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DTC: Much Ado About Nothing

After a year-long exercise, government settles for a very diluted version of the original DTC draft

Most commentary on the new Direct Tax Code (DTC) Bill is focused on lowering of income tax slabs. The top-line of this bill is that the basic income-tax that everyone pays will be reduced. However, when I look beyond the obvious, what comes to mind is the Hindi proverb ‘Khoda pahaad, nikli chuhiya’. This is just about the best way to sum up the whole one-year-long DTC song-and-dance that is now drawing to a close.

Taxes are lower, there are fewer exemptions, the act is (at least at this point of time) simpler than the old one, so there will hopefully be fewer ambiguities once the initial hump of interpretation is crossed. However, these just do not add up to the sort of ground-breaking, conceptual changes that the original August 2009 seemed to promise. That document was like a whiff of fresh air, almost all of which has dissipated by now. What has followed is a long process of bargaining at the end of which we have something that offers not much more than the kind of tinkering that goes on in every budget. Not just that, while the code reduces the scope and the number of exemptions, it in no way delivers on the original promise of doing away with the concept of arbitrary exemptions.

Similarly, it does not quite deliver on the promise of a simple tax law that would be understandable by ordinary tax-payers. The new law may be simpler than the forbiddingly complex one that exists now, but that is not the same thing as being simple.

For individual investors, the continuation of zero taxation on long-term capital gains is a great relief. The threat of re-imposition of such a tax was the biggest negative in the proposed law, and this is one rollback that is welcome. However, one change that seems to take away from one hand what it gives from the other is that of continuation of income tax deductions on certain investments made under Section 80C of the old act. Though deduction up to Rs 1 lakh continues, there are fewer permitted investment options. Only term-insurance policies, New Pension System (NPS), provident fund and public provident fund are now eligible for income tax deductions under Section 80 (c). I suppose this ought to give a fillip to the NPS, which is much in need of one.

Unfortunately, much about the new law is still unclear and will have to await a closer reading by tax lawyers. Still, there’s plenty of time to do that since the implementation has now been postponed by a year to April 1, 2012.