MEMORANDUM OF SUGGESTIONS ON DIRECT TAX CODE SUBMITTED TO THE HONOURABLE FINANCE MINISTER ON 02.02.2010.
We appreciate the initiative taken by the finance ministry to redraft/rewrite the present Income Tax Act of 1961. The present IT Act is 50 year old and has seen more than about 4500 amendments during this period. The BJP supports this initiative. However, the new Act must be simple/saral, progressive and imbued with the vision of the 21st Century.
The draft of the new Direct Taxes Code (DTC) is now in the public domain for debate and discussion. This Code claims to consolidate and amend the law relating to all direct taxes so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. Another objective is claimed to be to reduce the scope for disputes and simplify procedures.
The BJP believes that any direct tax law has to be equitable. The tax burden on the citizens should be based on their capacity to pay. It should promote economic growth. Most importantly, it should be procedurally as simple as possible especially for the individual tax payer. In fact, the simplicity of law should be tested on the touchstone of the ability of an individual taxpayer to fill up the return form himself without having to go to a professional.
Direct Taxes are more equitable than indirect taxes as they are levied according to the income of the payee unlike indirect taxes which are uniformly charged from the rich and the poor alike. Direct taxes, therefore, should play a more important role in our economy. The NDA Government during 1998-2004 had consciously pursued a policy of increasing the share of direct taxes in the tax kitty of the Government of India. During this period, the proportion of direct taxes in the total tax kitty of the Government had gone up from 29% to 43% and today it is more than 55%. Besides functioning as a vehicle for collection of revenues, the direct tax law has always been regarded as an important policy tool to aid the planned development of the economy, be it encouragement of specific industries, development of backward regions or specified group of individuals to promote social justice. In fact, if taxation has to serve as an instrument of economic growth and social justice, all exemptions/deductions can not be done away with. Some of these exemptions/deductions have to continue which may be area-based, industry-based or individual based. In this back drop, we do not agree with the philosophy of the Code that all exemptions/deductions are bad economics and should be discarded.
The Bharatiya Janata Party (BJP) has kept in mind the various sections of society before formulating its views. It is widely felt that the Direct Taxes Code has failed to come up to the aspirations of modern India which believes in change and progress without diluting its commitment to core values, be it social, political or cultural. The Code gives the unmistakable first impression of being guided by the models followed by the Western /Developed economies. Ours is a Developing Country. We have our own culture where economic growth is regarded as a means of ensuring social justice ; Savings is encouraged as a part of character building of an individual providing him the key to social security ; charitable activities by voluntary groups is considered as complementary to the role of the State in the development process. The basic philosophy in the Code runs counter to these core principles. There is a blind pursuit of ideas, concepts from the West. In one stroke, some of the fundamental principles which constitute the core of our current taxation policy and have stood the test of time have been jettisoned. This bias and prejudice is evident in the way the Code seeks to discourage savings & capital formation in the hands of the taxpayers, so important for social security of the people and economic development of the country.
Another very disturbing and disquieting feature in the Code is the rather thinly veiled attempt to destroy the charitable and religious institutions in our country. Our Party believes that these institutions have been playing a stellar role in promoting education, health and other social welfare activities in our country. The provisions contained in the Code would derail this success story. It hits them hardest where it would hurt them the most. This ground shift in the taxation policy, discouraging charitable/religious institution’s active role in the socio/educational/health areas is a Machiavellian first step towards reckless commercialization of education and health, for which these institutions are perceived to be road blocks. We strongly oppose this move.
Thirdly, while proposing the shift from EEE to EET the Government has just ignored the senior citizens, who constitute 10% of our population.
Fourthly, the Code seeks to establish a draconian regime with utter contempt for the genuine rights of the taxpayers. It seeks to confer arbitrary discretionary powers on the tax officials raising the specter of abuse and harassment.
Fifthly, the common man, the small assessee, who are 90% of the total number of Individual tax payers shall end up paying more taxes under the DTC.
In this background, the Bharatiya Janata Party deemed it fit to carry out wide-ranging consultations both within the Party as also with the various cross-sections of society who would be affected by this Code. The BJP had detailed discussions with trade and industry associations, professional bodies and the common taxpayers across various regions of the country. Based on these deliberations and discussions, we would like to highlight the concerns and apprehensions of the people about this Code. We strongly urge the Government to suitably address these concerns before proceeding further in this matter. The various areas of concern are outlined below:
1. Adverse impact on small and middle income groups.
The Code is an exercise in deception for the small and middle income taxpayers. With the new tax structure promising lower rates coupled with a higher amount of permissible savings, the Code paints the picture of lower taxes for all and sundry. But the devil lies in the detail. On a closer analysis, it turns out that the income tax liability of small and middle income tax payers is slated to increase under the Direct Taxes Code. The reason behind this is the reduction of the tax incentives to savings and withdrawal of the Fringe Benefit Tax which has resulted in shifting the burden of tax on perquisites from the employer to the employee. For the sake of illustration, a sample calculation is enclosed at Annexure A. It can be seen that taxpayers with income up to Rs. 10 lakhs would be subject to a steep hike in their tax liability. It may be noted that most of the existing tax saving instruments have been removed from the tax exemption and investment schemes. It’s truly shocking that the overall tenor of the Code is to discourage and disincentivies savings. It creates a make-believe impression that a great relief from tax burden awaits the common man but does exactly the opposite i.e. tax the smaller taxpayers more and grant relief to the big taxpayers. The lower income bracket would see a sharp rise in their tax burden under this Code. It’s a double whammy for the “Äam Kardata” who has to fork out substantially more tax even as the unrelenting double-digit inflation is already chipping away the value of his post-tax surplus.
We demand that the tax structure should be modified to ensure that the small and middle income taxpayer is not adversely affected. In particular, the minimum exemption limit must be increased to at least Rs.3,00,000/-. We further demand that a higher exemption limit of Rs. 3,50,000/- should be prescribed for Women and Rs. 4,00,000/- for Senior Citizens. The valuation of perquisites should be rationalized. The value of a residential house, for example, should be taken at not more than 5% of the basic salary component (minus allowances). The proposal to tax Leave Travel Concession, Leave Salary should be dropped. Medical expenses which are being reimbursed against actual expenditure should not be taxed at all. Only lump sum grants exceeding a particular limit, say 15% of basic salary (minus allowances) may be subjected to tax. As a matter of principle, reimbursement of expenses should not be taxed.
2. Implication for Government Employees
The code suffers from the mindset “One size fits all”. It proposes valuation of perquisites to government employees such as housing, conveyance etc. at market rates. This would be highly burdensome as the market rates of these perquisites in the context of Government employees are substantially higher. It would be impossible for them to meet this tax from out of the rather low cash compensation received by them. We demand that the present taxation norms for Government employees as regards housing, conveyance etc need not be disturbed.
3. Tax Rate
It is seen that the Code proposes a tax rate of 25% for domestic companies. Even the tax rate on foreign companies has been brought down from about 40-50% to 25%. It follows, therefore, that no individual or firm should be taxed at a higher rate. We demand that the highest tax rate for all Individuals/firms/LLPs be brought down from 30% to 25%.
