Or the Lunacy of making reforms wait Twenty years
The Direct Tax Code when it came now a year back, was much awaited and with illustrative rates that defined the governments' intentions as nobel and exemplary taking salaried classes and economic data into a new corrective orbit at the same time. However like all reform implementations of this regime ( Manmohan Singh, Chids and from NK Singh to the current Rev Secy not much has changed since 1995 or since 2001 when Insurance was reformed ) it has started at an ideological starting point, built in more disappointments and will cascade into a saving grace by the skin of the teeth by the time it makes law come August/September.
Let's begin at the beginning
The bill or the Direct Tax Code in its first draft, is almost forgotten. Let's face it. The basis of the revenue calculations at the new all time low rates read like a dream for the government and collections of March 2010 have given everyone a golden chance to renege on the pledges never made. The Income Tax rates are going back to the annual Finance Bill and that is a realistic thing. I believe the government is unlikely to renege on those rates except by a few pips or maybe pull down the top slab a flap or two.
The Wealth tax rate of 0.25% for $12 millon ( Rs 50 Crores) is the first minor one which is a great reform but may not hold hopes of great increase in personal declarations. The Capital Gains Rate was to be merged into a single rate as per ordinary income slabs, and that is unlikely to be acceptable as such so that contentious point has been left out even in this revision as a super bargaining chip much like the KP committee's fuel increase recommendations
The important one to catch in the revision among the 11 highlighted items has been the acknowledged gradient of EET-EEE for provident fund, pension fund and insurance product outcomes. The EET regime would have been a hard one to swallow and once the salaried start thinking about declaration of such holdings the tax regime would have been in a big big soup. so it was always EET at the beginning and then come down to more things real. Similarily unfortunately seems to be the case for the uniform tax rate for corporates, which now will be used for last minute balancing and the 'illustrative' 25% rate may become more of a ideal conditions never achieved kind of dream to be dangled a s a carrot.
The problem of course is that the ideal start presumed much rationalisation to recover from increasing tax base and coverage from UID, computerisation and other concepts of actually reaching the incomes at source and thus creating a tangible trail aka the US Tax system. Thus the rates are now unlikely to be permanent and once EEE regime returns the calculations along with reductions likely on Capital gains are causing a rethink in the Department of Revenue, that obviously has not been central to the first score released eight months back.
As usual nearer implementation, the government is also likely to erase all simplifications for exemptions etc, the plan of erasing them unacceptable to politicians and to commentators at a loss for where the tax code is going and hard pressed to present material opinions in Tv press and elsewhere. It happened to GST and it is happening to DTC and it will happen again to GST. Corporates Tax consultations seem to unnecessary hinge on the value of Rs 69000 crores (INR690billion/$17billion) in exemptions received and once the same is erased, the rationalised rate of 25% has a chance.
We would still recommend that the government go ahead and axe the corporate exemptions and start with a single 25% tax for Domestic and global corporates, else the rates would go back to usurius levels and the investability score plummet.
Discussing the Draft
Your Copy
The items revised in this paper and invited for comment:
i. Minimum Alternate Tax (MAT) - Gross assets vis-a-vis book profit.
ii. Tax treatment of savings - Exempt Exempt Tax (EET) vis-a-vis Exempt Exempt Exempt (EEE) basis.
iii. Taxation of income from employment - Retirement benefits and perquisites.
iv. Taxation of income from house property.
v. Taxation of capital gains
vi. Taxation of non-profit organisations
vii. Special Economic Zones – Taxation of existing units
viii. Concept of Residence in the case of a company incorporated outside India.
ix. Double Taxation Avoidance Agreement (DTAA) vis-a-vis domestic law.
x. Wealth Tax.
xi. General Anti Avoidance Rule (GAAR).
Items of personal tax and wealth tax are more or less dependent on final rates except for conceding EEE regime on retirement and pure insurance products forcing treatment of ulips as an investment further apart from the sebi-irda-amfi wars
On items of Corpoate Tax:
The proposed asset based MAT of 0.25% of total assets for banks and 2% of total assets has been reduced to not much more than a worthy ideal like all first time government proposals. The changes envisaged include clear indications to support investment incentives supported by the new DTC, and are suggestive of recommendations for treating preferentially infrastructure companies with long gestation periods, and importantly disregarding Capital WIP assets as they bloat both larger expansion plan companies like Reliance and infrastructure companies
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