Quick Edit | Adam Smith’s tax code

Quick Edit | Adam Smith’s tax code

The draft direct tax code released on Wednesday is yet another advance for the Indian tax system. It matches in importance the proposed goods and services tax (GST).

All this is a far cry from the bad old days when the Indian economy was strangled by high tax rates, a multiplicity of exemptions, regular changes in tax rates in tune with the politics of the day and even quantitative restrictions on certain imports.

The first tax reforms did try to simplify rules, but the main focus was undoubtedly on bringing down rates to levels that did not kill initiative and minimized rent seeking. The direct tax code will be one of the key steps in the next and necessary move to create a simple and stable tax system in India.

Adam Smith had outlined four canons of taxation more than 230 years ago. A good tax system should be based on the ability to pay, taxes should be convenient to pay, tax liabilities should be clear and certain, and taxes should not be expensive to collect.

The new direct tax code and GST seem to meet these four key rules.