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Direct Taxes > Direct Taxes Code - the fallacy

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Posted: 13-06-2011

Aims of DTC

The aim of the DTC as suggested by the government is to ‘simplify’ the income tax rules so that common man like me could understand the conditions. But on simple reading of the DTC and ITA will show you that it is actually the reverse!

DTC is not aiming to solve any of the major problems that plaque the direct taxes regime in the country.

1.       Tax Compliance.

2.       Flight of capital from the country.

3.       Encourage FDI.

The government does not claim to have solved any of these problems and neither has them attempted to in the DTC. Without any radical changes in it, the DTC is just another annual ITA exercise. Why make a fuss of it?


Tax Compliance

Will DTC bring in better Tax compliance? There is absolutely nothing new in the law to encourage people to be more compliant.

By default, Direct Tax is a negative tax. In the bygone ages, oppressive regimes introduced direct taxes to skin the conquered nations off their wealth. Socialistic legacy in this world believed uniform spread of income will solve social inequalities. Last few decades have established beyond doubt the weaknesses in the socialist theories.

Why is this, a negative tax?

Any tax that does not encourage growth in the country; on the contrary discourages growth is viewed as a negative tax. Slab rated increase of income tax or direct taxes is a negative tax that aims at discouraging people to earn more. Government is informing its citizens, if you earn more you need to part with more or when you earn more you enjoy less of your hard earned money.

Naturally, there is no surprise in finding more defaulters than people who are compliant. DTC does not try to make people more compliant. It is more of a negative tax. You will only end up with more defaulters and not willing compliance.

Any law that is not in line with the thoughts of the people will never be obeyed. The reason why there is so much of corruption in this country is because most of the laws of the land are not easy on the people. They are not in line with the lifestyle and they are far away from the ground realities. Either they have to break the law and have a rebellion or break the law and escape by being corrupt. The Indians chose the second, which is easier.

DTC is not in line with the thoughts of the people. People want to make more money. They want to be economically stronger; whereas DTC penalises them when they grow. Tax rates go up when you earn more money. What the law wants people to do is, either do not grow or at least, do not announce that you are growing. Suppress it!

DTC will only increase the black economy. Is that what is needed?

On the contrary, if there is a decreasing slab rate of income tax as the income increases, then the government motivates people to earn more. There is reason for me to show more income on my returns.


Flight of Capital from the country

There is so much being said about money going out of the country to ‘tax havens’ and to many others. If those countries are tax havens what are we? Tax Hells?

Flight of capital from a tax hell to a tax haven cannot be stopped unless either one of them changes colour. As a strongly worded presentation done in the United Nations by our permanent representative says, there should not be a place called tax haven!

There is also another way to handle the situation. A much easier one, at that! And that is, we change colour. Why should we continue as a tax hell and why should we not become a tax haven, after all!

DTC, again, does not address this issue of capital or fund movement out of the country. Strict controls have been laid down by the RBI and careful watch dogs are employed to monitor such flight of money from the shores of this country. But how successful is that?

Generally, money flows from a richer country to a poorer country. When it flows in the opposite way, some pumping of money is happening. This can happen only when people realise that money in the poorer country is not congenial for its growth.

Take a look at what happened with gold smuggling in this country. The government tried all means to control the smuggling. It only rose even after tranche after tranche of gold was held at the harbors and at the airports. How did it all stop? The government decided to reduce the customs and to de-control gold. You want to import gold, do so, freely! Now where is the smuggling of gold? The government created the business of Smuggling in this country. It had to be stopped by the government.
The same way, the government has created the business of black money. It has to be stopped by the government. Easy, remove income tax. Black money will cease to exist from the next moment!


Encourage FDI

One of the main purposes of the DTC is to encourage FDI. Though, I think, it has succeeded to some extent by giving some clarity and reduced ambiguity, at least in the cases pertaining to GAAR and CFC rules. To what extent, this would increase investment in this country might require a long wait and watch.

There is no new ground broken in DTC which could be called as a reason for increase in FDI. Yes, more clarity and simplification of the law would encourage FDI.

However, as indicated above, categorical changes in DTC to be in line with growth expectations of the people would increase FDI drastically. Whereas, the current system of complexity in taxation regime will only lead to more litigation as it did, and is doing, in the case of Service Tax regime.



Worldwide income tax abolition is becoming the most sought after requirement of the tax payers. 22 countries have accepted this and have charted out a roadmap for the same. Our recommendations are as follows:

1.       Direct Taxes should be abolished and they should be replaced with an equivalent consumption tax to avoid any drop in revenue to the government and it is Green as well.

2.       If not, the government should have a time bound plan to abolish Direct Taxes and a clear road map for the same should be worked out.


  • mark_taylor
  • Joined:22-04-2016
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Posted: 22-04-2016

Thanks for information.

  • mark_taylor
  • Joined:22-04-2016
  • Posts:1
  • Location:chennai

Posted: 22-04-2016

Thanks for information.

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