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Clarity a must in new tax law
August, 10th 2009

There is an urgent need for a simplified direct tax code as the old one has become too complicated and is only adding to litigation and tax administration costs.

The Income-Tax Act is in a complete mess with a plethora of interwoven sections, sub-sections, clauses, sub-clauses, cross references, explanations, provisos and rules that can even baffle the legislators. This was bound to happen, as the Act was written almost five decades ago though updated regularly to keep the law in line with the Indian economy.

It is interesting to know that of the original 298 Sections in the Act, 62 have been deleted, 208 have been amended over the last 48 years and only 28 Sections remain in the original form. As many as 390 new Sections (some of which stand deleted) have been inserted over the years. Today, we have as many as 625 Sections; and together with the rules, circulars and notifications, which are also part of the tax law and necessary for its application, the Act becomes mind-boggling.

There is an urgent need to bring the new tax code into force as the old one has become too complicated and is only adding to litigations and tax administration costs.

The draft of the new tax law is long awaited and it is probably not the right approach for the Government to keep the process of drafting in isolation, without seeking public comments. In 1996, a similar initiative was undertaken and a committee was formed to draft a simplified tax code. The code was made public butnever implemented.

Much debate likely

One can only speculate at this stage if the proposed code is just an extension of the earlier exercise or an independent one with a new approach.

The new code would be released for public comments by August 20. There is definitely going to be a lot of debate, suggestions and comments, and it would be a massive exercise to filter, accept and incorporate them.

It is not clear why the draft of the new direct tax code was kept in the dark for such a long time as the committee drafting it had submitted its report in September 2006. The delay could be because of the need to incorporate the large number of proposals, which are introduced through Budgets every year since 2006, and also the General Elections. For example, in the 2009 Budget, there were 80 tax proposals. Incorporation of such proposals in the new code will definitely take considerable time.

Stakeholders Views

It is important that sufficient time and opportunity is granted to the stakeholders to provide feedback. The Finance Ministry should consider forming a separate committee with representatives from the public, trade associations and the Institute of Chartered Accountants of India to voice views on behalf of the stakeholders.

After the draft Bill is released on August 20 for comments from public, the Bill would be introduced in Parliament during the winter session. If everything goes as expected, the Bill can be introduced by the next Budget, in February 2010. This, however, depends on how much time is allowed to the public for comments and suggestions and the time involved in incorporating the suggestions in the draft.

Further, the final draft will have to be vetted by the Law Ministry. Keeping all this in perspective, it is ambitious to target the implementation of the code by February 10.

Changing over

At least for a few years, the switching over to the new law would throw up challenges for both tax officials and tax professionals.

One of the challenging areas will be dealing with issues alive under the old law on the date of adoption of new code. The old law cannot be repealed in toto and many provisions of the existing law will have to be saved. It is to be seen how carefully the new law has been drafted in respect of disposal of pending matters.

When the whole Act is open for rewriting, the wish list cannot be small. The new law should be drafted in such a way so as to make it impossible to interpret the provisions in more than one way. On specific issues, there is a need to rationalise the TDS regime and for a comprehensive legislation in respect of non-residents that is aligned with model tax treaties.

 

 
 
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