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Direct Taxes Code, an overview
August, 31st 2009

The present method of outright deduction under Sec. 80C is sought to be replaced by Exempt Exempt Tax (EET).

Pranab Mukherjee releasing Direct Taxes Code for public discussion

?Criticism of the draft Direct Taxes Code has already started pouring in as though it is a Bill which is awaiting to be passed by Parliament. It has to be remembered that it is only a discussion paper, as has been described by the Government, so that one need not take it as the official view of the government, especially since it has been prepared by the tax administration without any involvement of either trade and industry, profession or even the field officers.

Personal taxation

In personal taxation, there are welcome proposals by way of revision of slabs and reduction in rate of tax. But there has been a major change proposed as regards the method of giving incentives on savings.

The present method of outright deduction under Sec. 80C is sought to be replaced by Exempt Exempt Tax (EET) so that there is only postponement of liability because what will be given will be taken back on maturity of the same scheme, though the limit is proposed to be enhanced to Rs. 3 lakh.

Such a scheme would render the incentives stagnant after the maturity period, once the assessees exhaust the limit. The best one could do to avoid tax is to replace the savings without any tax benefit of deduction for further savings.

Corporate tax undergoes radical change with the new minimum alternate tax (MAT) proposed to be replaced by a capital tax, but no more an alternate tax but an additional tax.

The proposals require detailed consideration.

Those who expect tax reforms to justify a new Code would be sadly disappointed in that they are not found. An excellent opportunity to bring the law to some sanity and compatibility with the prevailing principles of international taxation would be lost if the Code becomes law without material improvement.

Bilateral treaty

The Finance Minister was heard expressing that the new law will take into consideration the global concerns. But then, the concept of treaty override is proposed to be given a burial by providing that the treaty or the domestic law, whichever is later, will prevail so that a bilateral treaty can be modified by a unilateral change in law.

Double Tax Avoidance Agreements between two sovereign States have been hailed as a first step to a World State paving the way for fiscal harmony. They are essentially contracts meant to be honoured subject only to agreed changes by novation. Sanctity of a contract may be Shylocks slogan but still not to be lightly discarded.

Another disappointment is that the occasion is not taken to do away with the anachronistic receipt basis of taxation, which affects mostly non-residents with no income in India.

They may get trapped, if any income happens to be received in India, though such income, which had not accrued, would not have otherwise been taxable, if it had not been so received in India. This anomalous provision has no effect on residents of countries with which India has Agreement, because a mere receipt is never a basis for taxation.

There is no justification for continuance of this basis of taxation from which there is hardly any revenue in the light of the fact that India has Agreement with most countries. It is, therefore, only a dead weight and has no rational basis.

Scheduler system

Yet another matter of disappointment is that the scheduler system will continue. Scheduler system of taxation, which gives rise to litigation, will continue notwithstanding a long-standing recommendation of Rajah Chelliah Committee to drop it. The classification of source of income providing for different methods of computation for each head of income, leads to different income for the same activity, if taxed under different heads of income.

This legacy continues as a relic of the past in the new Code. However, the scheduler system is also found in most countries and it has also found its way into Double Tax Avoidance Agreements and is also subject matter of controversies depending upon classification of income. This probably is inevitable, if we follow the present global practice, though it does not make economic sense.

The abolition of Securities Transaction Tax would render the investors, hitherto exempt, taxable on the profits as capital gains on realisation of investments bringing the investors on a par with dealers at the normal rate and not as a lower rate as of now but with partly favourable changes in computation of capital gains tax. Charities get a raw deal with possible liability for quite a few voluntary agencies.

There has, no doubt, been some good measures but they are half-hearted as in the case of permissibility of indefinite carry forward of losses. What is more important for rehabilitation of affected industries with losses is to permit carry backward of losses as in the U.K. and the U.S. so as to help such industries with timely refund of income tax.

A professed objective of any tax reform is simplification of law. There is no evidence of simplification. Returns will continue to be complicated.

Tax Forum , in view of the importance of the new Code as the foundation of new law, which may be expected to be stable for many more years, would highlight the proposal subject-wise, reflecting the views of readers, which are welcome.


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