Addressing the second meeting of the parliamentary consultative committee attached to his ministry, Mr. Mukherjee said that since the issue of direct taxes impinged on the lives of millions of individuals directly, the suggestions and concerns raised by committee members during the previous meeting was of great importance in fine-tuning a taxation policy regime to meet the aspirations and expectations of the people, the younger generation and the globalised corporate sector.

They included Minimum Alternate Tax (MAT) on gross assets; provisions relating to taxation of foreign companies, residential status of foreign companies - their control and management; General Anti-Avoidance Rule (GAAR); taxation of charitable organisations; shift from EEE (exempt-exempt-exempt) to EET (exempt-exempt-tax) method of taxation of savings; capital gains taxation; taxation in the case of salaried class employees; taxation of income from house property and deduction of interest on housing loans.

The DTC, he explained, was aimed at giving a competitive edge to the country while dealing with international taxation issues. For instance, the code contains a provision for 'advance pricing agreement' (APA), a mechanism which has been proposed to bring about stability. DTC should not be compared with the Income-Tax Act, 1961 as the attempt was to move forward on the basis of a broad tax base, moderate tax rates, effective implementation strategy and better delivery of services to tax payers.

The Finance Ministry has also scheduled a meeting with Prime Minister Manmohan Singh to seek his guidance on the final draft of the Direct Tax Code on issues on which a political call is required. These are: the exempt-exempt-tax regime for retirement savings, the 2 per cent minimum alternate tax on gross tax assets of companies and the proposal to tax charitable organisations at 15 per cent. Hectic lobbying by interest groups is still on for dilution or altogether elimination of these proposals from the final draft.

According to officials, the effectiveness of the Code would be in its implementation as a full package. “if India Inc. and people want lower taxes overall, they should be willing to live without exemptions. The Code cannot be implemented in a piecemeal fashion since any distortions would lead to a falling apart of the entire structure,” it is said. The other option was to continue with the business-as-usual approach. “We have been following a gradualist approach towards tax reforms over the last 10 years. The Code presents an opportunity to leap forward and clear up the regime,” an official said.

This code when it comes into force is not likely to yield for the government more revenue to promote economic growth, let alone mass welfare. Its basic objective, it seems, is to further moderate the tax liability of business corporations and the wealthy in our society of mass poverty in the name of promoting voluntary and better compliance in the payment of taxes by individuals and business corporations.

The draft of the new tax code which was released for public consideration proposes that instead of 30 per cent of the profits and incomes, the tax liability would be brought down to 25 per cent for the top segment of wealthy individuals with income of 30 lakhs and above annually. The tax on profits of the business corporations in India are bound also to derive sizeable gain from tax concession. India is already among the least taxed counties in the world. It is, however, expected that tax relief will not reduce revenue of the Government. The hope is that there will be improvement in compliance in tax payment because it is moderate.

It is also proposed to withdraw current exemptions for some industries from taxation for their promotion in the initial period of their launching. But tax on income of exporters and traders in stocks and shares may also be moderated. These measures are likely to attract support from business interests who exercise clout on official policy making and administrative set-up. The new tax code, after all, is inspired by a surge in the confidence in the UPA - II government to carry forward its economic reform programme after its victory in the elections to Parliament and easing of political constraints from the left parties and other parties in opposition.

The guiding fiscal wisdom since early eighties in India has been that “reasonable rates” of taxes, especially direct taxes on income and wealth, would result not only in better compliance in the realisation of taxes but also in broadening their social base by increasing production and productivity in areas which generate new income from employment, that is modern industry in the private sector. Expenditure of the Government and consumerist cravings of the upper and middle classes will help tax compliance.

The lobbies of urban big business and landed gentry, have already succeeded remarkably in turning the fiscal regime in their favour by way of across-the-board cuts in income, wealth and corporate taxes. India is now among a few capitalist countries where estate duty too has been abolished. The principal of tax exemption has been extended to incomes from what are called sun rise industries and export incomes as well. Curiously, however, the urban business interests and their more outspoken representatives have begun suddenly to revive interest in agricultural income tax. But a meaningful approach to the question of equitable taxation of all incomes and wealth well above the per capita income level, which will still leave 90 per cent of population out of the direct tax, has been side-tracked.

Bringing into the direct tax net the “presumed” incomes of the self-employed and the traders is certainly a valid proposition but a timid start had been made in this direction. Tax system, especially direct tax on income and wealth, is so much distorted by incentives and exemptions that what are only apparently high rates of taxation which are in fact quite low rates as against notional 30 per cent in the case of income tax actually turned to be less than 20 per cent.

The fiscal policy adjustments since the mid-eighties were supposed to provide incentives for what is euphemistically called a viable class of individuals (as well as corporations) to work more and earn more and in the process not only to consume more but also save and invest more. This was in a marked contrast to the fiscal policy which sought, when development planning was attempted to be kept in place, not only to promote saving and investment rates but also quality and equity thrust.

Earlier, the class of people in Indian society which constitutes a thin crust of affluence at the top, and has money to save, invest, produce and consume, was also the one in a position to contribute a fair share of its income and wealth for meeting the expenditure of the state on administrative as well as developmental. A progressive structure of direct taxes has to be created; even indirect taxes too should be so designed that their incidence should fall heavily on items of upper class consumption and slightly less so on items of middle class consumption, with only items of the most essential mass consumption left out of the tax net. Another relevant norm should be distribution of incomes in India for a fair and just society. The concept of relatively well-off segments able to pay taxes might cover many who would not be regarded as rich by standards in the developed societies from which bulk of revenue has always been raised : It should be socially more broadbased. (IPA Service)