4. Housing Sector
It is the dream of every ordinary Indian to own a house. The NDA Government accorded the highest priority to “Housing for All” and provided attractive tax incentives, for persons availing loans for acquisition of house property. By withdrawing encouragement & incentives provided for housing, the DTC shall break the Dream Home concept. The NDA Govt’s approach had resulted in a phenomenal growth in the housing sector. The credit off take in the housing sector had gone up substantially from 1998 onwards. This had also created large scale employment opportunities and boosted the demand in respect of steel, cement and allied building materials industry, thus creating a momentum of growth in the economy. The various proposals in the Code are discouraging for the housing sector, including the draconian proposal that an individual would be expected to pay notional rent even when the property is lying vacant. Further, he would have to pay a notional rent @ 6% of the cost of construction if no ratable value has been fixed. This is excessive by any standards. He would no longer be entitled to the deduction for the repayment of principals in respect of amounts borrowed or the interest paid on such borrowed capital (in respect of self-occupied property). The overall deduction towards repairs and maintenance has been reduced from 30% to 20%. The exemption from Capital Gains presently available in case of investments of sale proceeds of house property has been whittled down. Thus earlier, the exemption was available if the assessee owned one residential property and invested in another. Now the exemption would be available only if he did not own any residential house. (Para 10.15(b)). The impact of these proposals would be a death-blow to the aspirations of a large cross-section of society who dream of having a house of their own. Those who have purchased their residential property by taking loans attracted by the tax incentives that are currently available would suddenly find that they would be fleeced for owning a house. Those who intend to acquire a house now would face an uphill task as buying a house has suddenly become a prohibitive luxury. They have to drop, defer or downsize their plans. Thus the dream run of the housing sector would come to an abrupt end if these proposals are implemented.
We do not support these anti-people proposals in the Code. We urge the Government not to discontinue any of the incentives that are available at present to taxpayers for owning a house or for investing in house property. We would further call upon the Government to continue the exemption under section 80 IB of the Act to maintain a sustained fillip to the housing sector. In fact, its scope should be enlarged to encourage even smaller players to invest in housing projects. Thus, individuals who construct apartments on a single plot of land larger than a certain size should be incentivized under section 80 I B. This would unlock the vast hitherto untapped potential of individual investors in this sector.
5. Social Security Issues
India does not have a State sponsored social security system unlike the western countries.
The draft of the new Direct Taxes Code (DTC) is now in the public domain for debate and discussion. This Code claims to consolidate and amend the law relating to all direct taxes so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. Another objective is claimed to be to reduce the scope for disputes and simplify procedures.
The BJP believes that any direct tax law has to be equitable. The tax burden on the citizens should be based on their capacity to pay. It should promote economic growth. Most importantly, it should be procedurally as simple as possible especially for the individual tax payer. In fact, the simplicity of law should be tested on the touchstone of the ability of an individual taxpayer to fill up the return form himself without having to go to a professional.
Direct Taxes are more equitable than indirect taxes as they are levied according to the income of the payee unlike indirect taxes which are uniformly charged from the rich and the poor alike. Direct taxes, therefore, should play a more important role in our economy. The NDA Government during 1998-2004 had consciously pursued a policy of increasing the share of direct taxes in the tax kitty of the Government of India. During this period, the proportion of direct taxes in the total tax kitty of the Government had gone up from 29% to 43% and today it is more than 55%. Besides functioning as a vehicle for collection of revenues, the direct tax law has always been regarded as an important policy tool to aid the planned development of the economy, be it encouragement of specific industries, development of backward regions or specified group of individuals to promote social justice. In fact, if taxation has to serve as an instrument of economic growth and social justice, all exemptions/deductions can not be done away with. Some of these exemptions/deductions have to continue which may be area-based, industry-based or individual based. In this back drop, we do not agree with the philosophy of the Code that all exemptions/deductions are bad economics and should be discarded.
The Bharatiya Janata Party (BJP) has kept in mind the various sections of society before formulating its views. It is widely felt that the Direct Taxes Code has failed to come up to the aspirations of modern India which believes in change and progress without diluting its commitment to core values, be it social, political or cultural. The Code gives the unmistakable first impression of being guided by the models followed by the Western /Developed economies. Ours is a Developing Country. We have our own culture where economic growth is regarded as a means of ensuring social justice ; Savings is encouraged as a part of character building of an individual providing him the key to social security ; charitable activities by voluntary groups is considered as complementary to the role of the State in the development process. The basic philosophy in the Code runs counter to these core principles. There is a blind pursuit of ideas, concepts from the West. In one stroke, some of the fundamental principles which constitute the core of our current taxation policy and have stood the test of time have been jettisoned. This bias and prejudice is evident in the way the Code seeks to discourage savings & capital formation in the hands of the taxpayers, so important for social security of the people and economic development of the country.
Another very disturbing and disquieting feature in the Code is the rather thinly veiled attempt to destroy the charitable and religious institutions in our country. Our Party believes that these institutions have been playing a stellar role in promoting education, health and other social welfare activities in our country. The provisions contained in the Code would derail this success story. It hits them hardest where it would hurt them the most. This ground shift in the taxation policy, discouraging charitable/religious institution’s active role in the socio/educational/health areas is a Machiavellian first step towards reckless commercialization of education and health, for which these institutions are perceived to be road blocks. We strongly oppose this move.
Thirdly, while proposing the shift from EEE to EET the Government has just ignored the senior citizens, who constitute 10% of our population.
Fourthly, the Code seeks to establish a draconian regime with utter contempt for the genuine rights of the taxpayers. It seeks to confer arbitrary discretionary powers on the tax officials raising the specter of abuse and harassment.
Fifthly, the common man, the small assessee, who are 90% of the total number of Individual tax payers shall end up paying more taxes under the DTC.
In this background, the Bharatiya Janata Party deemed it fit to carry out wide-ranging consultations both within the Party as also with the various cross-sections of society who would be affected by this Code. The BJP had detailed discussions with trade and industry associations, professional bodies and the common taxpayers across various regions of the country. Based on these deliberations and discussions, we would like to highlight the concerns and apprehensions of the people about this Code. We strongly urge the Government to suitably address these concerns before proceeding further in this matter. The various areas of concern are outlined below:
1. Adverse impact on small and middle income groups.
The Code is an exercise in deception for the small and middle income taxpayers. With the new tax structure promising lower rates coupled with a higher amount of permissible savings, the Code paints the picture of lower taxes for all and sundry. But the devil lies in the detail. On a closer analysis, it turns out that the income tax liability of small and middle income tax payers is slated to increase under the Direct Taxes Code. The reason behind this is the reduction of the tax incentives to savings and withdrawal of the Fringe Benefit Tax which has resulted in shifting the burden of tax on perquisites from the employer to the employee. For the sake of illustration, a sample calculation is enclosed at Annexure A. It can be seen that taxpayers with income up to Rs. 10 lakhs would be subject to a steep hike in their tax liability. It may be noted that most of the existing tax saving instruments have been removed from the tax exemption and investment schemes. It’s truly shocking that the overall tenor of the Code is to discourage and disincentivies savings. It creates a make-believe impression that a great relief from tax burden awaits the common man but does exactly the opposite i.e. tax the smaller taxpayers more and grant relief to the big taxpayers. The lower income bracket would see a sharp rise in their tax burden under this Code. It’s a double whammy for the “Äam Kardata” who has to fork out substantially more tax even as the unrelenting double-digit inflation is already chipping away the value of his post-tax surplus.
We demand that the tax structure should be modified to ensure that the small and middle income taxpayer is not adversely affected. In particular, the minimum exemption limit must be increased to at least Rs.3,00,000/-. We further demand that a higher exemption limit of Rs. 3,50,000/- should be prescribed for Women and Rs. 4,00,000/- for Senior Citizens. The valuation of perquisites should be rationalized. The value of a residential house, for example, should be taken at not more than 5% of the basic salary component (minus allowances). The proposal to tax Leave Travel Concession, Leave Salary should be dropped. Medical expenses which are being reimbursed against actual expenditure should not be taxed at all. Only lump sum grants exceeding a particular limit, say 15% of basic salary (minus allowances) may be subjected to tax. As a matter of principle, reimbursement of expenses should not be taxed.
