listed companies) are untenable.

There are many tax jurisdictions in the world that differentiate between short-term and long-term capital gains. It is true that economic theory demands that when there is a value gain on the part of the holder of the asset, it should be taxed. But the exemption from long-term capital gains tax from shares of listed companies is a deliberate move to help the markets. It is a targeted dispensation. For other types of assets, the rate is 20%, lower than the highest marginal rate. Anyway, there is the Securities Transactions Tax (STT), which partly makes up for the absence of long-term capital gains tax in regard to one type of asset, although the levy is at a very moderate rate and on the value of the transaction, rather than on the gain. As part of our review of draft DTC, the issue is also being discussed.

We would have the revised draft ready in a couple of months. The finance minister has indicated his preference for presenting the DTC Bill in the monsoon session of Parliament. We are working with that target in sight.

You said you would suggest major conceptual changes in DTC draft. How would you ensure that the basic philosophy of the proposed code _ moderate tax rates and larger tax baseis not compromised in the process?

The draft code has already achieved a great deal on simplifying the provisions. Another important objective of the new code is to make a major reduction of exemptions and deductions that leave scope for arbitrariness and tax evasion, besides necessitating lobbying. We are very clear that the code should ensure moderate tax rates and largely dispense with exemptions and deductions.

The introduction of the Goods and Services Tax (GST) would a major step that would help enhance tax base. GST will capture a sizeable amount of transactions, which are currently outside the purview of both the indirect tax authorities and us. The combined effect of GST and DTC on expanding the tax base, simplifying the administration and ensuring compliance would be enormous.

In India, 50% of the transactions are on cash basis, unlike in mature economies where almost all deals are bank-based and leave a trail. So, we have a long way to go. Administrative measures like computer-aided scrutiny, 360-degree profiling and monitoring high-value transactions have indeed been very useful. The introduction of the Unique Identification (UID) number and its integration with PAN would assist the process of widening the tax base.

DTC proposes stricter anti-avoidance rules. How helpful would these be in thwarting complex transactions aimed at duping the taxman?

The anti-avoidance provisions are an international norm and would come in handy for us in the effort to eliminate tax abuse. There are various transactions whose real nature is suspect. The proposed rules would help the tax authorities to go behind the veil and re-characterize the transaction so that its real nature is exposed. If the transaction is found lacking in commercial substance, whole or part of it can be declared impermissible. The powers given to the commissioners would be controlled by administrative checks and balances.

The Budget talked about equitable taxation. But the effective corporate tax rate is still lower for large companies than smaller firms. There is also the view that investment-linked incentives would help the larger firms with stronger financial sinews.

That is for the exemptions they (large companies) get. But the difference (between the effective tax rates of small and big firms) is not that big. The effective tax rate for companies in India are anyway much lower than that in many other countries at around 18-22%.

The Budget allowed capital gains tax exemption for companies converting to Limited Liability Partnerships (LLPs), but restricted this facility to only small companies.

We have just made a beginning in this regard. We will eventually extend the benefit to bigger companies. The direct tax code is a tool to do this.

Can the revised direct tax collection target for this fiscal be met?

We are making all attempts (to achieve the target). The revised estimate is Rs 3.87 lakh crore. We have collected over 3.58 lakh crore as on March 23.

What is status on the renegotiation of tax treaties?

The process is on. We started the discussions in November last year. Some of the countries have responded (to the request for re-negotiation).There are many who have not responded yet, who we are bound to persuade.

Another review of the IRS (Indian Revenue Service) cadre is underway. What do you aim at?

The last cadre review was in 2001. Actually, we are short of staff. We have also made a body for the transfers and positions to fill the vacancies faster and in a transparent manner. In 2001, when the cadre was restructured, we decided to have one commissioner for 70,000 assessees. The number of assessees has since increased from 1.75 crore to 3.5 crore. If you go by the 1:70000 norm, then we need 500 commissioner offices, as against about half that today. But, meanwhile, computerization has reduced world load considerably. The current cadre review exercise will anyway take into account the increased number of assessees.


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