The new direct taxes code must not die

The new direct taxes code must not die

The task force to rewrite the over five-and-a-half-decade-old income-tax Act must submit its report swiftly to enable the government to push for reforms in direct taxes ahead of the Lok Sabha polls. The drafting must be simple and clear, given that investors need clarity and certainty in tax laws to avoid disputes. The code should keep rates low and dump irrational incentives. A radical restructuring to bring corporate tax rate below 20% makes sense to attract investments and boost growth. The tax liability for companies with a turnover of over Rs. 250 crore is about 35% now. But the effective tax rate is 24% due to exemptions. Exemptions must end. Sensibly, many corporate tax exemptions have already been grandfathered. The global trend is towards lowering corporate tax rates.

A steep cut in the corporate tax rate will dent revenues. But proper implementation of the goods and services tax should offer up a bounty. The levy, with its multiple audit trails, will create a broader base for direct taxes. Income-tax collections will increase when the level of prosperity rises, as also when tax rates become less painful. Instead of raising the initial threshold for paying income tax, the attempt should be to lower rates and widen the income bands for each rate.

India also needs to move to an exempt-exempt-tax treatment for savings: no savings asset would be taxed, but income from the asset would be charged to tax. The changes in tax treatment should be prospective, leaving existing savings schemes grandfathered. Eventually, dividends should also be taxed in the hands of the investor at the rate applicable to the investor’s income bracket. The new code should be put in the public domain, and the government can introduce a Bill in the Winter session of Parliament.