Sunday, September 5

Damp Squib

Months ago, the draft of a new Direct Taxes Code for India had drawn much public acclaim, including in these pages. This was not without reason. For starters, the existing system was visibly knocking the doors of obsolescence. Hence, any review intended to simplify its archaic tenets (thereby reducing repeated recourse to judicial interpretation) was hugely welcome. Next, a forward-looking document shorn of its predecessor's dotage could enable the taxman to better engage and deploy tools of New Age technologies. This promised a sea change in efficiency and effectiveness of Direct Taxes administration (on counts like evasion detection, internal security etc) making it a progressive legislation worthy of our budding economic superpower billing. Last and not least, the very idea of promoting larger debate prior to finalization bespoke intellectual honesty and inclusiveness rare in our policymaking experience. A thumbs-up for this wiki approach was much in line.

However, implicit in all these arguments (in fact providing them overall credence) was the gamechanging nature of actual changes proposed to the tax framework. If it were to fall prey to back-room intrigue and lobbying, as the more cynical amongst us foretold, it would be a real pity in face of path-breaking promise. Even as these fears lurked, the Revised Discussion paper one heard of a few months back, too sounded headed in a compromise-riddled direction. And sadly that is exactly what has finally come home to roost in the proposal formally introduced in the Parliament this week.

So how has the cheer of the finest's toast for Pranab da slipped to old wine-new bottle despair? Not merely for selfish reasons, my first disappointment remains the largely superficial personal taxation changes. In fact, the reams of newsprint dedicated to laud the 'extra income' (INR 24K at the upper end) through marginally tweaked tax slabs makes one wonder when our mainstream media will mature beyond homilies and cliché. (To avoid sounding like a stuck record, one must steer clear of media-bashing: though richly deserved, there is zero surprise in our Fourth Estate's centrist and arguably pro-Congress slant.) In any event, basic math of inflation on the ostensibly cast-in-stone slab values itself beats hollow the DTC's pithy positioning as windfall for the taxpayer!

Going beyond this, one must rue the potential in a truly simplified tax framework. With 6.5% of tax incidence sacrificed at the politically expedient altar of Exemptions, the Government had a clear shot at reducing cost and complexity. Moreover, removal of potentially distortionary criteria would have improved investment decision-making for aam aadmi and HNI alike. Equally, a move to EET could have meant a boost for long term Savings (PF withdrawal is an example) but has been belied. Perhaps most importantly though, the survival of Exemption regime has reduced the leeway to lower rates and punt on increased adherence, ultimately limiting the ability to fund the Government's ambitious developmental agenda.

The saving grace has been the refusal to tinker with Capital Gains Tax that would have created an artificial portfolio churn opportunity (en masse profitbooking in March, followed by resumed long in April, a cost minus any economic value add) that has been avoided. (In lighter vein, the DTC is also the government's first assertion of having achieved its gender equality goals. So the deduction differential allowed for woman taxpayers stands withdrawn, unless if merely saved for a subsequent budget to reinstate)!

Of the pieces of fine print, the other notable revision in the Bill vs its draft is the compromise on corporate taxation. A strong argument exists as to how the Government thus frittered a chance to overhaul capital allocation in our economy. The erstwhile proposal to predicate MAT on gross assets vs book profits represented a fundamental change in the much-misused play around lowering tax liability via investment led depreciation benefits. From usage as tool to 'manage' tax, investments could have come into their own and be evaluated for true CBA. Big Business lobby however (including relatively genuine voices from its capital intensive variety) has ensured we are left with Photoshop type interventions in form of lowered tax rates via elimination of cess, surcharge etc. If, as successive FMs had given us to understand, these were temporary inclusions in our tax regime, it hardly needed a large-scale DTC exercise to get rid of them. Again, there is no surety that some other flavour that suits the incumbent political mood will not 'force' the government of the day to resurrect these ostensibly stopgap devices.

All told, this residual pot of half measures still sets the Taxman back 1% of their INR 5.8 lakh Cr annual kitty, without any redeeming expectation of increased adherence. A solitary hope remains - with the suspense and end Feb Budget jitters gone, we could leverage the long term Tax structure come 2012. If only the redoubtable Mr Mukherjee had been inspired by the spectacular doomsday caper of the same name, the changes would be a bit more appreciable...


Anonymous said...

Another good one, Bhaskar! The issue itself doesn't concern me like you can guess but I love how reading your blog reminds me of those Ramjas Eco Soc debates :-) Keep going dude!