MAY 02, 2015

By TIOL Edit Team

THE Parliamentary Standing Committee (PSC) on Finance has done well to pitch for revival of direct tax code (DTC) proposal. It has rightly proposed a study for introduction of progressive tax structure for companies and a slew of other tax reforms.

In its report on Department of Revenue's (DoR's) demand for grants for 2015-16 presented to Lok Sabha on 24th April, PSC has not bought the Finance Ministry's contention that there is no great merit in going ahead with the Direct Tax Code, as it exists today, as most of the provisions of the DTC have already been included or are proposed to be included in the Income-Tax Act.

As put by PSC, "Since the Income-Tax Act, 1961 is considered a very cumbersome Statute, fraught with complexities and several ambiguities prone to capricious interpretations and avoidable litigation, the Committee desire that the Government should go ahead with the Direct Taxes Code with its good provisions and implement the same within a stipulated deadline along the lines of the GST regime."

Any avid reader of the report would realize the DTC bill's abandonment has occurred due to due to change in political executive at the Government and not due to change in professional attitude.

The realization would emerge from composite reading of the submission and re-submission made by Finance Ministry officials to PSC.

When asked When asked as to why the Direct Taxes Code (DTC) is being implemented in piecemeal, DOR Secretary told PSC: "When I said that they have been incorporated in the Income Tax Act, what I mean is that the substantive part, that is, the taxability part of DTC is already included. The major advantage of DTC was that it was in a simple language. The entire tax law was written in a very simple language and in a much simpler language. It had great advantage in that. Sir, the Government weighed the balance in favour of going in for a simpler tax law. That is on the one hand. If you go for a new tax law, it will again take years or may be a decade for the jurisprudence, for the case laws to get settled."

Finance Ministry has subtly tried to back-track from this disclosure in a subsequent written submission to PSC.

The Ministry claimed: "the stated policy of the Government, as mentioned by the Finance Minister in Budget Speech 2015, is that there is no great merit in going ahead with the Direct Tax Code as it exists today as most of the provisions of the DTC have already been included or are proposed to be included in the Income-tax Act and the jurisprudence under the Income-Tax Act is well evolved."

This alteration in stance clearly implies that the decision to jettison DTC has been arrived at by the political executive and not by the professionals working in the direct taxation stream. PSC should have quizzed the Government on these two varying perspectives on DTC within the Ministry.

In keeping with canons of good governance, the Modi Government should explain in detail the logic of abandoning DTC.

The Ministry should also commission a study on the pros and cons of introducing progressive tax structure for the corporates as aptly recommended by PSC. Progressive tax structure envisages higher taxation of entities that earn more. It thus facilitates vertical equity and perhaps improves tax compliance by the entities that have lesser income. Progressive taxation is already built in the tax slabs for personal income tax.

PSC says: "The Committee note that there is no proposal at present to introduce progressive tax structure for corporate in India. The Finance Bill, 2015 has proposed to continue with the existing policy of having a specific rate of tax for corporates along with firms and local authorities. The progressive tax structure reduces the tax incidence for the payee with a lower ability to pay, while effectively taxing those with a higher ability to pay."

The Committee deserves applaud for turning the heat on the Government for time-bound, integrated implementation of recommendations of Tax Administrative Reforms Commission (TARC) contained in its four reports.

The Finance Ministry at present has identified 27 recommendations from the first and second reports for early implementation. The recommendations incorporated in the third and fourth reports are currently being examined by Central Board of Direct Taxes.

The Ministry told PSC that "Since recommendations contained in all the four reports submitted by TARC have linkages with one another, approval of the competent authority will be obtained for implementation of the recommendations identified from all the four reports as soon as examination of the third and fourth report is completed and necessary action will be initiated accordingly immediately thereafter."

DOR should ideally prepare an action-taken-report on TARC and put in the public domain. The report should explain the rationale for accepting or rejecting different recommendations.

If DOR is sincerely interested in creating an taxpayer-friendly regime, then it must communicate adequately and timely on all issues.