DTC 2013’s main aim is to show UPA is not pro-rich
At a time when the Congress is attacking Narendra Modi as being pro-capitalist, the release of the Direct Taxes Code (DTC) Draft Bill appears mainly to reinforce the view that the government’s heart is in the, well, left place—more so since the Bill has no hope of getting converted into an Act now anyway. Though the original purpose of the DTC was to simplify the plethora of tax exemptions, R1,13,000 crore in FY13, and go in for lower tax rates—in the case of corporate tax, since the effective tax rate is around 25% as opposed to the nameplate rate of 32.44%, the rate was to be lowered to 25%. What has emerged, instead, is largely a soak-the-rich approach to taxation. So, in line with the 10% surcharge in FY14 on those with an income of more than R1 crore, DTC proposes a new tax rate of 35% on individuals with an income of over R10 crore. This is ironic since the biggest tax evasion probably takes place among those who earn between R10 lakh and R20 lakh a year—indeed, according to data in the Standing Committe on Finance’s 49th report, those earning over R20 lakh comprised 1.3% of taxpayers but paid 63% of taxes in FY12.
Nor is it quite clear why DTC plans to tax overseas sale of assets—such as from Hutch to Vodafone—in the manner it does. The world over, the finance ministry’s expert committee said, such transactions are taxed if 50% of the company’s value was being derived from assets in a particular country, say India—so why lower it to 20% instead of the recommended 50% threshold?
In an attempt to ensure those earning dividends don’t get away with paying just a 15% tax—by way of a dividend distribution tax—another 10% is to be paid by those earning dividend incomes of over R1 crore. While this appears progressive, it goes against an earlier objective to draw investors into equity markets since there is a larger positive rub off in terms of overall investment activity in the economy. Indeed, the new wealth tax proposal which includes all financial assets—the nameplate rate has been lowered to 0.25% from the current 1%—reinforces this view, and appears regressive since, in effect, it ends up taxing savings. It is one thing to tax capital gains on assets when they are sold, quite another to tax them even if they earn little. Given the total value of financial assets, the taxes that can be got are large, but the general direction appears to be to hike tax rates instead of lowering them, the original purpose of the DTC—which assumed, correctly, that lower taxes result in larger compliance.