The draft direct tax code, released for discussion on Wednesday and scheduled to be placed before Parliament for its consideration during the winter session, is a complete rewriting of the country’s direct tax regime, and the most radical such move in half a century. It has features that are mostly welcome, but also elements that will generate debate—and hopefully lead to a review. The broad thrust is along the right lines, because the code further moderates income tax rates, making them among the most attractive in the world if one leaves out city-states like Dubai, Singapore and Hong Kong. It thereby reduces the incentive for tax evasion, since the tax rate up to an annual income of Rs 25 lakh is just 20 per cent. The code also rationalises incentives for savings, through the introduction of an EET (Exempt savings, Exempt interest on savings, Tax on withdrawals) regime, which has much to recommend it because it taxes expenditure, not savings. The other important element of the code is of course simplification, and this should result in fewer tax disputes.
The code addresses concerns about the unfairness of some existing tax exemptions and concessions, especially those relating to capital gains and wealth. While the stiffer tax treatment of capital gains may cause some negative comment, there is no proper justification for treating such income differently from other kinds of income—especially when vast sums have been earned by investors during successive bull runs and through real estate appreciation, without the exchequer getting much of a share. If anything, the abolition of the turnover tax on share transactions will encourage more trading and add depth to the market. The other significant change is the inclusion of shares in the wealth tax—for which, however, the floor has been raised to a stratospheric Rs 50 crore, and the rate slashed to a modest 0.25 per cent. Many people who are liable to pay wealth tax today will now escape the net, others will find that their tax burden has come down. In the end, only a couple of thousand people in the country will be covered by the wealth tax, so people who are counted among the country’s billionaires and yet pay no tax on their wealth, will find that they have a new tax to pay—which adds to the fairness of the system.
As with individuals, the corporate tax rate has been slashed to 25 per cent. However, there is the introduction of a new minimum alternate tax, which is a misnomer because what is proposed is a tax on assets. There is some economic rationale for this, but the proposed rate of 2 per cent is unconscionably high and will make life impossible for capital-intensive industries and the infrastructure sectors. The finance minister should re-consider the tax rate and slash it to a reasonable level. Meanwhile, the one area where there could be complications concerns the international coverage of the new proposals; clearly, there is some concern about large-scale tax avoidance, but it should be debated whether what is proposed is the best way to deal with the issue.