2. Implication for Government Employees
The code suffers from the mindset “One size fits all”. It proposes valuation of perquisites to government employees such as housing, conveyance etc. at market rates. This would be highly burdensome as the market rates of these perquisites in the context of Government employees are substantially higher. It would be impossible for them to meet this tax from out of the rather low cash compensation received by them. We demand that the present taxation norms for Government employees as regards housing, conveyance etc need not be disturbed.
3. Tax Rate
It is seen that the Code proposes a tax rate of 25% for domestic companies. Even the tax rate on foreign companies has been brought down from about 40-50% to 25%. It follows, therefore, that no individual or firm should be taxed at a higher rate. We demand that the highest tax rate for all Individuals/firms/LLPs be brought down from 30% to 25%.
4. Housing Sector
It is the dream of every ordinary Indian to own a house. The NDA Government accorded the highest priority to “Housing for All” and provided attractive tax incentives, for persons availing loans for acquisition of house property. By withdrawing encouragement & incentives provided for housing, the DTC shall break the Dream Home concept. The NDA Govt’s approach had resulted in a phenomenal growth in the housing sector. The credit off take in the housing sector had gone up substantially from 1998 onwards. This had also created large scale employment opportunities and boosted the demand in respect of steel, cement and allied building materials industry, thus creating a momentum of growth in the economy. The various proposals in the Code are discouraging for the housing sector, including the draconian proposal that an individual would be expected to pay notional rent even when the property is lying vacant. Further, he would have to pay a notional rent @ 6% of the cost of construction if no ratable value has been fixed. This is excessive by any standards. He would no longer be entitled to the deduction for the repayment of principals in respect of amounts borrowed or the interest paid on such borrowed capital (in respect of self-occupied property). The overall deduction towards repairs and maintenance has been reduced from 30% to 20%. The exemption from Capital Gains presently available in case of investments of sale proceeds of house property has been whittled down. Thus earlier, the exemption was available if the assessee owned one residential property and invested in another. Now the exemption would be available only if he did not own any residential house. (Para 10.15(b)). The impact of these proposals would be a death-blow to the aspirations of a large cross-section of society who dream of having a house of their own. Those who have purchased their residential property by taking loans attracted by the tax incentives that are currently available would suddenly find that they would be fleeced for owning a house. Those who intend to acquire a house now would face an uphill task as buying a house has suddenly become a prohibitive luxury. They have to drop, defer or downsize their plans. Thus the dream run of the housing sector would come to an abrupt end if these proposals are implemented.
We do not support these anti-people proposals in the Code. We urge the Government not to discontinue any of the incentives that are available at present to taxpayers for owning a house or for investing in house property. We would further call upon the Government to continue the exemption under section 80 IB of the Act to maintain a sustained fillip to the housing sector. In fact, its scope should be enlarged to encourage even smaller players to invest in housing projects. Thus, individuals who construct apartments on a single plot of land larger than a certain size should be incentivized under section 80 I B. This would unlock the vast hitherto untapped potential of individual investors in this sector.
5. Social Security Issues
India does not have a State sponsored social security system unlike the western countries.
At present, the tax law recognizes the importance of enabling individuals to build their own safety net as the State does not have one. Thus, savings in provident fund or in life insurance policies are tax free when they are finally received on maturity. Pensioner’s benefits are not taxed so that the social security is there when it is most needed in the twilight of one’s life. But in utter disregard of the concerns of the people, the Code proposes taxation of all of these savings. The EEE model (Exempt-Exempt-Exempt) being followed for a long time has been responsible for growth of savings in our country.
(a) The EET system is anti-saving & anti social security:
The Code proposes to replace the EEE model with the EET model. Thus, it proposes taxation of the savings when individuals seek to withdraw their money from the designated accounts where it needs to be kept to avoid being taxed. This would be a huge disincentive for savings. The Government must not lose sight of the fact that these individuals , most of whom are employees in Government/PSUs/Private sector or small businessmen, sacrifice their consumption today for the sake of their social security tomorrow .The people of India are savings-oriented. The strength of the middle class in India is largely the result of this conventional approach to money matters which clearly rejects the profligacy of the West. The present bouquet of incentives in the tax law enables the tax payers to build savings in the form of PPF/GPF, life insurance policies etc. The tax-free proceeds of these savings come to his rescue to meet any contingency throughout his life and of course, to meet his various needs in his post-retirement life. With EET, every time he withdraws any amount for meeting any expenditure such as buying a house or fulfilling a social obligation, he would have to shell out a hefty amount as tax. Thus, there would be very little incentive for saving for the future. It would usher in a culture of imprudence in spending and consumption at the cost of savings. This would adversely impinge upon the financial security of the individuals and the society at large.
The proposed EET model does not spare even the retirement benefits of an employee. Thus, the compensation under voluntary retirement scheme(VRS) , amount of gratuity received on retirement or death, and even the amount received on commutation of pension which were so far tax free would now suffer tax . The very purpose of these payments by the employer is to enable a retired employee to have a financially secured post-retirement life. By proposing to tax them unless they are put in the Retirement benefits Account and also to tax them as and when they are withdrawn from these accounts, the Code has proved to be the proverbial last straw on the Camel’s back for a middle class Indian. We would take this opportunity to lodge our strong protest against this proposal which is likely to severely affect millions of employees, be it in the Government or in the private sector. We condemn these sweeping changes proposed in the Code in the name of horizontal equity. We call upon the Government that the proposal to change the EEE (Exempt-Exempt-Exempt) system so far followed in respect of savings/retirement benefits to the EET (Exempt-Exempt-Tax) model should be rejected forthwith.
(b) Long Term Capital Gains
The Bharatiya Janata Party is against the concept of taxing financial transactions. We welcome the decision to abolish the Security Transaction Tax. (STT). But the Capital Gains tax should continue in the present form. The distinction between Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG) in the present law should continue. Long Term Capital Gains are presently being taxed at a lower rate as against Short Term Capital Gains. Thus, there is a tax incentive for investors to hold on to capital investments for a longer term. More often than not this has helped individuals to plan for their social security by investing their savings in these assets and gaining on long term appreciation. It is not uncommon to come across cases where these investments in land or property are sold off at an appropriate time in order to meet social obligations such as children’s education or daughter’s marriage or even to meet the cost of healthcare. The code proposes doing away with the difference between short term capital gain and long term capital gain (Para 10.6). This would be a retrograde move. Considering the present economic scenario, we demand continuation of the preferential treatment to long term capital gains through a lower tax rate. Further, the EET model is proposed to be applied to the “Capital Gain Savings Scheme” which is currently under the EEE model (though conditional that the withdrawals must be channeled into specific investments). The current EEE model should not be abandoned.
(c) Special Incentive for Women & Senior Citizens
While espousing the cause of the EET model over the EEE model, the Code has entirely missed the point that a well-conceived tax policy can not only help maintain a stable social order but also bring about social change . The basic concerns that an average middle class Indian family today has in terms of acquiring own house, creating a post-retirement stable source of income to meet their regular expenditure without any loss of their current social standing or even to plan for the contingencies of life have remained largely unaddressed in the Code. The BJP believes that in the current economic scenario where the secured means of investment are less and the return on such investments have reduced in line with the low interest regime, there is a need to provide a tax-free source of income to certain vulnerable sections of the society , particularly Women, Retired Persons and Senior Citizens. We propose that the interest income of these sections of our society should be tax-free to the extent of Rs.3,00,000/- per annum. This would have a very salubrious effect on individual financial planning. It would also result in empowerment of women in our society as there would be a tax incentive to create assets in the name of a housewife, or a mother or a daughter.
