With total tax exemptions adding up to around 80% of tax collections, you?d think the government would be desperate to get rid of them since, conceptually, this would result in a dramatic lowering of tax rates. In the case of excise duties, the ?revenue forgone? is actually higher than the tax collected and it is about 30-33% in the case of income tax, customs and corporate taxes individually. Since excise duty exemptions would be very difficult to crack, given their extent, the government then decided to come up with a Direct Taxes Code (DTC) to tackle one part of the problem?that of individual income and corporate tax collections. So, along with the list of exemptions to be taken away, the DTC suggested a lower rate of taxation as well. In the case of the corporate sector, the tax rate was to come down from the current 33% to 24%.
Tax slabs were also changed in personal income tax to lower effective tax levels. The designers of the DTC, while getting the general principle right, made some mistakes. Proposing a minimum tax on companies based on their assets instead of income was always a bad idea. It hit PSUs, most of whom have large assets and low profits. It also hit infrastructure investments badly?they are both capital-intensive and usually carried out through Special Purpose Vehicles. India Inc seized this obvious problem and then drove a carriage and four through it to ensure other tax concessions were not taken away. The original proposal on income tax, similarly, reduced tax rates too much and would probably have hit tax buoyancy, although economists who make the ?missing middle? argument?the middle classes aren?t paying enough taxes because tax rates are too high?would approve of the reductions.
The net result of all the discussions has been a DTC-2, with DTC-1 unveiled in mid-June, which is a pale shadow of the original DTC. MAT on assets has gone, overall MAT taxes on book profits are up marginally, but many exemptions have been retained?the exact picture on what?s happened on SEZ incentives is muddled, but since the new corporate tax rate is now going to be a fourth higher than what the original DTC proposed, it is obvious enough concessions remain, and that limits the government?s ability to lower tax rates. And when there are concessions, they?ll be abused as well. Most income tax concessions, similarly, appear to have been retained, which is why DTC-2 rates and tax brackets are pretty close to where they are at the moment. At the end of the day, a colossal waste of effort.