Business Today
Budget 2012: Will Pranab implement DTC?

Taxpayers would benefit immensely if the finance minister links the tax liability to the rate of inflation, and reverts to the peak rate of 25 per cent for corporate and personal incomes as proposed in the first draft of Direct Tax Code.

Finance Minister Pranab Mukherjee

Finance Minister Pranab Mukherjee


K.R. Balasubramanyam

Will we step into the Direct Tax Code, or DTC, regime from fiscal 2012-13?
Unlikely, but earlier the DTC comes the better it will be for taxpayers. The proposed law is written in a simple and easy-to-understand language. In many places, it provides mathematical formulae to calculate one's taxable income. Many citizens may not see the need for a professional consultant.
Finance Minister Pranab Mukherjee will do a world of good to the taxpayers if he links an individual's tax liability to the rate of inflation, and reverts to the peak rate of 25 per cent for corporate and personal incomes (as proposed in the first DTC draft). Even without this, DTC is still a big leap forward.
The present law - the Income Tax Act, 1961 - is half a century old, and has had more than 4,000 amendments. Nevertheless, it remains robust and versatile. Tax administrators say the IT Act is administratively very convenient to govern such complex activity as taxing incomes. The Act was passed by the elected Parliament of the independent India.

The British, however, take the credit for giving India its first income tax laws. The pre-independent India had its first IT Act in 1860 for a period of five years. It was, however, revived in 1867 and, again abolished in 1873. The great famine of 1876-78 led to the revival of the direct taxation laws in 1877. The present IT Act is a progeny of the first comprehensive income tax law legislation the British Raj enacted in 1922.

It tackled many issues of critical importance such as the extra-territoriality of taxation: like, whether the Indian taxmen had the right to tax a transaction carried out outside India, but with a bearing on earnings/source of income in India. The 1961 Act retained most of the fundamental provisions of the British law.

Then, where did the two differ? In many places. For instance, the British law had taxed farm income. The Indian law, however, took it off its purview. The new regime also introduced the assessment year concept and a slew of administrative provisions.

In the 1970s, then Finance Minister C Subramaniam brought in a significant amendment. This enabled the tax regime move from residence-based taxation to source-based taxation, and levy taxes on passive incomes such as fee for technical services, royalties, interest, dividends etc. Until then, for example, if an Indian company paid for a service availed from an overseas company, it remained outside India's taxmen's reach.

The DTC is going to be a reality. But that is not enough. As a nation, Indian tax regime needs to progress into a realm of certainty. "Tax is a key component of the cost, and hence, a key driver for investment decision. Unless there is a visible tax certainty, investors tend to hold back their investments," says Vivek Mallya, Executive Director at the audit and consulting firm, PwC.

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