6. Small and Medium Entrepreneurs
(a) Presumptive Tax
A strong SME sector is necessary for a vibrant economy. There is a need for the Government to proactively facilitate the business of small and medium entrepreneurs. The code proposes that for businesses showing a turnover up to Rs 1 crore, there would be exemption from the requirements of maintenance of regular books of accounts if they declare an income of 8% on their turnover. The presumption of 8% profit on turnover is excessive. As a result, most of these SME’s would have to maintain the books of accounts to justify that their incomes are indeed less than 8%. Thus the gesture shown by the Code to SMEs could actually be a non-starter. We call upon the Government to take a more realistic view and fix a lower rate of presumptive tax to make the proposal meaningful.
(b) Deeming of Loans/Deposits as Income
The proposal in the Code in para 11.4 states ”Any amount exceeding Rs.20,000/- taken or accepted or repaid as loan or deposit otherwise than by account payee cheque or draft shall be deemed to be income, and included under this head and taxed accordingly.” It may be seen that this threshold of Rs. 20,000/- was decided in the year 1989 and it has not changed even after two decades. There is a strong case for its upward revision in line with the needs of business today. We demand that this should be enhanced to Rs. 50,000/-.
(c) Maintaining of records and Books of Account
The code prescribes ‘maintenance of accounts and other related matters’ wherein it says that vouchers/receipts of items of expenditure as low as Rs.50/- have to be maintained. Thus, if somebody purchases any edible and non-edible item which costs more than Rs 50/kg such as pakoras, dosas, idli, vegetables, dals etc., the seller has to keep carbon copies or counterfoils of serial numbers of receipts issued by the persons, and these receipts should contain the name, address and such other particulars as may be prescribed. This would unduly increase the compliance burden and make small and medium businesses very difficult to manage.
(d) Procedure of Computation of Business Income
The Code has proposed a cumbersome procedure to compute business income. The existing accounting systems may need to be overhauled to meet the new requirements of asset and expenditure classification. It would also require training of existing staff as there is a whole set of new nomenclature, definitions and new concepts. All this would create an atmosphere of confusion and make the transition harrowing especially for small business.
7. Charitable or Religious Trusts
(a) Religious Trusts denied exemptions
At present, all religious trusts can avail of exemption from Income Tax by satisfying certain conditions but the Code proposes an end to exemptions for most religious trusts as religious activity is not included as a part of “Permitted Welfare Activity”. Para 15.6 of the Code exempts income only if the trust or institution is recognized/registered under the Religious Endowments Acts of the Central Government or the State Governments but declares that donors to these trusts/institutions would not enjoy any deductions. There would be a large number of Trusts who are not registered/recognized under these Acts. They would be required to apply for a registration/recognition which may or may not be granted, thus creating uncertainty and additional burden. They have to; in any case, apply for the registration by the Income Tax authorities . Thus, this requirement of an additional registration by State appears to be a backhand move to seize control of these institutions. We strongly object to this ill-conceived move by the Government. There is no basis or justification for subjecting these entities to tax. Therefore, the current exemption to religious trusts should not be withdrawn under any circumstances.
(b) Accumulations not permitted
The code proposes that the benefit of exemption would be available only if the income of the year is spent during that year. This is very impractical and would result in denial of exemption in most cases. It is common knowledge that the income of these Non-Profit Organizations are from donations/voluntary contributions which are mostly received towards the close of the financial year and It would not be possible for them to spend these funds before the end of the financial year. Under the present regime, accumulation of funds is allowed subject to certain conditions. This was a beneficial provision as it allowed them to create assets requiring large scale investments. The success of the private sector in education and health largely owes itself to these provisions. Therefore, the provisions allowing accumulations should be continued.
The BJP would like to place on record its appreciation of the performance of the so-called NPOs(Non-Profit Organizations) i.e charitable or religious organizations in the socio-economic development of our country. The basic objective of these organizations is to do public good and mitigate the burden of the Government. In this context, it is deplorable that the same Government should shed its responsibility of strengthening and supporting them. It is not good policy to choke their lifelines by prescribing more stringent financial norms. In fact, the 15% accumulation permitted today forces the hands of these organizations as they are required to spend 85% in a year. This prevents long term planning for asset creation and provisioning for regular expenditure requirements for future years which is necessary as receipts of voluntary contributions may not be uniform over all years . We would urge the Government to raise the limit of permissible accumulation from 15% to 50%.
8. MAT (Minimum Alternate Tax)
The Minimum Alternate Tax (MAT) is proposed to be taken at 2% of the assets base other than banking companies where a rate of 0.25% has been prescribed. In the present regime, MAT is levied only on the book profits. The proposal to levy the tax on the gross assets base could be very detrimental, especially for those engaged in infrastructure sector, say power generation, roads, airports and Ports construction which have a long gestation period. Subjecting them to MAT right from the inception in the crucial early years when they don’t even have book profits is wholly unwarranted. Secondly it will adversely affect the taxation of PSU’s, which have very huge asset base; thirdly sick units which are already reeling under pressure and have to continue due to labor and other considerations will be in enormously difficult situation. This also runs counter to the approach of the Code to grant investment-linked incentives to the infrastructure sector and declare a tax holiday till they recover their capital expenditure as they would now face MAT on their entire asset base without having any book profits. The proposal to levy MAT on asset base should be dropped.
9. Non-Resident Indians
The Code proposes very stringent tax structure for Non-resident Indians. At present, income of non-residents is either exempt from taxation or subject to tax in the same manner as residents. The Code seeks to tax the income of non-residents as “income from special sources” which means they do not get the benefit of the minimum exemption limit of Rs.1,60,000/- like residents. Further, their income would be taxed at flat rates unlike the slab structure for residents. Thus, their interest & investment income would get taxed at 20%, Capital Gains @ 30% and residual income at a whopping rate of 35%. Further, they would not be entitled to any deductions even for cost of acquisition of capital assets. All these proposals would more than double the tax liability of NRIs and for the same level of income, the NRIs would be paying much higher taxes as compared to domestic taxpayers. The bias against NRIs is so evident that many Indians abroad have given a new expression to the acronym NRI as “Not Required Indians”. We demand that these weird, irrational tax treatments of NRIs be withdrawn at once.
10. Tax Heavens’ / DTAA
Confusion seems to be created on double taxation treaty by the Code. BJP believes in proper regulatory system. Flow of funds from all foreign sources should be transparent & regulated. The Treaty override provisions are draconian in nature and have the potential for harassment of taxpayers. They should be revisited to provide proper safeguards against abuse of powers.
11. Co-operative sectors needs Justice & Protection
Provisions of DTC is harsh on co-operative sectors. Only primary agricultural cooperatives have been exempted. BJP wants that the present set of exemptions to the co-operative sector should not be diluted in any manner.
12. Wholesale removal of Deductions/Exemptions
We express our disapproval of the policy outlined in para 12.2 of the Code stating that tax incentives are inefficient, distorting, iniquitous etc. We believe that tax incentives serve as powerful instruments of public policy for promoting balanced economic growth and social justice. We agree that the incentives should be as rational and as transparent as possible. But any across the board rule that they should be removed from the statute would be unacceptable.
