The Direct Tax Code (DTC) several welcome features like reduction of corporate tax rate, widening of income tax slabs for individuals, introduction of advance pricing agreement and indefinite carry-forward of losses.

However, there are certain proposals which militate against the ethos of the times. The Indian economy needs investment, higher savings, capital formation and massive infrastructure build-up. Some provisions in the code will go against all these if adopted as they are. First, let us examine the tax code on investment friendliness; second, how stable and predictable it is and third, its social impact.

Firstly, the code goes against fundamental economic logic. MAT has been a tax on profits. It is now proposed to be levied at 2% of the gross asset value and represents a shift from profit-based taxation to asset-based taxation. This is the biggest disincentive in the DTC for investment.

For example, a power project with a capital investment of Rs. 1,000 crore with a gestation period of 5 years will have to shell out a sum of Rs. 100 crore (Rs. 20 crore a year, for 5 years) as MAT payment even before the commencement of actual generation of power.

It will require an entrepreneur to effectively borrow to pay tax: certainly not a situation which encourages investment in such infrastructure projects, which the country needs so badly. MAT is proposed to be levied even on debt-funded assets and thus is actually a tax on gross assets without netting of debts. This is surely not in line with best global practices on taxation.

The code proposes to include all financial assetsshares, securities etc. (currently tax exempt) in the computation of wealth tax. This would materially impact promoters, family trusts and high net worth individuals who are providers of capital and therefore hold a portfolio of financial assets. It is suggested that financial assets should continue to be outside the ambit of wealth tax.

Similarly, the abolition of exemption or concession for long-term and short-term capital gains on listed securities and concessional rate of tax on short-term capital gains would have serious impact on investment in the capital market. Also, India may not be able to retain its preferential status for foreign portfolio investments. Status quo on these should be maintained.

Secondly, while the new code sees to avoid ambiguity and provide stability in the tax regime, there are some proposals which will add to ambiguity. Let me illustrate: the code proposes to vest wide discretionary powers on tax commissioners to invoke General Anti-avoidance Rule and to declare any arrangement as impermissible tax avoidance arrangement. Further, there is no recourse to appeal to the tribunal.

Similarly, treating a foreign company as resident even if it is partly managed from India is surely subjective, and lead to protracted litigations.

Thirdly, the tax code is iniquitous in some ways. The proposed shift to the concept of EET (Exempt, Exempt, Tax) from the current system of tax exemption for long-term savings like PF and life insurance (EEE) will impinge upon the terminal savings of those who have nothing else to fall back upon.

It has been clarified that withdrawal from accumulated savings as on March 31, 2011 will not attract EET provisions and this is welcome. However, any withdrawal from investment in long-term savings made after that date will come under the purview of EET. Ficci thinks the present provisions of EEE should continue.

The code proposes to tax all charitable organisations and trusts particularly those carrying on any activity of rendering any service for consideration, at normal tax rate of 30%. The criteria behind tax exemption for such organisation should be the end use of income and not the generation of income. So, while there are welcome features in the tax code, there are elements which call for correction. The tax code must be in consonance with the times.