There is no talk of reducing the corporate tax rate that was proposed in the original DTC. In its place appears the old scourge of taxing dividend in the hands of the shareholders where it exceeds R10 million. Apart from physical assets, wealth tax is also proposed on financial assets (which include shares) held by individuals, HUFs and private discretionary trusts. So, this will be the result whether or not a shareholder earns dividend, he/she pays wealth tax on the shares; if he/she earns dividend, there is the Dividend Distribution Tax of 15% on the company; and if a shareholder has enough shares to yield a dividend income of over R10 million he/she would have to pay a further 10% tax! Then there is the very tempting urge to tax the super rich by proposing to bring about a new 35% tax slab on individuals earning over R100 million. And the fact is, this is the group that has the investible surplus.
Again, a very sensible recommendation of the Standing Committee that has been brushed aside is that the tax slabs and exemption limits be linked to consumer price index. This would eliminate the need to tinker with slabs every year. If the Code were really meant to serve us for 20 years, given perennial inflation, this recommendation should have been accepted.
It is more or less a norm to consider taxing indirect transfers only where at least 50% of the share value is driven by assets in a source country. This idea has been given the short shrift. The logic given is that the threshold of 50% is unduly high. It is replaced by a safe 20%. Another reason offered, that the transaction does not get taxed anywhere, also challenges plain understanding. Most major economies tax their residents on capital gains. So, how does the seller escape even residence country taxation In any case, provisions to bring to tax anything more than commercial and economic gain attributable to the value derived from India are neither fair nor equitable and are inconsistent to the economic rationale
The now-mandatory CSR spend, it has been clarified, will not qualify as deductible revenue expenditure because it is application of income. We have heard that a fine is a tax for doing wrong. Here, tax has become a fine for doing right!
Almost no attention is paid to containing the government expenditure (we seem to look for new ways to spend more), while we treat income as manageable merely by raising taxes and tightening collections. Most illsadministrative or otherwisethat Indias tax laws suffer from are due to collection-targets-related pressures on the administration.
The objective of enhancing revenue can be best served by bringing new tax payers under the tax net; targeting the tax from focus groups that show greater tax gap between the tax actually collected and that ought to be collected. The use of information technology along with data mining at various sources can effectively further a more sustainable revenue base. Such a base may not burden the existing taxpayers more than their due share merely because a large number of potential taxpayers continue to be outside the tax net or under-report the income.
The current version of DTC, despite the changes incorporated, misses this point and continues to look to the traditional sources for succour.
The author is leader, Direct Tax, PwC India