Discussion Paper
on
Direct Taxes Code Bill, 2009
Chapter I
Introduction
1.1 The Income-tax Act was passed in 1961 and has been amended every year through the Finance Acts. The Act deals with income-tax. Dividend distribution tax was included in the Act by inserting Chapter XII-D with effect from June 1, 1997. Fringe benefit tax was included in the Act by inserting Chapter XII-H with effect from April 1, 2006. Wealth-tax is administered through the Wealth-tax Act, 1957.
1.2 Tax administrators, chartered accountants and taxpayers have raised concerns about the complex structure of the Income-tax Act. In particular, the numerous amendments have rendered the Act incomprehensible to the average taxpayer. Besides, there have been frequent policy changes due to changing economic environment, complexity in the market, increasing sophistication of commerce, development of information technology and attempts to minimize tax avoidance. The problem has been further compounded by a multitude of judgements (very often, conflicting) rendered by the courts at different levels.
1.3 Any complex tax legislation increases the cost of compliance as well as administration. Given that the cost of compliance is essentially regressive in nature, this undermines the equity of the tax system. Similarly, high cost of administration is wasteful.
1.4 Over the last twenty five years, the marginal tax rates have been steadily lowered and the rate structure rationalized to reflect the best international practices. Any further rationalization of the tax rates may not be feasible without corresponding increase in the tax base. Broadening of the base is important to enhance revenue productivity of the tax system and to improve its horizontal equity.
1.5 The strategy for broadening the base essentially comprises of three elements. The first is to minimize exemptions. For many decades, the tax base has been eroded through a steadily escalating range of exemptions. The removal of these exemptions will have three consequences : (i) it will result in a higher tax-GDP ratio ; (ii) it will enhance GDP growth, since tax exemptions and deductions distort allocative efficiency ; and (iii) it will improve equity (both horizontal and vertical), reduce compliance costs, lower administrative burdens, and discourage corruption. The second element of the strategy relates to the problem of ambiguity in the law which facilitates tax avoidance. Therefore, it is necessary to undertake a periodic exercise of rewriting the Tax Code in the light of new trends in interpretation by the judiciary, aggressive tax planning by taxpayers, and new opportunities for reducing compliance cost through massive induction of technology and public private partnership. The third element of the strategy relates to checking of erosion of the tax base through tax evasion.
1.6 The Direct Taxes Code (hereafter referred to as the "Code") is designed to reflect this strategy.
1.7 The Code is not an attempt to amend the Income-tax Act, 1961 ; nor is it an attempt to "improve" upon the present Act. In drafting the Code, the Central Board of Direct Taxes (the Board) has, to the extent possible, started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. Tax policies that would promote growth with equity have been reflected in the new provisions. Hence, while reading the Code, it would be advisable to do so without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Income-tax Act, 1961.
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