Taxmen across the country have been sharply critical of the Direct Tax Code, which was open for public comment in August, opposing proposals to cut personal income and corporate tax and scrap taxes on various transactions, on grounds that these would lead to heavy revenues losses.
This was evident in a report that the National Academy of Direct Taxes, the apex training and educational body for direct taxes, has forwarded to a Central Board of Direct Taxes (CBDT) committee. The report consists of a compilation of the views of tax officials.
The CBDT committee will finalise these recommendations and send it to the finance ministry, which is now examining the code.
To start with, the report said the new changes proposed in the code will amount to an estimated revenue loss of Rs 55,000 crore in 2011-12. This includes personal tax revenue loss of Rs 25,000 crore and corporate tax revenue loss of Rs 30,000 crore, which includes the removal of the fringe benefit tax, the securities transaction tax, the cash withdrawal tax and reduction of corporate tax rate as suggested in the code.
Taxmen are unhappy that the code was prepared without prior consultation of public, professional bodies or even the income tax department. They also believe it would be difficult to implement the code before April 2011, since training officers and staff would require considerable time .
The report said the Law Commission, which introduced the original Direct Tax Code of 1961, had first constituted a committee in 1956 to examine the various provisions, invited suggestions from the public at large and then submitted the draft report in 1958 before the Act came into existence in 1961.
Rather than tinkering with existing structure, the report suggested the Income Tax Act 1961 should be simplified by incorporating various circulars, notifications and settled judicial pronouncements. New tax policies then should be incorporated only after they are referred by the CBDT. Thereafter, the Law Commission should be asked to bring in a comprehensive guidance document in lucid language.
"The report has suggested either retaining the corporate tax rate at 30 per cent or revising it upwards to avoid the severe shortfall in tax collection from companies.
"The Direct Tax Code proposes to reduce the present rate of 33.99 per cent corporate tax to 25 per cent and its effect will be tax-neutral with withdrawal of all these exemptions/deductions available to companies. However, it is evident that most of the exemptions cannot be removed given the nature of businesses in some sectors and the existing provisions in the code itself," the report said.
Similarly, in personal taxes, the code proposes to reduce taxes by widening tax slabs with the underlying presumption that it would be set off by better tax compliance.
However, the Academy's report said personal tax rates have been reduced significantly over the years, which is evident from the sluggish growth in personal taxes in the current financial year so far. It has also suggested restoring several tax benefits for personal savings to ensure voluntary tax compliance by individuals and the salaried class, which constitutes a large component of income tax payers.
The report also said the proposal to abolish long- and short-term capital gains tax and tax capital gains at regular tax rates would prove detrimental to wealth creation, productivity and mobilisation of long-term investment capital.
Instead, the report has recommended that the differential tax rate for long- and short-term capital gains tax should continue as a slab of lower rate structures, separate from the normal rate slab.
For international taxation, the report has asked for clarifications on the definition of assets for companies assessed under the minimum alternate tax, and stringent laws to check understatement of assets by companies. The report, however, is of the view that the proposed increase in the capital gains tax rate from zero to 30 per cent for non-residents could adversely affect equity investments in Indian companies.
The report has also sought clear guidelines for selecting cases for scrutiny and strict rules to discourage non-payment of tax deducted at source (TDS). TDS is one of the most effective and painless modes of tax collection, which ensures regular cash flow to the government, said the report.
| WHAT TAXMEN WANT (Some key suggestions) |
| On personal tax |
| Upward revision of tax rates and narrowing of tax slabs |
| Reduce exemption limit for wealth tax to Rs 10 crore against Rs 50 crore to capture greater mass |
| Tax to be exempt on employer contribution to provident fund and public PF |
| Children education allowance, children hostel allowance and house rent allowance to be made tax exempt |
| For retirement benefits under VRS, gratuity, principal amount exceeding Rs 50 lakh and interest in excess of Rs 5 lakh to be taxed due to lack of any other social security network. |
| For tax treatment of personal savings , exempt-exempt- tax ( EET) to be made applicable only for income accruing in the year of withdrawal |
| 100 per cent tax deduction for medical reimbursement since medical reimbursement is mostly less than the total medical expense |
| Deductions from LTC , leave encashment to be allowed up to Rs 1 lakh and Rs 5 lakh respectively from taxable income |
| On corporate tax |
| Clear rules to check tax evasion by understatement of assets by companies paying minimum alternate tax |
| Increase corporate tax rate or keep it at 30 per cent ( proposed 25 per cent) |
| Dividend taxation to be made receiver based and not source based |
| Not to roll out investment-linked incentivisation of tax exemptions immediately without research and evidence |
| Include income or gains from share transfers involving business reorganisation, sale/ purchase within a company with its subsidiary or between companies or any form of distribution of assets to shareholders to attract capital gains tax |
| Differentiation to be maintained in long-term and short-term capital gains tax |
The taxmen also suggested that the provision for TDS payments be tightened for non-tax paying entities like the government, non-profit organisations and companies with huge losses.
The report has also recommended revival of the settlement commission as the appellate authority with wide powers of plea bargaining, parallel to facilities of compounding and consent orders for other regulators.
The report has strongly recommended against any modification to the present organisation structure saying it would hamper implementation of the new Act with the new processes.
