M A I N   N E W S

New tax code unveiled, to replace I-T Act
Bhagyashree Pande
Tribune News Service

New Delhi, August 12
Making the process of paying taxes simpler for the common man has always been on top of the UPA’s agenda. This was amply demonstrated today with the government initiating radical tax reforms by releasing the direct tax draft code that aims to moderate tax rates and at the same time tries to make it easier for a layman to understand and calculate his tax liability.

n 10% tax on Rs 10 lakh income proposed n Security transaction tax to go n Wealth tax cap to be hiked to Rs 50 cr n Greater incentives for savings

The reform of the tax regime introduced in 1961 is based on the objective of having a tax system that is simpler, fairer, and easy to administer. The specific objectives of the measures are to improve the responsiveness of the tax system, that is, to enhance the automaticity in the increase in tax revenues with increases in economic activity; improve tax administration by simplifying the tax system; and, lastly, promote tax compliance objective as to reduce the scope for disputes and minimize litigation.

The new code proposes to exempt the general taxpayer from paying income tax if his income is Rs 160,000 in a year. The tax liability will be 10 per cent for income up to Rs 10 lakh, 20 per cent beyond Rs 25 lakh and 30 per cent beyond Rs 25 lakh.

“We expect to have better compliance and better collection of taxes and want to promote stability”, said Finance Minister Pranab Mukherjee while introducing the new tax code, which will be up for discussion before the bill being introduced in Parliament in the winter session to be enacted into law.

The new code proposes abolition of the controversial securities transaction tax and instead suggests reintroduction of tax on long-term capital gains on securities trading.

Among the highlights of the reforms are proposals for the common man and investors. These include uniform tax rates; hike in tax deduction limit on savings to Rs 3 lakh; change in income tax slabs; and a proposal for highest tax rate of 30% for individuals to be applicable for income over Rs 25 lakh.

Other major reforms proposed include abolition of security transaction tax; effective corporate tax rate at 25%; scrapping distinction between short and long term capital gains; business losses to be carried forward indefinitely; no tax deduction on interest payable on any government security; moving the base year for calculation of capital gains tax to April 2000; wealth tax liability to be discharged by payment of prepaid taxes; and income from certain transfers not to be treated as capital gains.

Among the new tax code’s proposals for businesses are rationalization of taxes for all nonprofit organizations; annual disclosure of profits of nonlife insurance businesses; government may enter overseas agreements for double taxation avoidance; and no tax deduction on interest payable to banking firms and insurers.

All direct taxes have been brought under a single code and compliance procedures unified. This will eventually pave the way for a single unified taxpayer reporting system.

With the economy’s expansion the number of taxpayers can be expected to go up significantly. The bulk of these taxpayers will be small paying moderate amounts of tax. Therefore, it is necessary to keep the cost of compliance low by facilitating voluntary compliance by them.

This is sought to be achieved by using simple language in drafting so as to convey, with clarity, the intent, scope and amplitude of the provision of law. Each subsection is a short sentence intended to convey only one point. All directions and mandates, to the extent possible, have been conveyed in active voice.

Similarly, provisos and explanations have been eliminated since they are incomprehensible to nonexperts. The various conditions embedded in a provision have also been nested. More importantly, keeping in view the fact that a tax law is essentially a commercial law, extensive use of formulae and tables has been made.

Further, an attempt has been made wherever possible to avoid ambiguity in the provisions that invariably give rise to rival interpretations. The objective is that the tax administrator and the taxpayer are ad idem on the provisions of the law and the assessment results in a finality to the tax liability of the taxpayer.

To further this objective, power has also been delegated to the central government/board to avoid protracted litigation on procedural issues.

For most taxpayers, particularly in the small and marginal category, the tax law is what is reflected in the form. Therefore, the A-10 structure of the tax law has been designed so that it is capable of being logically reproduced in a form.

In order to enable a better understanding of tax legislation, provisions relating to definitions, incentives, procedure and tax rates have been consolidated. Further, the various provisions have also been rearranged to make it consistent with the general scheme of the Act.

Traditionally the taxing statute has also been used as a regulatory tool. However, with regulatory authorities being established in various sectors of the economy, the regulatory function of the taxing statute has been withdrawn. This has significantly contributed to the simplification exercise.