While finance minister Arun Jaitley had announced, in his February 2015 budget, that he would reduce corporate tax rates from 30% to 25% in four years, this is far from being done—in this year’s budget, taxes have been cut to 25% but only for units that have a revenue of less than Rs 50 crore. For Jaitley to be able to do this, he has to reduce the plethora of exemptions given to corporates—only then can taxes be cut without seeing a major loss in revenues. That is why, prime minister Narendra Modi did well to talk last week—at the annual retreat of tax officers, Rajaswa Gyan Sangam—of the need to overhaul the direct taxes framework. Following this, according to a report in The Times of India, the government is planning to set up a task force to draft a new law to meet India’s needs. While an attempt to write the new direct tax law was made in 2009 when then finance minister P Chidambaram led an exercise to draft Direct Taxes Code (DTC), the legislation could not take the shape of law even after substantial dilutions. It was finally junked by finance minister Arun Jaitley after the NDA came to power.
Some parts of the DTC, like lower corporate taxes and elimination of corporate exemptions, have already been built into the law; others like GAAR have also been made part of the income tax law. Even so, a larger exercise of reducing personal income tax exemptions is also required since this is also a large contributor to poor income tax compliance, especially at the level of those in the Rs 10-20 lakh income bracket—if tax moderation is a critical part of GST, it has to be a critical part of direct taxes as well. Indeed, instead of reducing the gap between tax slabs, this year’s budget has gone and increased them. While annual incomes between Rs 2.5 lakh and Rs 5 lakh are taxed at 5%, the tax rate jumps to 20% for the income between Rs 5 lakh and Rs 10 lakh. If that isn’t bad enough, the top tax rate of 30% kicks in at just Rs 10 lakh. The DTC, in 2009, had proposed the 30% rate being charged on incomes above Rs 25 lakh and the 20% rate to be charged on income between Rs 10 lakh and Rs 25 lakh, along with the removal of all exemptions and a Rs 3 lakh taxable income limit. Similarly, in case of the companies, the DTC had proposed a reduction in the tax rate from 30% to 25% along with the removal of all exemptions. Even if it is not possible to make all these changes next February, a roadmap for the final changes must be announced by the taskforce.