As a broad principle, the government’s decision to set up a panel to review the Income Tax Act, 1961, is unexceptionable. The current statute is unwieldy, and multiple court rulings over the past five decades have made Indian tax law confusing and opaque. In any case, direct taxes do need a dose of reform to bring them in line with current needs and international best practices. This could include incorporating the latest provisions of base erosion profit shifting (BEPS) and clarity on taxation of new types of business models and digital transactions. In terms of current realities, however, the government would have done better to have waited a while before venturing into such an exercise. The committee is expected to submit its report to the government within six months. Since the recommendations will go through close scrutiny by all stakeholders, it is unlikely that the new Direct Tax Code Bill can take final shape before 2019, which is an election year. This means the next government will have to take a call on piloting the Bill, leading many to question the timing of the constitution of the committee.
Then there is the issue of whether there was a need for the elaborate process of constituting a panel to review direct taxes when a blueprint exists in the form of the earlier Direct Tax Code Bill introduced by the United Progressive Alliance (UPA) government. That Bill, introduced in 2010, lapsed in 2014 and the incoming National Democratic Alliance decided not to reintroduce the Bill in 2015. Though the UPA diluted several of those recommendations – notably in terms of ignoring the proposals to reduce exemptions, and the added complication of multiple cesses – these could well be resurrected and enhanced without a duplication of effort. Several key changes suggested in the earlier code have been incorporated the Income Tax Act already. For instance, corporate taxes were reduced to 25 per cent for enterprises with turnover of up to Rs 50 crore, the General Anti-Avoidance Rules and Place of Effective Management regimes introduced and rules simplified for indirect share transfers. The earlier Bill advocated removal of profit-linked deductions, which has already been announced in the Income Tax Act. It is worth noting that the Central Board of Direct Taxes member who will be the convenor of the new panel was responsible for drafting the earlier code.
Further steady reform on these lines could have gone a long way towards signalling the government’s buy-in on tax reform and would be, given the current circumstances, preferable to the disruptive signals from a big-bang exercise. Indeed, much more than rates and rules, the critical demand from trade and industry is for a sea change in the nature of the tax administration, from being enforcement-oriented to focusing on simplicity and clarity. There is surely something amiss when the number of tax assessees remains minuscule compared to the potential. It would have been more helpful if the focus were on more reasonable and fair administration of tax laws to address the concerns of uncertainties and needless tax litigation, rather than going through another elaborate exercise.