The parliamentary standing committee on finance has recommended raising the tax bar for companies and phasing out exemptions given to them rather than burdening the salaried class and the smaller tax payers. The panel was also of the view that the government should be cautious while strengthening the anti-Avoidance measures in the Direct Tax Code Bill to avoid litigations. However, the panel does not want government to alter the 30% corporation tax rate.

"It would be just and equitous to put in place a policy on exemptions, which would substantially reduce the percentage of tax foregone but at the same time encourage household savings, foster social security and is generally favourable to small tax payers," the committee said in its recommendations on DTC submitted on Friday.

To plug loopholes in foreign-registered company avoiding tax on income earned out of their operations in India, the DTC had proposed to introduce Controlled Foreign Company provisions to provide that passive income earned by a foreign company, which is controlled directly or indirectly by a resident in India, and where such income is not distributed to shareholders resulting in deferral of taxes, shall be deemed to have been distributed. Consequently, it would be taxable in India.

On phasing out exemptions, the committee noted that the revenue foregone in respect of corporate income tax during the 2009-10 increased to Rs 79,554 crore, while the same for personal income tax was Rs 40,929 crore. Revenue foregone on account of direct tax incentives/deduction given to export promotion schemes and others amounted to over Rs 30,000 crore during this period. If the aggregate exemptions in both direct and indirect taxes are taken into account, it works out to Rs 5,02,299 crore (in 2009-10), which is almost 80% of the total revenue collections, the panel observed.

"Such exemptions have been increasing, leaving an adverse impact upon revenue buoyancy. The committee would, therefore, recommend that while formulating the proposed DTC, the government should review the present regime of tax exemptions and deductions, which is obviously loaded in favour of companies and big tax payers at the expense of small tax payers and the salaried class," it said.

"Most of these exemptions have outlived their purpose," the panel noted in its observations, and added that the revenue thus retrieved may be utilized to fund government's developmental programme, particularly in agricultural sector. The committee asked the government to expedite the move towards a regime wherein tax exemptions are minimal and confined to exceptional cases. The committee also endorses the view that in the long run, exemptions may be limited to life saving goods, goods of security and strategic interest, goods for relief and charitable purposes and exemption for small scale industries.