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Economy

Direct Tax Code May Be Deferred, Again

The government may defer the Direct Tax Code by a year, even though Pranab Mukherjee mentioned as recently as Dec 7 that he would bring it in force from April 2012.

Dhirendra Kumar at Value Research expresses his concern about the delay – the second such one if the news is true – saying it causes unnecessary uncertainty for the regular classes:

Tax-saving patterns will change drastically when the DTC comes into effect. Broadly, the DTC tends to higher limits and a much smaller menu from which tax-saving investments have to be chosen. The lock-ins are also longer. For example, the shortest lock-in that was available was three years for ELSS, which will be gone. The NPS, which will be the only tax-saver in which money could go into equity will be locked in till retirement age.

These are very deep changes in savings patterns that we have spent our entire lives with. Unfortunately, while the new law is simpler than the existing one, it is not as simple as what was promised in the first draft of the DTC. It will take time not just for tax-payers but also accountants and tax lawyers and even tax officials to fully understand the implications of the new system. There will be the inevitable cycle of cases, appeals and clarifications. All this is going to take time and effort. And for the middle class individual without much spare resources or time, it’s going to be hard work. Fortunately, for most middle-class people, the DTC would probably have meant a lower tax outgo. The sooner that begins, the better it is.

What the DTC also means is lesser expenditure in collecting tax, lesser scrutiny ambiguities and lesser insurance/ELSS activity. The government will lose revenue but gain in terms of more compliance from simpler laws, and from the lower cost of collecting tax. But that won’t happen in a year, so the first year will be bad – a bad year, at a time the government needs revenue badly, is what might not be a good idea, it seems.

A short-term thinking government, which is pretty much what the Congress govt. is right now, will choose to scuttle the DTC. An opposition, like ours currently,  obsessed with trying to derail efforts rather than foster progress will choose to scuttle the DTC. The middle classes, whose life would be simplified by a better tax act, don’t get nada.

A bill which can actually be used to catch corruption (the anti-evasion clauses are serious and severe in the DTC) will silently die in the wake of an agitation against corruption. He who shouts the loudest is the only one heard. Push your way through, we don’t believe in merit anymore.