Budget and the DTC

Great expectations were roused among assesses, auditors and advocates when the Direct Tax Code (DTC) was brought on the anvil in the place of the half a century old Income Tax Act, 1961. The then Finance Minister thought that the Code will herald a fiscal revolution and advised the public to ignore the old Act and read only the DTC.

The euphoria generated by the introduction of the DTC in Parliament can be attributed to the way the draft Code prepared the taxpayer for a certain degree of stability in tax rates and slabs. All rates of taxes were proposed to be prescribed in the Schedule to the Code itself obviating the need for an annual Finance Bill. The initial slab was fixed at 10 per cent of the income between Rs 1,60,000 and Rs 10,00,000, the next slab of 20 per cent on incomes up to Rs 25,00,000 and the final slab of 30 per cent on income above Rs 25 lakh for individuals.

For companies the rate was indicated at 25 per cent. These slabs were definitely liberal by any standard. It would have certainly led to loss of Revenue.

Slabs and Rates

The DTC is meant to come into effect from April 1, 2012. Finance Act, 2011 modified the slabs and revised the same as Rs 1,90,000 to Rs 5,00,000 (10 per cent), Rs 5 lakh to Rs 8 lakh 20 per cent and Rs 8 lakh and above 30 per cent. No announcement was made about the fate of the slabs and rates prescribed in the DTC and no assurance was given that they will prevail with effect from April 1, 2012.

Analysts were left to infer that Government was having second thoughts on the liberal slabs laid down in the DTC. Budget 2012 will be presented on February 29, 2012. It will tell us about the future of the DTC. But Mr Pranab Mukherjee can usher in the golden era for the taxpaying public.

He can achieve the object of laying down permanent slabs discarding the procedures followed hitherto and also discarding the method of the DTC. The most worrying concern of the taxpaying public in India today relates to the impact of inflation.

The Reserve Bank of India raised the bank rates 13 times. Inflation has not come down substantially. Consumer price inflation is around 8 per cent. The GDP deflator measures inflation in the domestic economy and the average inflation rate between 1969 and 2010 is indicated as 7.99 per cent.

Since the average rate of inflation is around 8 per cent to 9 per cent, it stands to reason that the tax slabs should be adjusted on a permanent basis to the rate of inflation in the economy. This is what Dr Manmohan Singh did with reference to taxation of capital gains. He introduced the concept of cost inflation index in 1992.

cost inflation index

Two decades have gone by and the system is working efficiently and effectively in the field of capital gains taxation. The present FM should take a leaf out of the then FM's book and introduce the cost inflation index for fixing the slabs. This will obviate the need for revising the slabs on an ad hoc basis.

The slabs will be automatically indexed without any room for arbitrariness. Nobody can complain on the ground that inflation is impeding their incomes. This one revolutionary piece of legislation will earn for Mr Pranab Mukherjee a permanent place in the fiscal history of India. He will also earn the gratitude of the taxpaying public in the 150{+t}{+h} year of the income tax legislation.

In the budget of 2011, the FM has gone beyond the DTC and conferred benefit on those with incomes below Rs 5 lakh. These persons need not file their returns of income. The newly introduced Section 139 (1C) refers to any class of cases to be notified for this purpose. This was not thought of by the framers of the DTC.

It released the bulk of the salaried taxpayers from the legal obligation to file tax returns. It reduced the work load of Senior Officers and enhanced their productivity.

The same way, the FM can travel beyond the contours of the DTC and rope in all peddlers in black money and in money laundering. Government has tabled the Prevention of Money Laundering (Amendment) Bill in 2011 in Parliament seeking to introduce the concept of a ‘corresponding law' to link the provisions of Indian law to those of other countries and to provide for transfer of proceeds of crime committed in any manner in India.

The Bill enlarges the definition of money laundering to include concealment, acquisition, possession and use of proceeds of crime as criminal activities and to remove the existing limit of Rs 5,00,000 in fine.

The question that arises is whether tax evasion will fall in the category of money laundering crimes. A clarificatory amendment in the Bill will obviate all doubts and send the fear of the taxman to those holding secret accounts in foreign banks.

(The author is a former Chief Commissioner of Income-Tax.)

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