Fintotal News Analysis | What Ails the Current Income Tax Regulations?
What Ails the Current Income Tax Regulations?
, 14 Jan 2011

The Government is bringing in the New Direct Tax Code, to replace the existing Income Tax Regulations. Before we understand the changes, it is important to know the issues with the old system. We can then appreciate why an overhaul and a new system were needed, and not just a tinkering with rates and rules.

In India, besides providing revenue to the Government, Income Tax rules are made with two other objectives:

1. Taking more from the rich, to pay the poor (through welfare schemes) - The tax rates are zero for low income, and keep getting higher for higher income levels. This is called progressive taxation

2. Encouraging certain 'desirable' behaviour like insuring oneself and saving for the long term

While these two objectives are laudable in themselves, they have given rise to numerous clauses, sub-clauses and exemptions in the tax rules. On one hand, this has made rules complicated and difficult for a layman to understand. On the other, it has increased the possibilities of tax avoidance by adhering to the letter, but not spirit, of the law. Worse, many of these exemptions have been under pressure by lobby groups. The result is that every budget leads to a tinkering of numbers here and here. As a result, there is no coherent policy or direction our tax laws are having.

The main objective of the Direct Tax Code was to keep a low tax base to increase compliance. It was also to remove all exemptions and thus keep overall revenue to the Government roughly neutral.

However, since the Draft Bill was introduced for discussion in early 2010, it has been subject to various pressure groups. Corporate lobbies have opposed increase in Minimum Alternate Tax Rate. Pensioners have opposed taxing retirement schemes. Investment product providers have opposed their product being taken out of the tax exemption.

The Government is bringing in the New Direct Tax Code, to replace the existing Income Tax Regulations. Before we understand the changes, it is important to know the issues with the old system. We can then appreciate why an overhaul and a new system were needed, and not just a tinkering with rates and rules.

In India, besides providing revenue to the Government, Income Tax rules are made with two other objectives:

1. Taking more from the rich, to pay the poor (through welfare schemes) - The tax rates are zero for low income, and keep getting higher for higher income levels. This is called progressive taxation

2. Encouraging certain 'desirable' behaviour like insuring oneself and saving for the long term

While these two objectives are laudable in themselves, they have given rise to numerous clauses, sub-clauses and exemptions in the tax rules. On one hand, this has made rules complicated and difficult for a layman to understand. On the other, it has increased the possibilities of tax avoidance by adhering to the letter, but not spirit, of the law. Worse, many of these exemptions have been under pressure by lobby groups. The result is that every budget leads to a tinkering of numbers here and here. As a result, there is no coherent policy or direction our tax laws are having.

The main objective of the Direct Tax Code was to keep a low tax base to increase compliance. It was also to remove all exemptions and thus keep overall revenue to the Government roughly neutral.

However, since the Draft Bill was introduced for discussion in early 2010, it has been subject to various pressure groups. Corporate lobbies have opposed increase in Minimum Alternate Tax Rate. Pensioners have opposed taxing retirement schemes. Investment product providers have opposed their product being taken out of the tax exemption.

As a result, what we have is a much diluted version of the Code. We believe this is at best a good starting point. A lot more political will is needed to make the Income Tax rules genuinely efficient and streamlined.

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