Direct tax code baby steps forward

Direct tax code baby steps forward

Release the report for public scrutiny, comment.

The reported recommendations of the Akhilesh Ranjanled task force on the Direct Tax Code — to lower the corporate tax rate to 25% for domestic and foreign companies, widen the personal income-tax bands and remove surcharges — are welcome in their direction but fall short of a radical overhaul of the tax system. Corporate tax reduction has been in dribs and drabs, this year’s Budget reducing the rate for companies with a turnover of up to ₹400 crore to 25%. This could stunt corporate growth. Ideally, India should lower the corporate tax rate below 20%, in sync with global trends, to attract investment and boost growth. But irrational incentives must be dumped. Rightly, many corporate-tax exemptions have already been grandfathered.

The panel’s suggestion to scrap the dividend distribution tax (DDT) on companies and, instead, tax dividends in the hands of shareholders at the rate applicable to their income bracket makes eminent sense. This would be fairer and revenue-efficient. A tax regime that encourages startups is fine. Bold reform calls for scrapping the angel tax. Hopefully, the drafting of the code that will replace the archaic income-tax law would be simple and clear, to maximise certainty and minimise disputes. The report of the task force must be available for public comment at the earliest. The panel’s suggestion to have a negotiated settlement via mediation — between the taxpayer and the Central Board of Direct Taxes — is sensible. This is an efficient and effective way to resolve disputes without moving courts. In tandem, the existing dispute-resolution mechanism must also be strengthened.

Typically, listed companies want to maximise their value on the stock markets and do not achieve anything by concealing incomes. The goods and services tax, with its multiple audit trails, will create a broader base for direct taxes, when its data is mined, and help tap undisclosed incomes by individuals and businesses. Income-tax collections will increase when the level of prosperity rises, and when tax rates hurt less.