(a) Area Based Exemptions
The BJP would, in particular oppose the withdrawal of Area Based Exemptions. They should continue in future also. Area Based Exemptions have the great advantage of ensuring balanced economic growth across the country. We believe that the purpose can be best served by providing these incentives for a fixed timeframe after which they should end. We also believe that these incentives should be available for fresh investments and not for transfer or relocation of existing industries.
(b) Exemption to Agricultural Marketing Committees
The Code has withdrawn the exemption to Agricultural Produce Marketing Committees (APMCs) and State Agricultural Marketing Boards (SAMB). It was only 2 years back, the Government in Finance Act 2008 granted exemption to the income of Agricultural Produce Marketing Committees and State Agricultural Marketing Boards by introducing Section 10(28AAB). One wonders how an exemption which was rational and justified by the Finance Minister in 2008 would lose its relevance in 2010 and be removed by the same Finance Minister. The exemption granted to these Marketing Committees should be continued.
(c) Exemption to News Agencies
The Code has withdrawn the exemption given to news agencies. When the Constitution of India has guaranteed freedom of speech as a fundamental right, it should be the duty of the State to support such agencies . We demand that the exemption to news agencies should continue in its present form without any dilution.
(d) Exemption to Universities/Educational Institutions/Hospitals
The Code has withdrawn exemptions to Universities/Educational Institutions/Hospitals which were earlier available under section 10(23C) . The Bharatiya Janata Party opposes this move and advocates the continuation of the present provisions as these institutions do contribute immensely to the socio-economic development in the Country.
The above examples out of the large number of exemptions currently available are only illustrative of certain insensitive approach to the preparation of the Code.
(a) The EET system is anti-saving & anti social security:
The Code proposes to replace the EEE model with the EET model. Thus, it proposes taxation of the savings when individuals seek to withdraw their money from the designated accounts where it needs to be kept to avoid being taxed. This would be a huge disincentive for savings. The Government must not lose sight of the fact that these individuals , most of whom are employees in Government/PSUs/Private sector or small businessmen, sacrifice their consumption today for the sake of their social security tomorrow .The people of India are savings-oriented. The strength of the middle class in India is largely the result of this conventional approach to money matters which clearly rejects the profligacy of the West. The present bouquet of incentives in the tax law enables the tax payers to build savings in the form of PPF/GPF, life insurance policies etc. The tax-free proceeds of these savings come to his rescue to meet any contingency throughout his life and of course, to meet his various needs in his post-retirement life. With EET, every time he withdraws any amount for meeting any expenditure such as buying a house or fulfilling a social obligation, he would have to shell out a hefty amount as tax. Thus, there would be very little incentive for saving for the future. It would usher in a culture of imprudence in spending and consumption at the cost of savings. This would adversely impinge upon the financial security of the individuals and the society at large.
The proposed EET model does not spare even the retirement benefits of an employee. Thus, the compensation under voluntary retirement scheme(VRS) , amount of gratuity received on retirement or death, and even the amount received on commutation of pension which were so far tax free would now suffer tax . The very purpose of these payments by the employer is to enable a retired employee to have a financially secured post-retirement life. By proposing to tax them unless they are put in the Retirement benefits Account and also to tax them as and when they are withdrawn from these accounts, the Code has proved to be the proverbial last straw on the Camel’s back for a middle class Indian. We would take this opportunity to lodge our strong protest against this proposal which is likely to severely affect millions of employees, be it in the Government or in the private sector. We condemn these sweeping changes proposed in the Code in the name of horizontal equity. We call upon the Government that the proposal to change the EEE (Exempt-Exempt-Exempt) system so far followed in respect of savings/retirement benefits to the EET (Exempt-Exempt-Tax) model should be rejected forthwith.
(b) Long Term Capital Gains
The Bharatiya Janata Party is against the concept of taxing financial transactions. We welcome the decision to abolish the Security Transaction Tax. (STT). But the Capital Gains tax should continue in the present form. The distinction between Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG) in the present law should continue. Long Term Capital Gains are presently being taxed at a lower rate as against Short Term Capital Gains. Thus, there is a tax incentive for investors to hold on to capital investments for a longer term. More often than not this has helped individuals to plan for their social security by investing their savings in these assets and gaining on long term appreciation. It is not uncommon to come across cases where these investments in land or property are sold off at an appropriate time in order to meet social obligations such as children’s education or daughter’s marriage or even to meet the cost of healthcare. The code proposes doing away with the difference between short term capital gain and long term capital gain (Para 10.6). This would be a retrograde move. Considering the present economic scenario, we demand continuation of the preferential treatment to long term capital gains through a lower tax rate. Further, the EET model is proposed to be applied to the “Capital Gain Savings Scheme” which is currently under the EEE model (though conditional that the withdrawals must be channeled into specific investments). The current EEE model should not be abandoned.
(c) Special Incentive for Women & Senior Citizens
While espousing the cause of the EET model over the EEE model, the Code has entirely missed the point that a well-conceived tax policy can not only help maintain a stable social order but also bring about social change . The basic concerns that an average middle class Indian family today has in terms of acquiring own house, creating a post-retirement stable source of income to meet their regular expenditure without any loss of their current social standing or even to plan for the contingencies of life have remained largely unaddressed in the Code. The BJP believes that in the current economic scenario where the secured means of investment are less and the return on such investments have reduced in line with the low interest regime, there is a need to provide a tax-free source of income to certain vulnerable sections of the society , particularly Women, Retired Persons and Senior Citizens. We propose that the interest income of these sections of our society should be tax-free to the extent of Rs.3,00,000/- per annum. This would have a very salubrious effect on individual financial planning. It would also result in empowerment of women in our society as there would be a tax incentive to create assets in the name of a housewife, or a mother or a daughter.
6. Small and Medium Entrepreneurs
(a) Presumptive Tax
A strong SME sector is necessary for a vibrant economy. There is a need for the Government to proactively facilitate the business of small and medium entrepreneurs. The code proposes that for businesses showing a turnover up to Rs 1 crore, there would be exemption from the requirements of maintenance of regular books of accounts if they declare an income of 8% on their turnover. The presumption of 8% profit on turnover is excessive. As a result, most of these SME’s would have to maintain the books of accounts to justify that their incomes are indeed less than 8%. Thus the gesture shown by the Code to SMEs could actually be a non-starter. We call upon the Government to take a more realistic view and fix a lower rate of presumptive tax to make the proposal meaningful.
(b) Deeming of Loans/Deposits as Income
The proposal in the Code in para 11.4 states ”Any amount exceeding Rs.20,000/- taken or accepted or repaid as loan or deposit otherwise than by account payee cheque or draft shall be deemed to be income, and included under this head and taxed accordingly.” It may be seen that this threshold of Rs. 20,000/- was decided in the year 1989 and it has not changed even after two decades. There is a strong case for its upward revision in line with the needs of business today. We demand that this should be enhanced to Rs. 50,000/-.
(c) Maintaining of records and Books of Account
The code prescribes ‘maintenance of accounts and other related matters’ wherein it says that vouchers/receipts of items of expenditure as low as Rs.50/- have to be maintained. Thus, if somebody purchases any edible and non-edible item which costs more than Rs 50/kg such as pakoras, dosas, idli, vegetables, dals etc., the seller has to keep carbon copies or counterfoils of serial numbers of receipts issued by the persons, and these receipts should contain the name, address and such other particulars as may be prescribed. This would unduly increase the compliance burden and make small and medium businesses very difficult to manage.
