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New Direct Taxes Code: Comforting the comfortable! - Is it Income Tax's H1N1?

SEPTEMBER 02, 2009

By Subhashree Kishore

(H1N1 is a variant of the 1919 Spanish Influenza,and the present Direct Tax Code is a variant of the Income Tax Act of 1961. Both are curable but fatal if left untreated.)

The New Direct Tax Code has been hailed and hollered as per individual tastes. It claims to make the process simpler and intoxicate assessees into compliance.

Well, it begins earnestly enough by merging the assessment year and financial year concepts and removing the resident not ordinarily resident proviso. It seeks to tax non-profit (a much maligned term) organizations at 15%. It is sincere in promotion of economic activities and fuelling investment and growth by bringing down rate of corporate tax, doing away with STT and indefinite carry forward of losses. It is true to industry by relaxing the individual tax slabs so that people have  more purchasing power.

Amongst the bright lights and concentrated intellectual exercise of over three years to sweeten taxes, unfortunately at the end of the day, as usual, the individual tax payer has got a raw deal.

Typos

The simplest ‘technical’ error in the carefully drafted code is ‘turst’ an unexplained word which appears in Part D, Clause 101 (3).  It may however be overlooked considering that this section could hardly touch salaried classes as the threshold limit for wealth tax has been generously hiked to Rs. 50 Crores.

Renting ideas from Uncle Sam

The bursting of the realty bubble in the US led to a global depression-like (depression is after all a bad word) situation and hence every attempt has been made to deglamourize this sector.

Once the draft code becomes law, an assessee can no longer claim deduction in respect of housing loan interest, should he choose to live in the house that he built. Repayment of housing loan also does not qualify for deduction under the investment bracket. So he should choose to live as a tenant rather than go through the arduous process of building a house, committing himself to EMIs and still end up paying more tax.

Of course, the tax slabs will be enhanced and income upto Rs 10 lakhs attracts only 10% as per the new Code. But factor in the taxable perquisites, denial of exemption in respect of HRA, medical reimbursement and EET regime - his gains are negligible. Again the Code is not clear on treatment of capital gains on sale of residential property. One can only claim residual exemption by investing in the Capital Gains Deposit Scheme.

Firing at elderly with 'Cannon' of Equity

In pursuit of “all being equal before law”, everyone has been placed at equal disadvantage. Retirement benefits have been skillfully deprived of any benefit in the new Code. All new payments into various Provident funds will be taxable on withdrawal. The only relief is if the same is used as a rollover - to buy annuity or invest in the same account or other account with the permitted intermediaries namely

(a) approved provident fund;

(b) approved superannuation fund;

(c) life insurer; and

(d) New Pension System Trust;

All other instruments like the NSCs, bank fixed deposits and equity-linked schemes have been closed out. So everyone, be from public or private sector, who plans for his life after superannuation has few options but to trust the New Pension Scheme or buy whole life policies which are exempt from tax on receipt of money at the end of contract period. In effect, though retirees may enjoy higher threshold limit, they can hardly bank on the money saved in working life to see them though the autumn.

The only way to enjoy your money seems to be to keep it as far from you as possible!

Children with new toys

Exempt-exempt-taxable (EET) was the long-time slogan of the finance ministers. It does have a stylish ring about it. It has no intrinsic merit so as take the pride of place in income tax law.

Withdrawal fails to satisfy the definition of income. The money has been saved from tax-paid or taxable income. It is not an additional income. One may agree with taxing appreciation in value or interest. But principal is not income. It would be better to classify the aggregated savings and withdrawals under wealth. Then most assesses would benefit under the Rs.50 crore umbrella. 

Let us be clear. Either something is exempt or taxable. We need not bring in temporal dimension and postpone the pain.

Regression Lines

It may be too much to expect taxes to have a human face while also enforcing compliance. But when it falls short on logic and certainty as well, we are forced to rethink it. The present draft has merely tinkered with, the long overdue phasing out of exemptions, and rates. It offers nothing new. We do not find any new direction or positive policy changes. Given that the new rates in fact lessen burden for the higher income bracket one wonders whether direct taxes are really progressive. Perhaps that is the change in policy - comforting the comfortable!

If the focus had been ‘aam aadmi’, we should have seen a radical change with concepts like different threshold limits based on number of dependents the South Korean way, joint filing of returns as in Mississippi or favoring savings by taxing interest and not withdrawals. But as it stands the individual is made more and more resilient, always bending without breaking and managing to stay afloat. The super rich who ‘mistakenly’ walk through green channels are anyway armed to teeth to protect themselves or pay their way out.

If the focus was growth and encouraging industry, we have again nothing to write home about. The easy things like purported increase of purchasing power and lowering taxes, altering the base for MAT have been proposed.

If the focus had been on clarity of rules and simplicity we should have been given something like the rules on MP’s Emoluments and Pension. It is a superbly drafted piece of legislation frequently updated and responsive to current needs! Instead more fodder for legal battles is being sought to be brought in by the Code.

We could do with a simple rule on donations. All the old ghosts of weighted deduction and different levels of charity have been maintained.

We don’t even have creditable imports from foreign countries like FBT or doing away with capital gains tax!

Going through the maze of “without prejudice to the generality of the provisions”, “notwithstanding”, “subject to the provisions of this Code” one is tempted to do a Bertie Wooster and say

“I am flum…what is the word I want Jeeves? … ox enter into it…”

And Jeeves would reply “Would Flummoxed be the word you are groping for sir?”

“Ah yes! Flummoxed. Also depressed, disappointed , frustrated….and..and..”

“Benumbed, bemused and bedazed”.


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