The Hindu Business Line : Uneasy wait for new tax code

Ever since Mr P. Chidambaram became the Finance Minister of the first UPA Government, he made various announcements regarding what he described as a “brand new income-tax law” for the country. But this did not happen during his tenure as FM. Nevertheless, making changes in the income-tax law seemed to be a passion with him. Even in his first stint as FM, he got a new Income-Tax Act drafted in just a few months’ time. So deficient was it that nobody though t seriously about it and it is since a part of the I-T Department’s archives.

So it was refreshing when the present Finance Minister announced that the Direct Taxes Code with a Discussion Paper will be released for public discussion 45 days from July 6, 2009.

The new Code is said to have been prepared by an expert group in the CBDT. It is reported to have combined all existing direct taxes such as income-tax, wealth tax and fringe benefit tax (discontinued by the Finance Bill 2009) into a single “Direct Taxes Code”.

It seeks to ensure that the language is simple with no complicated legalese, and all the provisos and explanations in the existing law are eliminated and, wherever necessary, suitably incorporated in the main provision.

Discussions needed

However, so far public and taxpayers’ participation in these exercises has not been adequately solicited. As the Government is to issue a discussion paper, sufficient time should be given for discussion. The approach paper route for changes has been unsuccessful in the case of the Companies Act, 1956. Obviously, this method cannot be suitable for income-tax law if a similar methodology is thought of for the new tax code.

A combined code for income-tax and wealth tax may seem conceptually sound, but is problematic because, first, wealth-tax law is insignificant at present, generating merely Rs 150 crore a year; and, second, if there are moves in the future to tax gifts, expenditure or properties passing on death (estate duty) or restoration of FBT, then the newly drafted Code may need substantial changes, again making the concept of one common Code for all taxes complicated and cumbersome.

Fixing a time schedule

As for the time needed for such an exercise, one can get an idea from the appointment of the Carter Commission in Canada in 1962 for major tax reforms. It involved three major stages. First, the Canadian tax system was studied in detail by tax and public finance specialists resulting in a six-volume report with 27 supporting staff studies; this was presented to Parliament in February 1967.

The report provided a blueprint for tax revisions by systematically defining income according to the definition of Henry Simons. The second stage began with a national debate on the Carter Report and ended with the publication in 1969 of a White Paper containing the government’s proposals for tax legislation.

The White Paper made important changes in the distribution of the income-tax burdens. The final stage began with the Parliamentary debate on the White Paper and ended with the enactment of Bill C-259 at the end of 1971.

Though such a long period may not be possible or necessary for the new code, a hurried approach must be avoided.

Checklist

The Act should not be reduced (as in the case of the Companies Bill awaiting Parliament’s consideration) by shifting sections to Rules, as this would not simplify it in any way. Rather, it would pass on the legislative functions of Parliament to executives.

Care should be taken while numbering the sections to ensure that existing case laws, reports, CBDT’s circulars and notifications can be used without much dislocation.

(The author is a former Chairman of CBDT.)