(d) Procedure of Computation of Business Income
The Code has proposed a cumbersome procedure to compute business income. The existing accounting systems may need to be overhauled to meet the new requirements of asset and expenditure classification. It would also require training of existing staff as there is a whole set of new nomenclature, definitions and new concepts. All this would create an atmosphere of confusion and make the transition harrowing especially for small business.
7. Charitable or Religious Trusts
(a) Religious Trusts denied exemptions
At present, all religious trusts can avail of exemption from Income Tax by satisfying certain conditions but the Code proposes an end to exemptions for most religious trusts as religious activity is not included as a part of “Permitted Welfare Activity”. Para 15.6 of the Code exempts income only if the trust or institution is recognized/registered under the Religious Endowments Acts of the Central Government or the State Governments but declares that donors to these trusts/institutions would not enjoy any deductions. There would be a large number of Trusts who are not registered/recognized under these Acts. They would be required to apply for a registration/recognition which may or may not be granted, thus creating uncertainty and additional burden. They have to; in any case, apply for the registration by the Income Tax authorities . Thus, this requirement of an additional registration by State appears to be a backhand move to seize control of these institutions. We strongly object to this ill-conceived move by the Government. There is no basis or justification for subjecting these entities to tax. Therefore, the current exemption to religious trusts should not be withdrawn under any circumstances.
(b) Accumulations not permitted
The code proposes that the benefit of exemption would be available only if the income of the year is spent during that year. This is very impractical and would result in denial of exemption in most cases. It is common knowledge that the income of these Non-Profit Organizations are from donations/voluntary contributions which are mostly received towards the close of the financial year and It would not be possible for them to spend these funds before the end of the financial year. Under the present regime, accumulation of funds is allowed subject to certain conditions. This was a beneficial provision as it allowed them to create assets requiring large scale investments. The success of the private sector in education and health largely owes itself to these provisions. Therefore, the provisions allowing accumulations should be continued.
The BJP would like to place on record its appreciation of the performance of the so-called NPOs(Non-Profit Organizations) i.e charitable or religious organizations in the socio-economic development of our country. The basic objective of these organizations is to do public good and mitigate the burden of the Government. In this context, it is deplorable that the same Government should shed its responsibility of strengthening and supporting them. It is not good policy to choke their lifelines by prescribing more stringent financial norms. In fact, the 15% accumulation permitted today forces the hands of these organizations as they are required to spend 85% in a year. This prevents long term planning for asset creation and provisioning for regular expenditure requirements for future years which is necessary as receipts of voluntary contributions may not be uniform over all years . We would urge the Government to raise the limit of permissible accumulation from 15% to 50%.
8. MAT (Minimum Alternate Tax)
The Minimum Alternate Tax (MAT) is proposed to be taken at 2% of the assets base other than banking companies where a rate of 0.25% has been prescribed. In the present regime, MAT is levied only on the book profits. The proposal to levy the tax on the gross assets base could be very detrimental, especially for those engaged in infrastructure sector, say power generation, roads, airports and Ports construction which have a long gestation period. Subjecting them to MAT right from the inception in the crucial early years when they don’t even have book profits is wholly unwarranted. Secondly it will adversely affect the taxation of PSU’s, which have very huge asset base; thirdly sick units which are already reeling under pressure and have to continue due to labor and other considerations will be in enormously difficult situation. This also runs counter to the approach of the Code to grant investment-linked incentives to the infrastructure sector and declare a tax holiday till they recover their capital expenditure as they would now face MAT on their entire asset base without having any book profits. The proposal to levy MAT on asset base should be dropped.
9. Non-Resident Indians
The Code proposes very stringent tax structure for Non-resident Indians. At present, income of non-residents is either exempt from taxation or subject to tax in the same manner as residents. The Code seeks to tax the income of non-residents as “income from special sources” which means they do not get the benefit of the minimum exemption limit of Rs.1,60,000/- like residents. Further, their income would be taxed at flat rates unlike the slab structure for residents. Thus, their interest & investment income would get taxed at 20%, Capital Gains @ 30% and residual income at a whopping rate of 35%. Further, they would not be entitled to any deductions even for cost of acquisition of capital assets. All these proposals would more than double the tax liability of NRIs and for the same level of income, the NRIs would be paying much higher taxes as compared to domestic taxpayers. The bias against NRIs is so evident that many Indians abroad have given a new expression to the acronym NRI as “Not Required Indians”. We demand that these weird, irrational tax treatments of NRIs be withdrawn at once.
10. Tax Heavens’ / DTAA
Confusion seems to be created on double taxation treaty by the Code. BJP believes in proper regulatory system. Flow of funds from all foreign sources should be transparent & regulated. The Treaty override provisions are draconian in nature and have the potential for harassment of taxpayers. They should be revisited to provide proper safeguards against abuse of powers.
11. Co-operative sectors needs Justice & Protection
Provisions of DTC is harsh on co-operative sectors. Only primary agricultural cooperatives have been exempted. BJP wants that the present set of exemptions to the co-operative sector should not be diluted in any manner.
12. Wholesale removal of Deductions/Exemptions
We express our disapproval of the policy outlined in para 12.2 of the Code stating that tax incentives are inefficient, distorting, iniquitous etc. We believe that tax incentives serve as powerful instruments of public policy for promoting balanced economic growth and social justice. We agree that the incentives should be as rational and as transparent as possible. But any across the board rule that they should be removed from the statute would be unacceptable.
(a) Area Based Exemptions
The BJP would, in particular oppose the withdrawal of Area Based Exemptions. They should continue in future also. Area Based Exemptions have the great advantage of ensuring balanced economic growth across the country. We believe that the purpose can be best served by providing these incentives for a fixed timeframe after which they should end. We also believe that these incentives should be available for fresh investments and not for transfer or relocation of existing industries.
(b) Exemption to Agricultural Marketing Committees
The Code has withdrawn the exemption to Agricultural Produce Marketing Committees (APMCs) and State Agricultural Marketing Boards (SAMB). It was only 2 years back, the Government in Finance Act 2008 granted exemption to the income of Agricultural Produce Marketing Committees and State Agricultural Marketing Boards by introducing Section 10(28AAB). One wonders how an exemption which was rational and justified by the Finance Minister in 2008 would lose its relevance in 2010 and be removed by the same Finance Minister. The exemption granted to these Marketing Committees should be continued.
(c) Exemption to News Agencies
The Code has withdrawn the exemption given to news agencies. When the Constitution of India has guaranteed freedom of speech as a fundamental right, it should be the duty of the State to support such agencies . We demand that the exemption to news agencies should continue in its present form without any dilution.
(d) Exemption to Universities/Educational Institutions/Hospitals
The Code has withdrawn exemptions to Universities/Educational Institutions/Hospitals which were earlier available under section 10(23C) . The Bharatiya Janata Party opposes this move and advocates the continuation of the present provisions as these institutions do contribute immensely to the socio-economic development in the Country.
The above examples out of the large number of exemptions currently available are only illustrative of certain insensitive approach to the preparation of the Code.
We strongly urge the Government to review the entire gamut of deductions/exemptions without any predetermined bias and then go for rationalization wherever necessary.
