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Direct Tax Code: A boon for IT Sleuths!
A Closer Look into The Provisions of The Proposed Direct Tax Code reveals India’s Digression from a Trust-Based system of Taxation to one which is Based more on The Element of distrust.
Issue Date - 21/07/2011
The existing Income Tax Act, which came into legislation in 1961, has often been criticised for being economically inefficient and incompatible with the current requirements and inequitable to all tax payers. Thus, to avoid this criticism and to replace archaic rules, the Ministry of Finance finally came out with the draft of Direct Tax Code (DTC) Bill in August 2009. But, the draft Bill, after being introduced in public domain, received a lot of criticisms on certain amendments in relation to removal of existing tax subsidies, and modifications in the tax rate structure that it sought to introduce. So, in June 2010, the ministry again issued a new revised DTC Bill and presented the draft to the Union Cabinet.

In what the government has claimed to be an attempt towards bringing path breaking changes to the existing tax regime in India, the DTC Bill, which is proposed to be implemented from April 1, 2012, will replace the five decade old legislation. In fact, in the foreword to the Tax Code, Union Finance Minister Pranab Mukherjee said that “the aim is to eliminate distortions in the tax structure, introduce moderate levels of taxation, expand the tax base, improve tax compliance, simplify the language and lower tax litigations.” Meanwhile, the Bill is being scrutinised by the Yashwant Sinha-led Parliamentary Standing Committee on Finance.

Personal income tax, as almost all salaried persons will agree, in our country is one of the highest in the world. More open and honest an employer is in terms of disclosing remunerations, worse it is for the employees because taxable income goes up. There is no denying that the present system is outdated and rewards dishonesty and non-disclosure of income by way of lower tax. The rationale for introducing DTC, government says, is to increase the efficiency and equity of the tax system by eliminating the plethora of tax exemptions or subsidies that create distortions. Its major policies include replacement of profit-linked exemptions with investment linked incentives, particularly for export units, and reduction in the tax rates to bring more people and companies under the tax net. Even the government wants a modern tax code in step with the needs of an economy, which is now amongst the largest in Asia. “In India, tax reforms have lagged behind growth. It is a big challenge for politicians and policymakers to keep the pace of reforms with growth,” Jeffrey Owens, Director of the OECD Centre for Tax Policy and Administration, said during a recent visit to New Delhi, adding, “Indian economy has transformed in the last two decades. Along with high growth, it has increasingly become the importer and exporter of capital. But tax regulations have largely remained the same. You have to change with the changing environment.” While the rationale behind the government’s proposals with respect to the DTC has been largely accepted as a right step in the right direction, a closer look into the provisions of the proposed tax code reveals India’s digression from a trust-based system of taxation to one which is based more on the element of distrust.

A case in point is provisions for penalty in the proposed DTC Bill. Currently, a penalty is levied on a person for concealing the particulars of his/her income and if he/she is somehow able to convince the government that he/she didn’t intend to evade tax; he/she is let off without any penalty. But, under the revised DTC Bill, the tax department will have more powers to force a penalty. In the new tax code, a person will be levied penalty even for under-reporting. However, the penalty for tax evasion will be reduced to 200% of the tax due from the existing 300%. While the introduction of these penalty provisions are said to be aimed at curbing the willful attempt to evade tax, the maximum penalty mooted will not be more than two times the amount of tax payable with respect to the amount of tax base underreported. However, imprisonment for a term, which may extend to seven years, along with a fine has been proposed for a person who willfully attempts (in any manner) to evade any liability with respect to tax, interest or penalty. The DTC further states that a person shall be liable to penalty if he/she has under reported the tax base for any financial year and a person shall be deemed to have willfully under reported the tax base if his assessed income exceeds the disclosed income. “This means a number of proposals in the DTC are antithetical to a trust based regime,” says Nishith Desai, a senior international tax and corporate lawyer. Desai further believes that the proposed General Anti-Avoidance Rules (GAAR) are likely to have a critical impact on both the sophisticated taxpayer and the common man. “GAAR provides wide discretionary powers to the Commissioner of Income Tax to tax impermissible avoidance arrangements lacking commercial substance. While some developed countries have introduced some form of a GAAR to curb tax evasion, the GAAR framework proposed in the draft DTC Bill is vague and does not have sufficient checks to check abuse of power. Unfettered discretion may result in harassment of the average taxpayer,” Desai tells B&E.

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