The proposed Direct Tax Code could be the most significant tax reform India has ever seen, but it seems that there are too many vested interests lined up against it.

Is the new Direct Tax Code Dead?

Different people have different ways of dealing with their tax-related problems. A week ago, a small plane crashed deliberately into a building in the city of Austin in Texas, USA. After the expected panic about terrorism had settled down, it turned out the building housed the offices of the Internal Revenue Service (IRS), the USA equivalent of our Income Tax Department and the pilot’s suicide note said that he was taking revenge for 30 years of harassment by the IRS. I doubt whether we’ll ever see anything like this in India, but the tax law that is the root of many of our frustrations seems increasingly immune to change.

The long-awaited simplification and rationalisation of India’s direct tax system is not as imminent as we’ve been led to believe, and that’s not good news. The Direct Tax Code (DTC) is in trouble. In the corridors of power in Delhi, ‘everyone’ knows this. The latest indication came a few days ago when a delegation from the Bharatiya Janata Party (BJP) met the finance minister to protest against some measures in the DTC. The FM’s response was, among other things, to assure them that the DTC is just a draft and there would be no implementation, at least not till 2011-12.

This isn’t anything different from what was supposed to be the case, but the whole tone in which the DTC is being talked about has changed. Earlier, the general view was that there may be minor problems with it, but it was a huge step in the right direction. Now, that has changed to the view that it may be a step forward in the right direction, but there are huge problems with it. If we know how things work in the government, the inevitable result will be a delay.

It is true that from a narrow savings and investments perspective, there are certain problems with the DTC draft. Taxation of long-term capital gains tax, the elimination of ELSS exemptions will be hard to swallow. Moreover, the switch to EET taxation will hit retirement savings hard. The idea of paying tax on withdrawing Provident Fund (PF) money is not easy to accept.

The real benefit of the new code comes in the simplification of the law. The tax code document is readable and understandable, and more importantly, one can instantly appreciate the logic of everything that it contains. One may or may not agree with everything in it, but at least there is a clear thread of systematic thought running through the draft DTC. While the fiscal gap, stimulus withdrawal and inflation is taking up all the pre-Budget mindshare, the tax code could end up being put in cold storage.

-- Dhirendra Kumar