The revised discussion paper on the direct taxes code (DTC), which seeks to address major issues raised by the various stakeholders in response to the first draft, indicates that the effort to whittle down the enormous complexities of the Income Tax Act of 1961 will be no easy exercise. The new proposals, unfortunately, dilute the primary objective of a reformed DTC to reduce the number of exemptions and preferences provided to income and corporate tax payers. Implemented in this form, the DTC will lead to a reduction in the tax base and nullify, at least partially, the efforts to remove distortions and restore equity in the tax system. While the government can claim greater sensitivity to public sentiment as the reason for these roll backs?most of the revised proposals pertain to concerns of individual tax payers?the fact is that the new proposals go against the seminal principles embedded in the DTC: low tax rates, voluntary compliance and improved tax flows.
Income tax payers, who have been promised a substantial reduction in taxes, will now have to settle for slightly higher rates to compensate for the restoration of many of the tax incentives on savings, retirement benefits, perquisites, income from house property, capital gains and wealth tax. However, most of the gains will be disproportionately larger for a small group who are employed in the organised sector and account for most of the inflows in the savings schemes and retirement funds, and enjoy perquisites; and those who have income from property or come under the purview of wealth tax. One gain in the bargain would be its positive impact on the financial and housing markets, which do play a substantial role in accelerating growth. Gains to the corporate sector will come mainly from the revised proposals to restore the minimum alternative tax (MAT) on book profits. But a better way is to tax book profits in line with normal tax rates. Today, half the 7.86 lakh registered companies pay no taxes as the provisions for accelerated depreciation and tax incentives allow them to get away with showing very little corporate tax liabilities even while they have reasonable book profits. So there is not much rationale for attempting to correct this anomaly by levying a MAT, even while allowing such disparities to continue. Unless, of course, the MAT rate is exactly aligned with the rate of corporate tax.
