The finance ministry has scheduled a meeting with Prime Minister Manmohan Singh on January 5 to seek his guidance on the final draft of the Direct Tax Code that will be finalised by the end of December. His views on the Code will be reflected in the tax proposals of Budget 2010-11.
A senior revenue department official told  that There are three issues on which a political call is required:-

  • the exempt-exempt- tax regime for retirement savings,
  • the 2 per cent minimum alternate tax on gross tax assets of companies
  • the proposal to tax charitable organisations at 15 per cent.”

Hectic lobbying by interest groups is still on for dilution or an altogether elimination of these proposals from the final draft.

The officials in the revenue department said finance minister Pranab Mukherjee is yet to make up his mind on these three issues. “His views are expected over the next few days,” the official said.

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,” an official, who did not wish to be quoted said.

The other option, the officials said, 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 clean up the regime,” another official said.

Of the nine areas of concern raised by stakeholders where Mukherjee had promised a review, the department has received the Finance Minister’s go-ahead on four. The proposals that will be retained as proposed in the Code are as follows:-

  • elimination of difference between short term and long term capital gains;
  • double taxation avoidance agreement,
  • General Anti-Avoidance Rule
  • test of residency and treaty override.

The most vocal opposition to the DTC is from India Inc that wants the new proposal on MAT to go. At present, MAT is levied based on the book value method. “But this is a key proposal. MAT on gross assets is expected to make good for the expected shortfall on account of the sharply lower overall tax rates,” the official said. The ministry’s grouse is though the statutory corporate tax rate is 33.99 per cent, companies pay only 22.24 per cent according to 2007-08 figures.

In Budget 2009-10, Mukherjee had highlighted that the revenue foregone due to corporate tax exemptions was Rs 68,914 crore in 2008-09 or 11.36 per cent of the total corporate tax collection. Though he reckons that exemptions are a bane, it will not be an easy call for the finance minister, the officials noted.

Similarly, the Code’s proposal to bring all savings schemes under an EET regime has met with stiff opposition. But revenue department officials argue that it would discourage employees from withdrawing all their moneys at the time of retirement. “They will be forced to invest in annuity schemes and this is particularly required in a country like ours where there is little or no social security mechanism and life expectancy will only increase in the coming years,” an official said.

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