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Progressive steps to fiscal stability
March, 15th 2012

The Government's efforts to unleash next generation' tax reforms seem to have finally made some headway with the Parliamentary Standing Committee on Finance presenting its report on the Direct Tax Code Bill, 2010 (DTC), with the aim of rationalising tax rates, expanding the tax base and minimising exemptions.

After several rounds of consultation and discussion with the stakeholders, the panel, under the chairmanship of senior BJP leader Mr Yashwant Sinha, submitted its report to Parliament on March 9. The report is expected to pave the way for debate, substantial modifications and passage of the DTC Bill, which seeks to replace the Income-Tax Act, 1961.

The panel has laid emphasis on tapping the potential, unaccounted and concealed income to bridge the revenue gap as against just widening the tax base. Simultaneously, it has strongly recommended measures in respect of accountability of tax officers and evaluation of tax policy and its effectiveness, while ensuring that the supreme authority of Parliament is not compromised.

The key highlights of the report are succinctly as under:

RECOMMENDATIONS ON DRAFTING THE CODE

The panel recommends that the DTC should be:

Simple, self-contained and easy to comprehend, instead of the present incoherent nature of chapters and schedules

Lucid, unambiguous and clarity in provisions, leading to greater tax efficiency, compliance and reduced tax avoidance

Minimise compliance and transaction costs of the tax department, with renewed focus on higher-income groups, tax avoidance and untaxed or concealed income

RATIONALISING OF AND WIDENING TAX BASE

Raising the income tax exemption limit to Rs 3 lakh and wealth tax ceiling to Rs 5 crore, with an inbuilt mechanism to adjust for inflation be embedded in the statute itself; retaining the corporate tax rate at 30 per cent.

Introducing moderately higher tax rates for taxpayers in the higher bracket.

Emphasis on general principle that all incomes and profits should be taxed, with exemptions, if any, being the exception. Thus, the panel has approved implementation of investment-linked holiday, and removal of exemptions as well as profit-linked tax holiday scheme.

GENERAL ANTI-AVOIDANCE

RULES (GAAR)

Clearing the air of uncertainty on GAAR, the panel rightly plans to implement it cautiously by incorporating the following safeguards and ensuring that such provisions do not lead to litigation, which is already at a peak:

The current draft provides wide-ranging powers and ammunition to the tax authorities to demand tax in situations where even a genuine or bonafide transaction could be challenged; thus, it is widely feared to be misinterpreted and misused. The Panel recommends bringing greater clarity and precision in the scope, with an aim to deter tax avoidance rather than penalising tax-payers.

The onus should be on the tax authorities to prove that there was a motive to avoid tax (and not on the taxpayer). It has also proposed an independent unbiased body (as against the collegiums of three tax commissioners) to approve invocation of the GAAR provisions; this will ensure the process is fair.

There will be suitable grandfathering provisions to protect the interest of the tax-payers who have entered into structures/ arrangements under the existing law.

To uphold the credibility of India, its important to ensure that treaty override' provisions or uncertainty with regard to applicability of tax treaties are removed.

TAX CONSOLIDATION

In line with best international practices, the panel has recommended the provision of tax consolidation for group entities at the option of the tax-payer, thereby eliminating cascading taxation levels on income generated within a group.

The powers and accountability of the tax department are:

Enforcing accountability of the department, to ensure no unreasonable tax demands are raised, with appropriate disciplinary actions against such officials, and

Review of relevant clauses with the intent to minimise the extent of discretionary powers made available to the tax department.

The panel has thus laid down the guidelines and principles to be considered while revising the DTC. However, it is believed that the government, pending approval of the DTC Bill by Parliament, is likely to introduce some measures concerning taxes in the Budget.

India's tax revenues have been around 19 per cent of the GDP, compared with 30-35 per cent in the developed / matured economies and around 23 per cent among developing countries. The Government has already taken significant measures to tap and recover unaccounted / concealed money. This should certainly bridge the revenue gap and also bring the precious and much desired capital back into the country to fuel growth and employment.

 
 
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