An exercise in futility

Instead of replicating the old Act, we should focus on executing the existing laws.

Arvind P. Datar        Print Edition: October 2010

The Direct Taxes Code (DTC), 2010, was introduced in the Lok Sabha a few weeks ago. This Bill replaced the Direct Taxes Code Bill, 2009, which was intended to replace the existing Income Tax Act, 1961.

The 2009 Bill had shocked everyone except, perhaps, the team that had drafted it. Several provisions in this Bill were against the elementary principles of taxation. The 2010 replacement has removed some of the glaring discrepancies, but one essential question remains unanswered: Why do we need a new DTC that substantially replicates the old Act?

In his statement on 27 August 2010, the Finance Minister explained that the 1961 Act was amended no less than 34 times, resulting in "complexity in tax laws", and the inability on the part of the average taxpayer to comprehend it.

The new tax code is being brought in with the objective of revising, consolidating and simplifying the language and structure of direct tax laws.

However, a simple comparison of the 2010 code and the 1961 Act shows that there will be no substantial structural change (see Act Vs Code). A plain reading of the new DTC shows that it does not result in either revision, consolidation or simplification of the language and structure of the direct tax laws.

Merely replacing 'salary' with 'employment' and adding expressions like 'tax base' is not simplification. The hard reality is that the new DTC is as complex as the 1961 Act.

A few new provisions

The new Bill has attracted a lot of praise for lowering tax rates. But this can be done by any finance Act and we do not need to discard the old law just to reduce or streamline the rates of tax. Undoubtedly, there are a few new provisions in the 2010 code, but these could have been easily inserted in the old Act.

"There is no purpose in having a new direct tax code whose shelf life is going to be very limited. We are better off with the old Act despite its frequently amended provisions"

The corporate sector, the Income Tax Department, auditors and tax professionals will now have to spend an enormous amount of time in comparing and analysing the difference between the old Act and the new code.

Then, there are bound to be heated arguments on the applicability of numerous case laws under the old Act. Adding to the confusion will be a spate of board circulars that will, of course, interpret every difference in favour of the revenue department.

The Income Tax Act, 1961, repealed the 1922 Act with the avowed objective of placing the income tax law on a stable ground. The First Law Commission had spent several months in preparing the new draft.

A parliamentary select committee had then examined the Bill with a fine-tooth comb, after which it was debated in Parliament for many days. This is in stark contrast to the present day Parliament, where several Bills are passed without any discussions.

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