Reworking direct tax laws is not a bad idea given that all indirect taxes have been consolidated under goods and services tax (GST). And setting up a seven-member panel headed by Arbind Modi might have been the first step towards reforming the Income Tax Act of 1961.
Only, one wonders how the new exercise being undertaken by the Modi government is different from the Direct Tax Code (DTC) drafted by UPA regime way back in 2009, which, incidentally, was consigned to dustbin later. Interestingly enough, Arbind Modi was also involved in the formulation of DTC based on recommendations of the Vijay Kelkar Committee. Kelkar himself had taken a lot of inputs from the reforms suggested by the taxation guru, late Raja Chellaiah.
Pranab Mukherjee and Palaniappan Chidambaram as finance ministers had overseen the drafting, changes and final DTC. Parliamentary standing committee on finance had also vetted the DTC before it was finally junked in 2010 and the pending bill lapsed when Lok Sabha completed its term.
Unless the government is ready to come up with sweeping measures in direct taxes, there’s no point in attempting to rework taxes. For instance, the policy advocacy group, Artha Kranti has famously recommended complete abolition of personal income tax and keeping corporate taxes at minimum, saying it could usher in an economic revolution. If the government is not willing to think out of the box, there’s no reason why a new panel should have been set up in the first place. Even if there’s some room for a fresh exercise, then the DTC drafted eight years ago must become the starting point. The new panel should prioritise doing away with finance minister’s discretionary powers to provide exemptions, concessions or lower rates to several product categories.
Perhaps, finance minister Arun Jaitley could work on reducing the complexity of taxes levied, computation and limiting the scope for loose interpretation of these provisions. Cascading effect of direct taxes should be tackled upfront.
Tax laws must be precise and straight as against the 298 sections and 14 schedules in the current IT Act and 319 sections and 22 schedules drawn up under the junked DTC.
Reducing transaction costs and compliance burden of taxpayers could be one area that the Arbind Modi panel should focus its energies on. Removing ambiguity and dealing with tax evasion and avoidance are two key areas where direct taxes reforms could progress.
Rule based direct taxation regime must be rolled out like GST for both individuals and businesses. Procedures for filing tax returns by corporates and individuals could still be simplified further. For instance, the government may retain the financial year as basis for filing returns as against complex ways of the prevalent assessment year and previous year as basis.
Proposed changes in laws may also settle tricky issues like taxing or exempting returns from insurance policies that have metamorphosed into investment vehicles. Similarly, taxing returns from mutual funds is yet another grey area that needs to be tackled.
Stocks transaction tax has become a big avenue for revenue mobilisation by centre after PChidambaram introduced this levy much against resistance from investors and market participants. Wealth tax needs be looked into as well. Collecting taxes under too many heads is not a very efficient way of mobilising revenues. Hence, Arbind Modi panel should look at the possibility of retaining just income tax and corporate tax with two slabs while doing away with all other minor heads and cesses. Keeping the rates at modest level was key to success of any future taxation framework.