Given the Prime Minister?s reservations over the introduction of higher tax brackets to soak the rich among other aspects of the modified direct taxes code (DTC), it is just as well the Cabinet postponed a decision on it?in any case, the Bill itself said there had not been enough time for inter-ministerial consultations on it. While the finance ministry has done well to restrict the plethora of tax breaks given today?Rs 1,13,470 crore in FY13?to only those linked to investments by firms, the larger point is the DTC fails to meet the basic objectives for which it was being introduced, to reduce tax exemptions and lower overall tax rates. In the case of companies, lowering the number of exemptions would allow the numberplate rate to be cut to 25% which is near the effective rate today?the latest draft, however, keeps the rate unchanged.
In the case of personal taxes, similarly, the idea was to remove various exemptions and to lower taxes. The original DTC, before it was changed by a new finance minister in 2010, had proposed removal of several deductions including those on investments in life insurance, in provident funds and interest paid on housing loans, and had restructured tax slabs. The idea then was to tax annual income of Rs 1.6-10 lakh at 10%, Rs 10-25 lakh at 20% and income above Rs 25 lakh at 30%. Under the new draft, however, the 30% slab kicks in at just Rs 10 lakh (which is the current case). It is this very high taxation at low rates of income, in fact, that is responsible for high tax evasion?those earning R10-20 lakh, tax data show, have an effective tax of just 8.6%. While that suggests the tax rate needs lowering, there is no case for hiking taxes on the rich who, based on latest tax data, pay an effective rate of more than 20%. The finance minister, to be fair, was constrained by the Parliamentary Standing Committee having studied the DTC prepared by his predecessor. It would be a better idea to start afresh and come out with a good DTC since, in any case, this government can?t implement it now.