13. Tax Holiday for certain Businesses
The Code in para 12.21 puts forward arguments in support of removal of profit-linked incentives and replacing them with investment-linked incentives. We do not subscribe to the logic that profit-linked incentives are inherently inefficient. The evils attributed to profit-linked incentives such as laundering and shifting of profits to exempted activity would continue even under investment–linked incentives albeit in a different form. The present system of allowing depreciation on Capital Expenditure has shown a fair degree of success and there is no strong case for replacing it with the investment-linked system where the taxpayer would enjoy a tax-holiday till he recovers his entire capital expenditure. In fact, these proposals are fraught with serious consequences as the tax holiday can be literally unlimited for large cap projects. While the taxpayer would reach break-even before 10 years in even the projects having the longest gestation periods, he would not be required to pay any taxes over the entire life-cycle (50-75 years) of the project if this system is followed. There would also be a greater temptation to fudge records to boost Capex because of 100% deduction proposed in the year of expenditure as against the normal depreciation charge. This would create distortions and worsen the rent-seeking behavior and cause significant loss of revenue. This is highly undesirable. We strongly oppose this move as the remedy suggested is clearly worse than the disease.
14. TDS for all- Ordeal for the Am Admi
The utter contempt and disregard for the ordinary citizen of this country in this Code is evident in the manner it seeks to force tax deduction at source (TDS) for all persons even though their income is below taxable limit. They may be anyone starting from the cobbler to the rickshawallah to the street vendor or even our Senior Citizens, or anyone whose total income is less than the taxable limit, having their savings in the Post Offices, Banks or NBFCs. Today they file a declaration in Form 15 G or 15H and are spared from TDS. But the Code has this grand-arching proposition that they should all be first subjected to TDS and then they should claim their refunds from the Department by filing returns. While the taxpayer of today struggles to get his refunds in the current dispensation, one can not imagine the plight of millions of citizens who, for no fault of theirs, as they have no liability to pay income tax as such, have to undergo the ordeal of filing returns and await endlessly for refund of their most valuable savings. We condemn this highly insensitive, high-handed approach in the Code. We demand that the current prescribed policies in this regard should be continued without any change.
The scope of TDS provisions have been enlarged in a bizarre fashion. The existing threshold limit for TDS on professional fees has been dispensed with. A sweeping provision has been made by prescribing a 10% TDS in respect of “payments of any other income.” Thus, transactions for sale of goods or services or transfer of movable or immovable property would attract TDS whether personal or commercial in nature at the rate of 10%. This would be excessive in most cases leading to a huge number of refund claims. Going by the track record of the Department as regards the promptness with which refunds are issued , it would lead to further harassment and encourage rent-seeking behavior. We demand that the entire gamut of TDS provisions be reviewed and recast in a more rational way.
15. Abnormal-Extraordinary Power to the Administration
(a) General Anti Avoidance Rules (GAAR)
We believe that law has to be tough on tax evasion. At the same time, the delicate balance between enforcement of law and abuse of law has to be maintained . The General Anti Avoidance Rules prima facie confer unbridled powers on the tax authorities. Unless sufficient safeguards are built into the provisions, there is great potential for harassment of genuine tax payers.
(b) Re-opening of assessments
The proposals in the Code give an uneasy feeling that assessments can be reopened quite easily. This has created an unsettling feeling in the minds of taxpayers. At present, an assessment can be reopened subject to strict conditions. The provisions in the Code, however, would enable the Department to reopen and start roving enquiries with ease at any time afterwards. This will simply increase corruption and harassment by the department. Further, the Code permits reopening of assessments up to 7 years as against 6 years under the present law. Earlier, it was permitted up to 10 years. There is a lot of flip-flop on this account. In order to maintain some semblance of stability, the 6 year rule should continue.
(c) Stay of Demand
The Code does not have any provision for stay of demand by the IT authorities except at the stage of the Income Tax Appellate Tribunal. An assesses, who face huge demand from high pitched assessments would have no alternative but to approach the court for relief. The administrative machinery of the Department should be responsive to the genuine problems of business when it comes to payment/recovery of taxes. The higher authorities of the Department should be empowered to grant stay in appropriate cases where the taxpayer is facing genuine hardship. It may be good to minimize discretion but being insensitive to the call of good governance is not the way forward.
(d) Deemed Service of Notice
Under the Code, a notice would be deemed to be served on the fifth day after the day it is sent whether the notice is actually received or not. This is highly objectionable and violates all norms of judicial / administrative decorum. We call for its removal forthwith.
(e) Seizure of stock-in-trade
The Code empowers the Department to seize the stock-in-trade in the form of bullion, precious or semi-precious stones or jewellery found as a result of search. The present Act expressly provides that such stock in trade should only be inventorised and not seized. Again , such powers would be misused and result in harassment. The present rule of non-seizure of stock in trade is based on the sound principle that the Departmental action should not seriously hamper the business of the trader. We demand that the power to seize stock in trade in a search proceedings be dropped.
(f) Penalty/Prosecution Provisions
Some of the penalty provisions in the Code appear to be quite harsh. Thus , a penalty of Rs. 50,000 minimum and Rs. 2,00,000/- maximum is leviable for non-maintenance of books of accounts. These provisions can be misused particularly against the small and middle income businessmen with the Code making the maintenance of books of accounts quite onerous. The failure to file the return by the due date can attract penalty from 100% to 200% of the tax payable. These provisions defy any rationality. The prosecution provisions are also very draconian. The prosecution proceedings have been declared to be independent of other proceedings in the code. An omnibus provision for prosecution has been made for willful failure to comply with any direction under the Code. The most pernicious provision is the change in the rules of evidence. At present, the rule in any prosecution proceedings is that facts have to be proved beyond reasonable doubt (Section 278E(2) of the Act) . The Code states that the existence of a fact can be established by the rule of preponderance of probability.( Section 245(4) of the proposed Direct Tax Code Bill 2009). This goes against the basic canons of criminal jurisprudence in the country. This shows the dictatorial mindset behind the drafting of these provisions. The Bharatiya Janata Party would like to express serious reservations against these provisions and calls for its removal forthwith.
16. Other Issues in the Code
While we have outlined prominent angularities in the Code affecting the public, there are many more provisions which are objectionable. There are many provisions in the Code which indicate an attempt to concentrate powers in the hands of the Assessing authority without sufficient safeguards. The complexities in the Code in the areas of GAAR, taxing of international transactions, procedural provisions such as deemed service of notice , would ultimately give rise to unwarranted litigation which would frustrate the very objective of the Code. The proposal to obviate the need for a Finance Act every year is also fraught with ramifications. Although we appreciate the need for stability in rates, in a democracy, the Parliament’s supreme right to approve the same every year should not be diluted in any manner. While change is always welcome, one has to be wary about pitfalls on the way. We should be conscious of the fact that all settled law on the direct taxes stands the risk of exposure to fresh bouts of litigation/ judicial interpretation as the Code seeks to usher in changes in the present law.
At the end, we express our strong reservations on the Direct Tax Code in its current form. We urge the Government to take a serious look at the Code by engaging experts and consulting all stakeholders as it is not as simple as it is made out to be. We hope that the future course of action adopted by the Government would be guided by transparency which has been a casualty so far. The manner in which the Drafting Committee conducted its proceedings in secrecy and failed to carry out the much needed pre-drafting consultations with relevant stakeholders leaves a lot to be desired particularly when such sweeping changes have been proposed . Nothing should happen in haste. The least the Government must ensure is that the taxpayers must not be hurled from the frying pan to fire in the name of overhauling of the existing system.
