August 31, 2010

the direct tax code: mere tinkering with tax provisions

India will soon have a new tax law, one with fewer exemptions and lower tax rates. It is called the Direct Tax Code.

The Direct Tax Code in its present form brings in hardly any substantial reform to the Indian tax system as was expected.

With numerous exemptions and provisos, the Indian tax law has become highly convoluted and unfriendly, and also prone to tax evasion. It was expected that the Direct Tax Code would provide a tax-payer friendly, straight and simple tax regime. However, the Code, as placed in the form of a bill in parliament, goes hardly beyond what can be achieved during the annual budget exercise.

The draft Direct Tax Code will now be debated in parliament and will become a law, which will be implemented only from 2012. The government says, we have given time for tax lawyers to study it, the international economic scenario is not yet stable, etc but the fact is that the government was not itself ready to implement it from the next financial year. There may yet be some changes in the Code till it is finally enacted, but you can't expect much: we are talking about reform, not playing with some exemption here or some limit there. We have missed a big opportunity to reform the direct tax system. The positive sentiment created over the last many months in favour of reforms has been wasted.

Who is the gainer? Not the taxpayer or the government, but those interested in status quo.

Main features of the Code can be seen here

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