If the taxation arena were an auto show, the Direct Taxes Code (the Code) was intended to be the model that would be a show-stopper. It was exhibited, public comments were invited and some were implemented in the revised model.

The model had a good look and feel about it though the hidden troubles would come into focus a few years after use. Though the Finance Minister asserted in Budget 2011 that the Code would be implemented, a Parliamentary panel has indicated a delay since there is insufficient time to offer its comments on the Code as various Ministries and State governments have to be consulted.

While one does not know the reason why this was not thought of six months ago, it appears to be a case of ministerial stickiness that is stalling the Code. State Governments would be interested in a central law only for revenue-sharing. As the endless and fruitless talks over compensation for loss of central sales tax prove, these can turn into bottomless pits. The Code has been discussed thread-bare at various levels, and not much value-addition is expected at this stage.

The Code

The Code had a few good things going for it. Rounding-off of the threshold deduction to Rs 2 lakh, widening the tax slabs, retaining the break for interest on housing loans were some relief for the salaried class. The removal of the notional taxation for vacant house property was in keeping with the overall spirit of the Code.

Artificial deductions from business profits were removed and there were no major alterations in capital gains taxation, save for the initial proposals to set off all capita losses against each other and not providing a limitation to carry forward business losses. Non-profits would be among the ones that are gleeful with the postponement of the Code as they would not have to shell out 15 per cent as tax. There were some other inconsistencies in the Code that would be of minimal impact. Transfer pricing laws are by their very nature very subjective and judgemental.

Some of the transfer pricing orders issued cut into the core of the business model of enterprises and pit ones intuitive logic against each other.

Transfer Pricing

This has led to unbridled litigation with the tax-payer feeling that the Department is misusing the power it holds and the Department visualising a tax-avoidance scheme behind almost every international transaction. Clause 118 of the Code offered a solution- an Advance Pricing Agreement (APA).

The APA between the tax-payer and the Revenue would fix the arms length price and could be in place for a period of five years. Though arriving at this arms length price under APA would be subject to the same judgement and subjectivity, regular litigation would be avoided. The clause contemplated a scheme for APA to be drafted. The Department protected itself with the General Anti-Avoidance Rules (GAAR). The APA was supposed to be the protection for the tax payer. 100 per cent export undertakings could feel the impact of the postponement of the Code.

With the Software Technology Parks Scheme (STPI) living a charmed existence on year-on-year life-support, many entities planned to shift to the Special Economic Zone (SEZ) scheme.

SEZ units

The Twelfth Schedule of the Code shifted the deduction for SEZ units from a blanket exemption to one based on investment by permitting capital expenditure as a deduction from income. Though the existing tax break would remain even if the Code is not implemented, the tax impact of capital expenditure would not be reckoned. Many of the changes that the Code proposes can be incorporated in the annual Budget pronouncements. It does appear that this path of least resistance would be chosen by the Government.

However, it will not be like the Code. The Government should overcome administrative delays to ensure that the Code fructifies. It could brighten up the gloom that has surrounded them. After all, every new car model has more than merely a new name.

(The author is a Bangalore-based chartered accountant.)

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