Direct taxes Code: need for greater Reflection
M Govinda Rao, R Kavita Rao
A new tax code that overhauls the complexities that have emerged in the Income Tax Act of 1961 has been long overdue. The draft Direct Taxes Code put out by the Finance Ministry for discussion and comment does just that in a number of areas. At the same time questions must be posed of the sweeping reduction in rates and restructuring of slabs in income tax, which are likely to rob the exchequer of a significant amount of income. Questions must also be asked of the proposed taxation of not-for-profit organisations.
M Govinda Rao (firstname.lastname@example.org) and R Kavita Rao (email@example.com) are with the National Institute of Public Finance and Policy. Economic & Political Weekly EPW
n the 2009-10 budget speech, Union Finance Minister Pranab Mukherjee promised to build “…a trust based simple, neutral tax system with almost no exemptions and low rates designed to promote voluntary compliance” and towards that end, committed to unveil a Draft Code of Direct Taxes for public discussion. The purpose of the new code is to simplify the enormous complexities in direct taxes since the enactment of Income Tax Act, 1961. As stated by the finance minister, the objective of the new code is, “…to improve the efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base”. In fact, periodic redrafting of the code is necessary to update the tax system to conform to emerging economic realities and clean up the complexities it acquires over the years. Income taxes – both individual and corporate – have indeed become extremely complex over the years. The plethora of exemptions and tax preferences to fulfil a variety of objectives has not only eroded the base, it has also complicated the tax system with unintended consequences on resource allocation. The complexities in the Income Tax Act have only...