Given the political climate, it was always obvious finance minister P Chidambaram?s Direct Taxes Code (DTC) was dead in the water, and would have to be introduced by the next government, in either its present form or in a new shape. But in the interest of time, perhaps it is a good idea to open up the DTC to public debate over the next few months so that, when the new government is in place, it can quickly move on the Bill. The current version of the DTC is already a diluted version of what Chidambaram had originally proposed several years ago. So, instead of really cleaning up the tax code completely, it retains many of the incentives for industry, except these have been explicitly linked to investments?as a result, there is no proposal now to dramatically lower the headline corporate tax rate to near the effective tax rate. Similarly, in the case of
personal income taxes, the original DTC had proposed to clean up various incentives given on savings and sought to bring in the top tax rate only at an income of R25 lakh. This made sense given the rampant tax evasion in middle-income groups, itself a function of the top rate kicking in far too quickly. This, however, was given up since the flavour of the day is, in fact, higher taxation on the better off.
According to Parathasarathi Shome, the finance minister?s advisor, the new DTC is still powerful enough to raise India?s tax-to-GDP ratio by 1-2 percentage points, in line with most proposals that have sought to rationalise the tax framework. This may or may not be true, but the best way to find out is to get all manner of opinion on the DTC. While this newspaper is not in favour of a DTC that retains a plethora of exemptions since that is what really makes tax evasion simpler, the fact that?going by Shome?s statement?the tax code has been
reduced by half is very encouraging.
