The tax calculus

The proposed direct tax code (DTC) is supposed to remove the complicated web of exemptions and make the tax regime simple and direct. The revised draft paper placed in public domain by the Central Board of Direct Taxes (CBDT) does not reflect the simplification process. The exemption regime has not been done away and that seems to bring a note of cheer to the middle class tax-payer. The exemptions on house loans as well as on various pension schemes remain. This does not however go far enough on the path of simplification.

The problem with the existing tax regime, dating back to 1961, is that it has too many exemptions subject to conditional clauses and sub-clauses. This has only spawned tortuous litigation but it has also encouraged tax-payers to look for the many ways to seek tax exemptions.

When the idea for the DTC was mooted last year, it was meant to do away with the forest of regulations of the 1961 Income-Tax Act. The revised draft shows that the goal remains elusive. The issue of tax slabs has also not been addressed in a satisfactory manner. For example, the proposal to increase exemption from Rs1.5 lakh to Rs3 lakh for housing loans in case of living in one’s own house is attractive indeed but it does not seem to make things simpler. Similarly, the idea to keep the exemption-exemption-exemption (EEE) regime in case of pension schemes instead of the exemption-exemption-tax (EET) system is good news indeed but it is not clear whether this would make the big picture of the tax system clear and simple, which was the aim of the DTC.

There are two views of the existing Indian tax regime. First it is too complicated and clumsy. Second, compared to many of the developed countries, the tax rates are really on the lower side.

There is more than an element of truth in the two views. It is not so much the amount of taxation but the manner in which the tax is calculated and the exemptions worked out that makes it a mind-boggling affair. The question on lower tax rates is not as outrageous as it may seem. It is indeed the case.

What is outrageous about the Indian tax system is that it does not provide the safety net in the form of social security. Neither the poor nor the rich can look to minimalist support when the chips are down. The DTC is not merely about how much tax exemptions that the middle and rich classes can hope to gain.