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Direct Tax »
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Welcome Direct Taxes Code Bill: Government to release revised bill for public comments
April, 08th 2014

The government's decision to release the revised Direct Taxes Code Bill for public comments is welcome. The Bill has no legal sanctity with the dissolution of Lok Sabha, but can be the foundation to reform India's direct tax law.

The next government must replace the cumbersome income-tax law with a clean new law, settle for low tax rates on the broadest possible base so that the burden on individual taxpaying entities is low, even as the Centre cumulatively raises more resources.

Rightly, the revised Bill seeks to widen the tax net and plug loopholes in the current law. The Bill has also made it tougher for foreign companies to escape paying taxes in India on deals where the underlying assets are in India.

The threshold has been lowered to 20 per cent of global assets in India from 50 per cent earlier. The threshold can be reviewed, but charging capital gains tax on such deals validates the basic principle that what counts for the government is the value accruing to a company changing ownership because of its economic activity in India.

This is in sync with the OECD's effort to curb MNCs inflicting "base erosion and profit shifting" on their host nations, and, therefore, welcome. Not so welcome are some other measures: a higher 35 per cent tax for individuals earning over Rs 10 crore, 10 per cent dividend tax on shareholders who receive dividends of over Rs 1 crore a year and wealth tax on all assets over Rs 50 crore.

It would be better to scrap the dividend distribution tax and tax dividend incomes in the hands of the shareholder. A tax on financial assets of individuals and trusts is a bad idea. It will drive ownership underground, letting the country slip to the pre-reform days. Instead, focus on the goods and services tax, which would capture value addition across the income and production chain.

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