Column: Holes in the DTC net

Apr 11 2014, 03:41 IST
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SummaryThe latest draft of DTC overlooks the need to develop a more sustainable tax base

Yet another attempt has been made to resurrect the Direct Taxes Code (DTC). The purpose of the recent version, apparently, is to present a fresh bill incorporating all subsequent changes in law and the accepted recommendations of the Standing Committee. It is hard to see how this present draft—coming at a time when one is waiting with bated breath to see in who forms the next government at the Centre rather than examining comparative tax policies—takes the government any closer to achieving the objective of establishing an efficient, effective and equitable direct tax system. Indeed, parts of the present draft are rather regressive, a throwback to the old philosophy that hiking rates yields more revenue.

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

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