Opinion Why the tax code is nice

As reported,taxmen have made significant departures between DTC 1.0 and DTC 2.0.The high points deal with tax treatment of companies,investible assets and organised sector employee savings. So most of the changes impact on the three most economically powerful groups in the country,the business class,the investor class and the middle class.

One can agree or disagree with the changes between DTC 1.0 and DTC 2.0 (of this more later). But the stand-out fact is that between August 2009 and June 2010,anyone who cared to know would have found out that there was public chatter,which the government was committed to listening to. Take a bare minimum of examples. Business class spokespersons were speaking against DTC 1.0’s proposal on imposing a minimum tax on company gross assets (as opposed to book profits). Investor class spokespersons were worried about whether bilateral tax treaties with other countries would stand abrogated. Pretty much any thinking middle-class Indian was upset at the prospect of provident withdrawals being taxed.

Many of the sharp changes in proposals between DTC 1.0 and 2.0 favour the three powerful classes in that their potential tax liabilities in some areas have come down between the two versions. But no matter what,say,as an economist,you think of these changes,you cannot deny that never have so many things involving so many powerful interests and so much money been decided so transparently.

Ask economists who are realistic about the policy negotiation process that’s inevitable in political economy,who have been involved as advisors in these processes — realists as they are they frequently could not stomach the corporate-government negotiation process on,especially,tax policies. India has always excelled in producing an abundance of shadiness and even sleaze when such decisions have been taken. The current tax code is not a policy abomination simply because it is a huge horror house of bureaucratese. The endless clauses and subclauses are also a reflection of many,many closed shop shady negotiations between the governing and the moneyed classes. That’s one of the reasons why the current tax code has had so many micro changes over the years — who’s talking to whom behind which closed door.

The contrast with the process via which India’s new direct tax code is being decided can hardly be greater. That’s what’s so nice. Nicer still is that the big reform attempt in the indirect tax code,the goods and services tax (GST),is also going on and that,too,should reduce massively the scope of creative negotiation of tax rates. “Exemptions” sound like an fairly innocuous word. But in the context of tax policy,where exemptions mean the government deciding who or what cannot be taxed or be taxed at easy rates,they have sinister political economic implications. They are a measure of closed shop moneyed class-governing class non-transparent negotiations.

Of course,such negotiations will continue in other areas of economic policy post direct/indirect tax reform. But in tax policy,there’s genuine hope of a paradigm shift.

Therefore,the question is,will the niceness persist? Yes,it’s nice that through open public discussion with stakeholders the government decided not to tax middle class savings options like PF. But it will not be nice if the government changes it mind either between the time all public discussions are over and the legislative draft is completed (unlikely but not absolutely impossible) or anytime shortly after the new law is passed,say in the budget one or two years after the new tax law comes into force (a likelier possibility). The government should be very clear and remain clear for a length of time,and so should be the political class when the bill is debated in Parliament,that this is what tax treatment on savings should be: that the idea of treating earnings from

major savings options has been abandoned. This is contentious (many,including your correspondent,do not agree). But the government’s mind should be made up. A further change will not be preceded by open discussions and will therefore defeat the reform’s main principle. The same applies to some other changes between DTC 1.0 and DTC 2.0.

Another set of questions on whether the niceness will persist comes from the absence of proposed new tax rates in DTC 2.0. DTC 1.0 had mentioned them as part of public discussions. Taxmen are saying tax rate determination is the business of Parliament so those will be in the bill that will be tabled. That is not a non-argument. But,first,it does not answer why tax rates were mentioned in DTC 1.0. Second,it raises the question whether the government wants to retain “flexibility” in terms of tax rates.

Flexibility is a bad word here. It means it may be possible that the government does not any more want to have open discussion on new tax rates (and tax slabs) because it reckons for revenue reasons it may have to make things more complex and/ or continue tweaking rates now and then as has been the practice. If that is the reason,not mentioning tax rates in DTC 2.0 is the bureaucrat’s classic “say as little” option.

One hopes that’s not the case. That when final tax document comes out we can still look at it and say there’s something nice about it.

saubhik.chakrabarti@expressindia.com