The Hindu Business Line : Unconventional aspects of DTC

On the pretext of simplifying and reducing the size of the present legislation, the authors of the Code have covertly ushered in many provisions that are unreasonable.

T. N. Pandey

No progress is possible on being static. As is said, change is the law of nature. But change without any aims and objectives becomes counterproductive, and many changes proposed in the new Direct Taxes Code are, prima facie, so.

Definition clause

The usual legislative practice is to give the section containing the definitions in the beginning of a legislation — generally in Section 2.

This practice has been in vogue since long and has been followed in the I-T Act, 1961, its predecessor, the I-T Act, 1922, in the Wealth Tax Act and in many other enactments such as the IPC, the Indian Partnership Act, the Companies Act, the RTI Act and even in the Constitution of India.

This is with a purpose. That is, before a person traverses an Act, he should first become familiar with the words and phrases used in it. Disregarding the past healthy precedents and ignoring the objective of giving the definition section in the beginning of the Code, the definition clause, namely, 284, has been given at the end without mentioning any rationale for doing so.

This, apparently, is because the definition clause in the Code is unduly large (with 318 sub-clauses) and it would have looked odd and clumsy to start an enactment with such large number of definitions, with the idea of giving the Code a simple and sleek look, unmatched by any other enactment in the country.

Haig-Simmons concept

The second unusual feature of the Code is adherence to the Haig-Simmons concept of comprehensive income-tax base, in general, including in it all accruals and receipts of revenue and capital nature unless otherwise specified.

World over, the difference in income and capital receipts is well recognised (and has been so in India also) and the concept that income is ‘what comes in’, was rejected long back.

The qualitative aspects of accrual/receipts have become important and, hence, to equate revenue and capital receipts is not only archaic but not in tune with the present trends in taxation. The Code, thus, introduces a practice, which has long been disapproved and would subject taxpayers to underserved hardship.

Company residence

In the matter of residence of companies, the change proposed is that a company will be treated as resident in India if, at any time, in the financial year, the control and management of its affairs is situated even partly in India, that is, it need not be wholly situated in India as at present. This is a departure from the present practice without any valid ground — administrative convenience could perhaps be a reason. This implies that a foreign company will become liable to tax in India in respect of its foreign incomes also even if it holds one board meeting in India. This would be a departure from the past practice and would be a big disincentive for foreign enterprises to do business in India.

Bringing depreciation rates as a part of the Code, in the form of Fifteenth Schedule, may be in accordance with the practice followed in the case of the Companies Act, but it would take away the flexibility currently available.

Only a few months back, in January 2009, the depreciation schedule was amended to provide depreciation for automobiles purchased during the period January 1 to March 31, 2009 (later extended up to September 30, 2009) at 5 per cent to give boost to the industry. After the Code, an Ordinance or an amendment would be necessary for such relief.

Substantive provisions, imposing tax, are and have been in the main body of the taxing statute. The Code proposes to put these in the schedules. This is not only unusual, but an artificial way of showing that the size of the direct taxes legislation has been trimmed and simplified.

Receipts, which have been held to be exempt from tax since years, are proposed to be taxed unless they are placed at the disposal of a government regulatory authority for long. The instances are VRS receipts, gratuity, amounts received on commutation of pension amounts, payments for commuted leave, etc., in the case of employees. The proposals are not only unusual but unreasonable, arbitrary and confiscatory.

Maintenance expenses

Another instance of arbitrary decision-making is reduction in the amount of deduction towards maintenance and repairs of house property from the present 30 per cent to 20 per cent in the days of present high costs of construction material.

There are many more such decisions, but obviously space is a constraint. In the pretext of simplifying and reducing the size of the present legislation, the authors of the Code have covertly ushered in many provisions in the Code which are apparently unconventional, unreasonable and hard-hitting to the taxpayers. Hence, such provisions need to be reviewed and removed/amended.

(The author is a former chairman of CBDT.)