|More modern taxation|
|Monday, 10 June 2013 00:00|
Better to wait for a more efficient DTC than to rush it
With the Prime Minister telling Japanese investors that the goods and services tax (GST), India’s biggest tax reform in recent years, will be implemented by the next government, the question is whether the other big reforms measure—the direct taxes code (DTC)—will go the same way. If the government wishes to expedite the DTC, all it needs to do is to accept the report of the Parliamentary Standing Committee on this and pass the Bill in, if possible, the monsoon session. That would, however, be unwise and finance minister P Chidambaram has made it clear that he plans an overhaul of the DTC Bill that his predecessor had come out with in 2010—DTC 2010 is very different from DTC 2009, the Bill Chidambaram had drafted during his previous term as the finance minister.
To be sure, DTC 2009 also had some really red rags such as the 2% minimum alternate tax being levied on gross assets, in effect converting a tax on profits to a wealth tax. This would not only discourage firms from making large investments, the impact would be especially severe on the SPVs routinely set up to build and run infrastructure projects. The GAAR provision in DTC 2009 that allowed the taxman to reconstruct a transaction based on whether he thought it was merely a tax-avoidance scheme also needs to be rethought in the light of India’s desperate need for capital and the reaction GAAR has stirred up in the investor community. Naturally then, before it is ready, DTC 2013 needs intensive discussions with the investor community to avoid the kind of blushes we witnessed when, for instance, retrospective taxation was introduced or when the budget said Mauritius tax residency certificates may not be good enough to get a tax credit.
In principle, however, DTC 2009 was trying to eliminate as many tax exemptions as possible which is a good thing since all these do is to distort savings and investments. Right now, for instance, tax breaks encourage investors to park their money in certain schemes that end up being quite disastrous. By bringing in an EET instead of an EEE for some schemes at present, the taxman would get more funds under DTC 2009 while the system would also get cleaned up. Similarly, DTC 2009 brought in the top tax rate only for incomes of over R25 lakh a year, a good idea given India’s top rate kicks in too quickly which is why the largest tax evasion takes place among the middle classes—the effective tax rate for those earning between R10 lakh and R20 lakh today is just 8.6% as compared to the nominal rate of 30%. DTC 2010, however, brings in the top rate at income levels of just R10 lakh. In the case of corporate taxes, similarly, DTC 2010 leaves too many of the exemptions DTC 2009 sought to do away with. Removing exemptions is also a good thing from the point of view of improving tax efficiency. With no exemptions, the taxman can simply look at the effective tax rate of individuals and corporates and figure out where there is evasion—the presence of large exemptions makes it difficult to a priori figure out tax evasion and so makes the taxman’s job more complicated. If coming up with a better DTC means this has to be implemented by the next government, the wait may be worth it.