The new, old tax system

The new, old tax system

The Direct Taxes Code (DTC) Bill presented to Parliament on Monday is not a reform measure. Between DTC’s first draft a year ago, which was a radical change from the current system, and Monday’s Bill, the economy’s key players ensured they would not have to move out of their comfort zones. Consequently, what was tabled on Monday was a tribute to successful lobbying and not a shot at reforming the direct tax environment.

Every major economic reform has to necessarily upset some of the key players as they are the prime beneficiaries of a rotting system. DTC’s first draft, introduced last August, suggested a radical measure to shake up the business environment and enhance the efficiency of capital use in India. The levy of a minimum alternate tax (MAT) on gross assets, instead of book profits, stirred a hornet’s nest because of its implications for some large companies, which reduce their tax incidence by claiming depreciation benefits on investments.

India is a capital-scarce country, and with underdeveloped financial markets, access to capital is uneven. MAT on gross assets signalled that investments would have to make economic sense without tax benefits distorting decisions.

Unsurprisingly, MAT was the proposal that saw hectic lobbying. With the most radical change of DTC’s first draft diluted, the platform on which a number of other proposals had been built was knocked down and corporate tax rates remained unchanged. For sure, the effective tax rates have seen a decline, as the current surcharges and cess have been eliminated. These in any case were meant to be temporary measures to finance government spending in earmarked areas such as primary education. Given the way the radical version of DTC metamorphosed into Monday’s Bill, it would be no surprise if a cess is introduced down the road to support some pet theme of the government. Food security, for instance.

Similarly, in the case of personal taxation, the rates remain unchanged though slabs have been tweaked a little to marginally lower the tax liability. Here, too, the Bill missed the chance to significantly alter the pension landscape by using a fiscal catalyst. The first version of DTC tried to smoothen income over an individual’s lifespan by using tax to incentivize sticky long-term savings. Currently, long-term savings avenues such as provident funds see so many withdrawals during an individual’s working life that the very purpose of providing them tax incentives is defeated. Monday’s Bill made a half-hearted move in the direction suggested by its original version.

The DTC developments have shown that the United Progressive Alliance does not have the stomach for reforms.

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