The direct tax code released by the finance minister initially in August 2009 and subsequently, with some revisions, in June 2010 proposes far-reaching changes in the tax system. It has proposed changes in definition of income, rates of taxation and permissible deductions.
A positive feature of this code is that it proposes a more comprehensive definition of income that includes perquisites. It also aims to bring long term capital gains in equity markets within the ambit of taxation. These are clearly positive moves. Yet the problem with the code is that it is firmly wedded to the idea that a lighter rate structure will increase tax revenues by improving tax compliance. The code therefore proposes to slash both corporate and personal income tax rates. Moreover, the revisions proposed in June have diluted many of the positive features of the code with respect to taxation of housing income, retirement savings, capital gains and Special Economic Zones (SEZs), while retaining the same rate structure. There is, therefore, a great likelihood that the code may turn out to be a fruitless exercise providing no breakthrough in total direct tax collection. In fact it may even hurt direct tax collections if the expected improvement in compliance does not materialize.