The Hindu Business Line : Invest time in framing the new tax code

The expert group is said to have combined the existing direct taxes into one code known as the Direct Tax Code Bill, 2006. It seeks to ensure that the language of the law is simple and complicated legalese avoided.

Since becoming Finance Minister in the UPA Government, Mr P. Chidambaram, has been talking about a "brand new" income-tax law for the country. Making changes to the income-tax law seems to be a passion with him.

Even in his first stint as Finance Minister in 1996-97, he got a new I-T Act drafted in just a few months. This piece of legislation was so deficient that it has today become a part of the I-T Department's archives.

Now, the emphasis again seems to be on replacing the existing I-T Act with a new code. Mr Chidambaram has talked a number of times in the past two years fixing time limits, which have not materialised.

Again, according to a report (Business Line, September 9), the Finance Minister has announced that a brand new simplified I-T law would be operative from April 1, 2008.

Work in this direction is said to have been done by an expert group in the CBDT, which has submitted its report to the Finance Minister.

The expert group is said to have combined all the existing direct taxes, such as income-tax, wealth-tax and fringe benefit tax (FBT) into one code known as the Direct Tax Code Bill, 2006.

It seeks to ensure that the language of the law is simple and complicated legalese is done away with. Moreover, all provisos and explanations in the existing law are to be done away with and, wherever necessary, suitably incorporated in the main provision.

Not a right approach

It is, however, unfortunate that public and taxpayers' participation has not been solicited in the exercise.

Hopefully, the Government will publish an approach paper. But that is not the right way of getting comments, especially when structural changes such as getting rid of provisos and explanations are contemplated. The approach paper route was unsuccessful in the case of changes to the Companies Act, 1956. Obviously, this method will not work for income-tax law either.

The part-time in-house panel, it needs to be said, would not have had the time that an exercise of drafting an acceptable-to-all code requires. Prima facie, on some issues, the interests of taxpayers may have been overlooked. And considering the tendency to stick to what has been decided, making further changes may not be entertained.

A common legislation for both income and wealth taxes (the FBT is already a part of the I-T Act) may seem to be conceptually sound, but is not practical.

First, the wealth tax law is an insignificant at present, generating a measly revenue of Rs 100-110 crore a year. And, if in the future, the gift tax or the estate duty are sought to be levied, the newly drafted legislation would need substantial changes, destroying the concept of stability in tax laws.

If any lesson is to be drawn from the 1996-97 experience, it is that fundamental changes to tax laws must not be made hurriedly.

The Canadian experience

In this context, reference to appointment of the Carter Commission in Canada in 1962 for suggesting major reforms in the tax system can provide an idea about the realistic approach in fixing time schedules.

The Canadian reform passed through three major stages. In the first, the Canadian tax system was studied by a group of tax and public finance specialists resulting in a six-volume report with 27 supporting staff studies, which was presented to Parliament in February 1967. The report provided a blueprint for tax revisions to fundamentally alter the existing system, 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 paper, while not so sweeping as the Carter Report, made important changes in the distribution of the income-tax burdens.

The final stage began with the Parliamentary debate on the While Paper and ended with the enactment of Bill C-259 at the end of 1971.

The exercise, which began in 1962, ended with the passage of the Tax Reforms Bill in 1971. Obviously, tax reforms cannot be done in few months. Proper planning is a must.

Since structural changes are proposed concerning direct taxes, it would have been appropriate to get this exercise done by a full-time Commission, headed by a Supreme Court judge (a la Wanchoo Committee) with members from different disciplines.

However, this having not been done, there should be no hurrying up of the process of finalisation of the new tax code and there should be adequate debate and discussions.

(The author is a former chairman of CBDT.)