In line with its earlier policies and the pre-poll mandate, the United Progressive Alliance government has already initiated steps to revive the Indian economy. The thrust, as far as tax policies are concerned, has been on simplifying and rationalizing the tax structure, moderating tax rates, stabilizing tax policies and enhancing efficiency in tax administration. Some of the seeds for such tax reforms have already been sown by finance minister Pranab Mukherjee in the 2009-10 Budget in July.
Illustration: Jayachandran / Mint
As you read this, the government is believed to be giving final touches to a new direct taxes code, which will soon be released in the public domain for comments. The Income-tax (I-T) Act, 1961, and the Wealth Tax Act, 1957 are—the proposal goes—to be replaced with a unified direct taxes code.
Over the years, the I-T Act has developed into a complex legislation due to the introduction of several new provisions and explanations each year. With the passage of time, many provisions have become redundant and need to be deleted. Similarly, the provisions of the Wealth Tax Act have been considerably diluted since it was first introduced: Earlier, almost all assets belonging to an assessee were chargeable to wealth tax; now, only a few are considered to qualify as wealth.
The new code is expected to clear the numerous complexities and interpretation issues that shroud the present I-T law. It is also believed that complex provisions and tedious explanations may be replaced with mathematical formulae as far as computational provisions are concerned for, say, tax holidays. The objective is to provide the common man with a simple law, without complex tax jargon. The new code could draw on the experience of developed and emerging countries and simplify the tax law provisions as they stand today—although not all countries are known to have simple tax laws.
However, one imagines that the five-decade-old I-T Act cannot be completely replaced. For example, we may still need to characterize whether income is part of business earnings, salary, capital gains, or has accrued from other areas. Furthermore, the I-T law in India has for a long time been—to a large degree—reliant on judicial precedents and interpretations that vary from case to case. This has often led to prolonged litigation, which not only results in loss of revenue for the government, but also leads to investors losing interest due to uncertainty on tax positions. The government’s approach while drafting the new code could be to simplify provisions and to provide guidance on the interpretation of these provisions, wherever feasible, by relying on such judicial precedents.
Additionally, the new code could increase the potential base of assessees that could rely on the presumptive basis of taxation—that is, say, their taxable income could be determined based on a certain percentage of gross revenues/turnover, at the option of the assessee. This could obviate the need to maintain an elaborate set of accounts and make it simple to administer. Currently, the I-T Act already provides a presumptive basis of taxation for businesses that have difficulty in maintaining records or determining profits that should be taxable in India, such as the road transport business or oil exploration. One can already see in the Budget the introduction of presumptive basis of taxation for individuals, Hindu undivided families and partnership firms whose total turnover does not exceed Rs40 lakh. Under the new provision, eligible taxpayers may choose to pay income tax on 8% of the total turnover. Such provisions, if introduced for a larger base of assesses, would relieve taxpayers of the task of maintaining a complete set of books of accounts, freeing them of administrative hassles, and also reducing the costs of tax collection.
It is also believed that the new code would embody a “low incentive-low tax rate” system, which would essentially offset an expansion in the tax base against a drop in the rate at which income is taxed. The Kelkar Committee that was set up for tax reforms also recommended this approach in its 2002 report.
It is also essential that the new tax code bring with it a reduction in the quantum of litigation. While the government has already introduced the alternative dispute resolution mechanism and the safe harbour rules in the Budget, the next area that the government should target to reduce litigation and bring more certainty should be the introduction of advance pricing arrangements. Also, the implementation of the National Tax Tribunal would be a good step towards dispute resolution. There’s much else a new tax code could provide: Rearrangement of chapters in the I-T Act to lend flow to step-by-step tax computation, deletion of redundant provisions, presumptive basis of taxation for foreign companies and easy language.
It is said, “Well begun is half (job) done.” The government has indeed started on a good note with the new tax policy initiatives introduced in the Budget. We hope that it continues this by bringing clarity to the new direct taxes code.
Uday Ved is head of tax at KPMG in India. Comments are welcome at email@example.com