13. Tax Holiday for certain Businesses
The Code in para 12.21 puts forward arguments in support of removal of profit-linked incentives and replacing them with investment-linked incentives. We do not subscribe to the logic that profit-linked incentives are inherently inefficient. The evils attributed to profit-linked incentives such as laundering and shifting of profits to exempted activity would continue even under investment–linked incentives albeit in a different form. The present system of allowing depreciation on Capital Expenditure has shown a fair degree of success and there is no strong case for replacing it with the investment-linked system where the taxpayer would enjoy a tax-holiday till he recovers his entire capital expenditure. In fact, these proposals are fraught with serious consequences as the tax holiday can be literally unlimited for large cap projects. While the taxpayer would reach break-even before 10 years in even the projects having the longest gestation periods, he would not be required to pay any taxes over the entire life-cycle (50-75 years) of the project if this system is followed. There would also be a greater temptation to fudge records to boost Capex because of 100% deduction proposed in the year of expenditure as against the normal depreciation charge. This would create distortions and worsen the rent-seeking behavior and cause significant loss of revenue. This is highly undesirable. We strongly oppose this move as the remedy suggested is clearly worse than the disease.
14. TDS for all- Ordeal for the Am Admi
The utter contempt and disregard for the ordinary citizen of this country in this Code is evident in the manner it seeks to force tax deduction at source (TDS) for all persons even though their income is below taxable limit. They may be anyone starting from the cobbler to the rickshawallah to the street vendor or even our Senior Citizens, or anyone whose total income is less than the taxable limit, having their savings in the Post Offices, Banks or NBFCs. Today they file a declaration in Form 15 G or 15H and are spared from TDS. But the Code has this grand-arching proposition that they should all be first subjected to TDS and then they should claim their refunds from the Department by filing returns. While the taxpayer of today struggles to get his refunds in the current dispensation, one can not imagine the plight of millions of citizens who, for no fault of theirs, as they have no liability to pay income tax as such, have to undergo the ordeal of filing returns and await endlessly for refund of their most valuable savings. We condemn this highly insensitive, high-handed approach in the Code. We demand that the current prescribed policies in this regard should be continued without any change.
The scope of TDS provisions have been enlarged in a bizarre fashion. The existing threshold limit for TDS on professional fees has been dispensed with. A sweeping provision has been made by prescribing a 10% TDS in respect of “payments of any other income.” Thus, transactions for sale of goods or services or transfer of movable or immovable property would attract TDS whether personal or commercial in nature at the rate of 10%. This would be excessive in most cases leading to a huge number of refund claims. Going by the track record of the Department as regards the promptness with which refunds are issued , it would lead to further harassment and encourage rent-seeking behavior. We demand that the entire gamut of TDS provisions be reviewed and recast in a more rational way.
15. Abnormal-Extraordinary Power to the Administration
(a) General Anti Avoidance Rules (GAAR)
We believe that law has to be tough on tax evasion. At the same time, the delicate balance between enforcement of law and abuse of law has to be maintained . The General Anti Avoidance Rules prima facie confer unbridled powers on the tax authorities. Unless sufficient safeguards are built into the provisions, there is great potential for harassment of genuine tax payers.
(b) Re-opening of assessments
The proposals in the Code give an uneasy feeling that assessments can be reopened quite easily. This has created an unsettling feeling in the minds of taxpayers. At present, an assessment can be reopened subject to strict conditions. The provisions in the Code, however, would enable the Department to reopen and start roving enquiries with ease at any time afterwards. This will simply increase corruption and harassment by the department. Further, the Code permits reopening of assessments up to 7 years as against 6 years under the present law. Earlier, it was permitted up to 10 years. There is a lot of flip-flop on this account. In order to maintain some semblance of stability, the 6 year rule should continue.
(c) Stay of Demand
The Code does not have any provision for stay of demand by the IT authorities except at the stage of the Income Tax Appellate Tribunal. An assesses, who face huge demand from high pitched assessments would have no alternative but to approach the court for relief. The administrative machinery of the Department should be responsive to the genuine problems of business when it comes to payment/recovery of taxes. The higher authorities of the Department should be empowered to grant stay in appropriate cases where the taxpayer is facing genuine hardship. It may be good to minimize discretion but being insensitive to the call of good governance is not the way forward.
(d) Deemed Service of Notice
Under the Code, a notice would be deemed to be served on the fifth day after the day it is sent whether the notice is actually received or not. This is highly objectionable and violates all norms of judicial / administrative decorum. We call for its removal forthwith.
(e) Seizure of stock-in-trade
The Code empowers the Department to seize the stock-in-trade in the form of bullion, precious or semi-precious stones or jewellery found as a result of search. The present Act expressly provides that such stock in trade should only be inventorised and not seized. Again , such powers would be misused and result in harassment. The present rule of non-seizure of stock in trade is based on the sound principle that the Departmental action should not seriously hamper the business of the trader. We demand that the power to seize stock in trade in a search proceedings be dropped.
(f) Penalty/Prosecution Provisions
Some of the penalty provisions in the Code appear to be quite harsh. Thus , a penalty of Rs. 50,000 minimum and Rs. 2,00,000/- maximum is leviable for non-maintenance of books of accounts. These provisions can be misused particularly against the small and middle income businessmen with the Code making the maintenance of books of accounts quite onerous. The failure to file the return by the due date can attract penalty from 100% to 200% of the tax payable. These provisions defy any rationality. The prosecution provisions are also very draconian. The prosecution proceedings have been declared to be independent of other proceedings in the code. An omnibus provision for prosecution has been made for willful failure to comply with any direction under the Code. The most pernicious provision is the change in the rules of evidence. At present, the rule in any prosecution proceedings is that facts have to be proved beyond reasonable doubt (Section 278E(2) of the Act) . The Code states that the existence of a fact can be established by the rule of preponderance of probability.( Section 245(4) of the proposed Direct Tax Code Bill 2009). This goes against the basic canons of criminal jurisprudence in the country. This shows the dictatorial mindset behind the drafting of these provisions. The Bharatiya Janata Party would like to express serious reservations against these provisions and calls for its removal forthwith.
16. Other Issues in the Code
While we have outlined prominent angularities in the Code affecting the public, there are many more provisions which are objectionable. There are many provisions in the Code which indicate an attempt to concentrate powers in the hands of the Assessing authority without sufficient safeguards. The complexities in the Code in the areas of GAAR, taxing of international transactions, procedural provisions such as deemed service of notice , would ultimately give rise to unwarranted litigation which would frustrate the very objective of the Code. The proposal to obviate the need for a Finance Act every year is also fraught with ramifications. Although we appreciate the need for stability in rates, in a democracy, the Parliament’s supreme right to approve the same every year should not be diluted in any manner. While change is always welcome, one has to be wary about pitfalls on the way. We should be conscious of the fact that all settled law on the direct taxes stands the risk of exposure to fresh bouts of litigation/ judicial interpretation as the Code seeks to usher in changes in the present law.
At the end, we express our strong reservations on the Direct Tax Code in its current form. We urge the Government to take a serious look at the Code by engaging experts and consulting all stakeholders as it is not as simple as it is made out to be. We hope that the future course of action adopted by the Government would be guided by transparency which has been a casualty so far. The manner in which the Drafting Committee conducted its proceedings in secrecy and failed to carry out the much needed pre-drafting consultations with relevant stakeholders leaves a lot to be desired particularly when such sweeping changes have been proposed . Nothing should happen in haste. The least the Government must ensure is that the taxpayers must not be hurled from the frying pan to fire in the name of overhauling of the existing system.
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(Sushma Swaraj)
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(Arun Jaitley)
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(S.S. Ahluwalia)
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(Kirit Somaiya) Ex-MP
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(Nishikant Dubey)
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(Anant Kumar Hegde)
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| (Gopal Aggarwal) National Convenor, BJP CA Cell |
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