Two months after the draft of the New Direct Taxes Code (Code) was released, the Ministry of Finance (MoF) facilitated a power-packed formal 'Interactive Session' with the trade and industry last week. The session was attended by over 100 tax technocrats comprising ‘who’s who’ in the tax fraternity, chief of country’s three leading chambers of commerce and was chaired by the Finance Minister.
Pranab da – patient listener
The FM in his opening speech reiterated the stated objectives and underscored the importance of the Code being read and interpreted as a new legislation and not an overhaul of the existing legislation. He emphasised that such an approach to a great extent would enable the readers to rationalise new levies and justify withdrawal of incentive provisions in the Code. To dispel a lurking scepticism, the Revenue secretary joined in clarifying that principles enshrined in the judicial precedents and wisdom evolved over past several decades shall not be buried. This is the most comforting statement as Courts have done a stupendous and laborious job in interpreting the law and it would have been sheer waste of courts’ wisdom, had we nullified the judicial principles.
Another soothing aspect was the FM’s acknowledgement of areas of concern and an assurance that the working group is evaluating all suggestions to harmonise the proposals. Its now clear that the working group shall focus upon seven key areas – levy of Gross Asset Tax (GAT); Treaty override provisions; General Anti-Avoidance Rules; residence test for foreign companies; capital gains taxation; taxation of charitable organisation; shift from EEE to EET scheme and its impact on the marginal investors. Should one view this as validation of rest of the Code provisions? I guess so. However, we should anticipate tweaking in several other portions, particularly errors of commission or omission.
The session undoubtedly was a fruitful endeavour, yet it is unclear as to the extent suggestions articulated by the chambers would be considered and incorporated in the final draft. Whilst the Revenue Secretary assured that all possible endeavours would be made to iron out unintended outcome, though, he was categorical that the fundamental premise of the new legislation targeted to provide a simplified yet robust tax regime would not be diluted. If that be the case, a rework of the existing law (as speculated) seems to be ruled out for the time being.
Taxmen spurn the Code
Following the ‘Interactive session’, an equally important development was a report submitted by the National Academy of Direct Taxes, the apex training and educational body for the Revenue officers. The report, which essentially is a compilation of tax officials’ views, (much to the Code team’s dislike) has evidently given thumbs-down to several key proposals.
The report has statistics on staggering revenue loss due to reduction in tax rates (corporate and personal) and abolition of Securities Tax; the forecast revenue loss to the tune of Rs 55,000 crores would compel the working group to revalidate its proposals. Whilst the tax officials have resented lack of prior consultation with the department officers and public /professional bodies, scepticism is echoed whether the code could be effectively implemented by April 2011, as training officers to gear up for the Code would be a time consuming process. The industry is however pleased with the Taxmen’s view that withdrawal of all extant exemption /incentives would be flawed as incentives can not be dropped owing to its very nature and given their importance from a macro-economic standpoint.
The undertone of the report seems to indicate Taxmen’s belief that the Code is far too simplistically drafted and bear lacunae which could discourage effective tax compliance. It strongly recommends against any modification to the present organisation structure for tax administration as it could hurt the effective implementation of the Code -- one such instance is a provision in the Code wherein the powers of the CBDT is proposed to be restricted to being a mere tax collection agency. While, this would perhaps be addressed with the Finance Minister having given a go-ahead (to the CBDT itself) to make necessary modifications, the Revenue officers seem sharply critical of disempowerment.
A proposal made in the report that instead of replacing the existing regime, the extant Income tax law of 1961 can be simplified by incorporating administrative guidance and settled judicial pronouncements has still not settled the debate.
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Certain sceptics view reworking of the Code could result in patch work, besides the benefits of five decades of experience.
My concluding remarks
Clearly, the FM has cut out an onerous task to review the Code and achieve the task of balancing expectations of the taxpayers and tax-administrators. While the Code is a sincere endeavour for a simplified tax regime, views of the tax administrators and officials is likely to wield muscle to the working group insofar as rationalisation of tax rates and sector specific incentives are concerned. In my personal belief, the task has begun and the MOF will have to stage a neat balancing act to harmonise expectations!
I view the tax code as a public policy document and not just a legislation. If it has taken us over a decade to unveil the Code, we should not hesitate in engaging in a wider debate rather than making ourselves prisoners of time.
I am confident that seeking views from all stakeholders shall form building blocks for a robust regime.
The author is a Partner with BMR Advisors and views are entirely personal