The Hindu Business Line : Getting the Act right

The basic requirement for a successful tax law is to visualise what is expected of the tax system, say, in the next 5-10 years, and formulate a long-term fiscal policy.

Since presenting the 2005 Budget, the Finance Minister, Mr P. Chidambaram, has been talking about the new income-tax law. Recently, at the National Academy of Direct Taxes, Nagpur, he said that four working groups have been set up to provide inputs for drafting a new income-tax legislation. However, the inputs of taxpayers, chambers of commerce, trade associations and tax advisors have not been solicited.

To give to the country an income-tax law that can serve its purpose and which is simple and easy to understand, some prerequisites have to be met. In-house committees which are bureaucratic and obsessed with revenue generation cannot bring forth a broadly acceptable Act. Also, a comprehensive I-T law cannot be conceived and legislated in a short timeframe. In this context, the following aspects need to be considered.

Planning

Thus far, holistic thinking has not gone into what is proposed to be achieved by amendments to the existing tax laws. No attempt has been made to clearly identify the fiscal objectives, indicating the areas that the tax reform is expected to cover.

Broadly, planning has to look at strategy and functioning of the reforms body. Strategic planning includes a clear statement of policy objective; a theoretical model explicitly relating the tax changes to the policy objective; an empirically grounded statement of all initial and final conditions; and a clear understanding and enunciation of the political, social and economic context.

In short, before initiating the process of tax changes, it is necessary to be clear as to i) what is sought to be achieved; ii) how it is proposed to be achieved (which would include taking care of implementation aspects); and iii) what would be the reaction of the changes in the existing social, economic and political set-up.

Timeframe

Adequate time needs to be given to the body entrusted with the task of framing the new Act. In this context, reference to the Carter Commission in Canada in 1962, for suggesting major reforms in the tax system, can provide an idea about realistic approach to fixing a time schedule. The Canadian tax reform process passed through three major stages. In the first, the Canadian tax system was studied in detail by a group of tax and public finance specialists resulting in a six-volume report with 27 supporting staff studies, which was presented to Parliament in February of 1967.

The report provided a blueprint for tax revisions that would have fundamentally altered the existing system, by systematically defining income according to the definition of Henry Simons.

The second stage began with a national debate on the Carter Report and ended with the publication in 1969 of a White Paper containing the Government's proposals for tax legislation. The Paper, while not as sweeping as the Carter Report, made important changes in the distribution of the income-tax burdens.

The final stage began with parliamentary debate on the White Paper and ended with the enactment of Bill C-259 at the end of 1971. The exercise, which commenced in 1962, ended with the passage of Tax Reforms Bill in 1971.

Obviously, in the Indian context, such a long time-frame is not possible. But then a comprehensive I-T Act cannot be drafted by in-house committees working on part-time basis with no fixed time schedules.

Taxpayers' participation

Tax changes cannot be made keeping merely the Government's interests in mind. A White Paper relating to the proposed changes needs to be issued and then widely discussed before legislating a new Act. The collective wisdom of the Government, taxpayers, tax advisors, trade and industry representatives, tax economists and policymakers needs to be utilised.

Imperatives for legislating new law

The basic requirement for a successful tax law is to visualise what is expected of the tax system, say, in the next 5-10 years, and formulate a long-term fiscal policy.

In spite of more a number of studies done in the past 50 years, there have been no major tax reforms on the direct taxes front.

The term `major reform' implies a thorough re-examination of the legal and procedural provisions, including some of the basic assumptions of the system. This exercise is imperative for formulating the new tax code. Legislative changes should be the product of serious thinking to accomplish specific tax policy goals.

The intention of the new I-T code must be stability, where the basic frame remains unaltered for years.

(The author is a former chairman of CBDT.)