The Finance Minister has kept
his word and released the draft of the Direct Taxes Code for public comment
within the promised time — in fact, one week in advance. It is now time for us
to study the code in detail, understand its implications and make
representations to the Government. The question that we need to ask is — at
first glance, has the Direct Taxes Code really lived up to the expectations ?
Undoubtedly, significant
efforts have gone into drafting of the Direct Taxes Code and into simplification
of complex provisions. The language of the Direct Taxes Code is definitely a
significant improvement on the legalistic and convoluted language of the Income
Tax Act. Unnecessary complications such as the concepts of previous year and
assessment year, which made understanding of the income tax provisions difficult
to most laymen, have been sought to be eliminated. To that extent, the
Government certainly needs to be complimented for its efforts.
Most individual taxpayers have
been enthused by the significant proposed reductions in individual tax rates,
with taxes at the Rs.10 lakh and Rs.25 lakh levels coming down from Rs.2,10,120
and Rs.6,73,620 levels to Rs.84,000 and Rs.3,84,000, respectively. However, one
aspect which most people have not realised is that their taxable incomes would
also be much higher under the Direct Taxes Code, on account of taxation of
withdrawal of provident fund monies, taxation of insurance monies, taxation of
capital gains on sale of equity shares at normal rates of tax, etc. Tax
exemption schemes would effectively be replaced by tax deferment schemes under
the EET method.
There are quite a few other
fundamental changes to the tax laws which are being made through the Direct
Taxes Code. Minimum Alternate Tax (‘MAT’) would no longer be based on book
profits, but on the gross assets of the company. The entire rationale behind
introduction of MAT, to tax companies which showed book profits and paid
dividends but paid no taxes, is therefore now being tossed aside, and MAT sought
to be justified by the rationale of need for productivity. Would MAT on gross
assets really increase productivity of companies, or just further hamper
loss-making companies ? The Government seems to believe that companies choose to
make losses, even when they are capable of making profits ! By that logic, the
day may not be far off when norms for productivity of different industries would
be laid down, and any company not meeting the norms of profitability would be
taxed on the income which, in the Government’s opinion, it ought to have earned.
The reduction in corporate tax
rates is being neutralised by MAT and changes in incentive provisions. Incentive
deductions for various industries, such as infrastructure, power, etc., are
being replaced effectively by accelerated depreciation, which is really not a
substitute for the profit deduction which has hitherto been available. Would
such an incentive be sufficient to enthuse companies to undertake such priority
activities ? It may perhaps be better not to have any such incentive at all, but
to ensure speedy project approvals and clearances to encourage such activities.
Unfortunately, we may end up with the worst of both — a poor tax incentive, as
well as delays in project approvals.
The general anti-avoidance rule
being sought to be introduced has the maximum potential for misuse by tax
authorities. Given the approach of tax authorities, who view every transaction
with a jaundiced eye, regarding it as having been entered into for tax
avoidance, such a provision should have inbuilt effective safeguards, if at all
it is to be introduced. Otherwise, the amount of litigation being seen in
relation to transfer pricing would certainly be dwarfed by litigation which
would be unleashed by such a provision. One thought that the objective behind
the new code is to reduce uncertainty and litigation, not encourage it. Such a
provision is therefore inconsistent with the objectives of the new code.
It is not only domestic
taxpayers who would end up with difficulties under the Direct Taxes Code. Though
all existing tax treaties may be renotified to override the Direct Taxes Code,
the general anti-avoidance rules, the provisions relating to rectification,
reassessment and revision on the basis of any order in the case of any person,
could see tax proceedings dragging on without finality.
