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Monday, 12 March 2012 00:00
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Will cost Rs 40,000 crore, doesn’t attack concessions

Though the Parliamentary Standing Committee (PSC) has given its report on the Direct Taxes Code (DTC) too late for it to be incorporated into this year’s Budget, the all-important General Anti Avoidance Rules are likely to be brought in anyway to prevent more Vodafone-type instances where no capital gains taxes got paid even though the underlying assets were based in India. The Standing Committee’s report makes all the right noises on making tax laws simpler, on cleaning up the plethora of exemptions in the statute and in removing loopholes, including bringing in provisions like ‘place of effective management’ to decide on whether companies are to be taxed in India as well as some to check avoidance through ‘controlled foreign companies’. The fact that tax rates don’t need to be changed each year—they can be changed if the finance minister desires, though!—is a positive step.

Apart from wanting to examine the PSC’s recommendations, the finance minister will hesitate to implement DTC in a year of falling tax-to-GDP rates since the PSC estimates a tax loss of R40,000 crore—the loss does seem a bit of an underestimate since the tax department had estimated a loss of R50,000 crore a couple of years ago. But the problems with the DTC go beyond that, even though it is true the PSC can’t be held responsible for this. With none of the radical proposals in the original DTC anywhere to be seen—even before the DTC went to the PSC, these were watered down by the finance ministry—it is not clear what exactly the new legislation hopes to achieve other than some minor tinkering that even the finance bill could take care of. In the case of personal income taxes where the PSC proposes the zero-tax cutoff limit be raised, most exemptions remain whereas the spirit behind the original DTC was that exemptions were a bad idea as they just distorted the incentives structure between various investment options—while all tax savings were to ultimately migrate to an EET structure, there is no sign of this any more. Similarly, no great dent has been made in terms of corporate exemptions, the best example of this being the fact that while the effective tax rate is 23%, the PSC has settled for a 30% tax rate—only when exemptions reduce will the actual rate move closer to the effective rate. The PSC is right in pointing to the ineffectiveness of the current wealth tax regime, but it is not clear how it fixes this, and levying wealth tax at market rates has its own problems. Theoretically, STT can be removed and the losses made up through capital gains taxes now that more transactions are computerised, but most FMs will balk at removing a proven tax for an unproven one


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