The dual taxation policy for corporate income - one for national companies and the other for foreign firms - is practised by governments in many countries across the world. Foreign firms are also often subjected to dividend repatriation tax. The present tax code has been particularly made foreign investor friendly.

The huge reduction of corporate tax on foreign companies is in keeping with the UPA government's psyche to drive the economic growth through increasing foreign investments in both the primary and secondary markets. The move is part of a big booster package for foreign investors being worked out now by the government to open up several hitherto restricted sectors to overseas companies, giving them larger equity control and greater penetration into economy. The tax code provides an additional opportunity for the government to make its intention clear before the existing as well as prospective foreign investors. The Reserve Bank of India (RBI), the finance ministry, the commerce ministry and the foreign investment promotion board (FIPB) are involved in expanding and further fine tuning the investment incentive package for overseas entities.

Beyond the tax largesse to foreign firms, there is little to cheer about in the direct tax code by either domestic companies or individual tax payers. The loss of government revenue on account of the abolition of surcharge on corporate tax has been doubly compensated by the introduction of dividend distribution tax at source, which will affect both companies and their ordinary shareholders. Both corporate promoters and shareholders will earn less, as a result. The only gainer is the government. Dividend distribution tax is often described as regressive and even illogical since distributable corporate income is post-tax surplus belonging to shareholders. Dividend can never be branded as corporate income. If any party is required to pay tax on dividends, it is shareholder. It is also an unfair way to tax all shareholders at a uniform rate, be their annual dividend income Rs. 100 or Rs. 100 crore, say for example. Not all ordinary shareholders of companies are lucky to earn dividends on their investment every year. The list of blue chip companies is limited. Any stock investment is risk linked. Investment friendly economies normally spare stockholders from payment of dividend tax.

The higher level of tax exemption at Rs. 2.50 lakh in the case of individual assessees prescribed in the direct tax code appears to be merely an eye wash. While it nearly denies the existing advantages of basic tax exemption enjoyed by pensioners, all senior citizens and women over others, the new exemption limit seems to discount the erosion of the value of money due to continuing high rate of inflation over the years and its direct impact on the gross income of an individual. At the moment, the maximum basic tax exemption limit for senior citizen, including women, is Rs. 2.40 lakh. The tax code raises the benefit level by a pittance, only Rs. 10,000 per annum.

For the government and organised sector employees, who are entitled to dearness allowance, higher DA may mean higher tax liability. This negates the very principle of awarding dearness allowance to employees to partly compensate for the loss of their real income in the face of high inflation. The code treats the concern of women and senior citizens rather shabbily and totally ignore the aspect of additional financial burden on medicine and treatment which the elderly population has to routinely suffer with advancing age. The tax code is rather harsh on this section of socially uncared people, who constitutes around 15-18 per cent of India's population. A good portion of them lives on income on personal savings alone. These savings accumulated over the years out of tax-paid income are generally invested in high security, low-yield bank fixed deposits, corporate deposits and LIC and post-office monthly income schemes.

Even for the fast expanding section of tax payers, comprising the middle income group, who are leading India's march to consumerism and trendy lifestyle, the mode of tax computation in several areas such as house rent allowance, leave travel allowance, insurance and savings related allowances, interest on housing loans and repayment of principal amount, etc., is left rather hazy and uncomfortable. However, corporate executives will get some small tax benefits on driver's salary (Rs. 900 per month for company-owned cars), children's education allowance (Rs. 100 per month and hostel allowance of Rs. 300 per month up to two children) and employer's entire contribution to superannuation fund.

Under the circumstances, the sudden urge on the part of the government to introduce a direct tax code remains a mystery. The existing system, which gradually brought down the direct tax level from its peak at 82 per cent until three decades ago to the current high at 40 per cent, has not performed badly. The downward direct tax levels had led to much better tax compliance by assessees, corporate or individual. Till the end of the 20th century, indirect tax by way of excise and customs duties and other levies was the highest revenue earner for the government. Today, the government's revenue from direct tax far exceeds that from indirect tax. Lower levels of indirect tax have made it happen. The government should continue with this experiment to give tax payers more to earn more. The revised three-tier tax slab for individuals under the new code is hardly attractive and also out of tune with the present day reality. The lowest slab should have been raised to at least Rs. 10 lakh.

The direct tax code is surprisingly silent on the circulation and expansion of black money and large unaccounted income being generated out of it. India's trillion-dollar-plus black economy is flourishing right under the nose of the government and its revenue intelligence and tax administration departments. Private healthcare industry, education, housing and real estate businesses are among the latest and the biggest black money rollers. There is hardly any serious effort on the part of the government to regulate these sectors of business and tap their hidden income to further increase the direct tax revenue. Even a small slice of this black income is capable of raising the government's tax revenue substantially and sharply reducing its fiscal deficit. The tax code lacks imagination and purpose at least in this area to tap such individual and corporate incomes and make them accountable for future. The large agricultural income, which represents almost a third of the economy, is, once again, kept out of bound for taxmen.(IPA Service)