Direct Tax Code

DIRECT  TAX  CODE

A new Direct Tax Code (DTC). That is what the country needs, not tinkering with the old DTC. Majority of the citizens of India like to play fair and square. This DTC enables them to do that.

The main thrust of this DTC is a fair equitable taxation policy. There will always be a certain percent of the tax paying people who will try to game the system. That is inevitable. They are the ones who will need to be picked up via surveillance and made to comply with fairness. 

We propose the following Direct Tax Code.

For individuals.

Two taxes – income and wealth.

All income up to Rs 10 lakhs per annum is tax free. From Rs 10 lakh to Rs 1 crore, a flat 10% tax rate. Rs 1 crore and above is a flat 20%  tax rate. All exemptions are removed. Gains/losses on financial investments to be annualised and taken into account every year. Agricultural income (not revenue) to be taxed.

Wealth tax will be calculated on total assets held by the individual. For assets up to Rs 10 crores, no wealth tax shall be levied. For assets beyond Rs 10 crore, a flat 1% of total value of assets exceeding Rs 10 crore will be charged per annum. Assets to be considered include land and property, financial holdings and  instruments – this can be called the sub-total asset value. Gold and jewellery will be computed as 50% of the sub-total asset value and will be added to the sub-total asset value to give the total asset value. This will remove the need of physical checking of gold and jewellery.

For non-individuals

All non-human legal entities will come under this.

A flat 20% on all income. No exemptions.

Wealth tax will be 1% of total asset value. 

For legal entities that are generally not taxed (charities, NGOs, Religious Trusts) income tax will apply if they do not spend 80% of the annual income of the year. Wealth tax of 1% will be applicable to this category. 

The reasoning for the above. 

No tax up to 10 lakhs will free up a lot of small tax payers. This will reduce the need for a large bureaucracy. The loss in revenue that occurs due to this will be more than compensated by the 1% wealth tax. The super rich (i.e. those with assets of Rs 10 crore and above) can easily bear the 1% annual tax.

Gold and jewellery is ingrained in our DNA. Instead of wasting time exhorting people not to buy gold, lets accept it and use it to our country's benefit. For calculating how much gold and jewellery an individual has, it's better to use a thumb rule of one third of total net assets, which is what most of us Indians do anyway. This way every Indian is freed the hassle of keeping a record of gold purchases, the country does not have to bother about wasting time in calculating gold assets for taxation and most importantly, we satisfy our national obsession in a transparent manner. 

Agricultural income (not revenue) needs to be taxed. Small and marginal farmers do not make more than 20 lakhs per family, so they will not be burdened. Presently, agricultural income is being used as a means of accumulating tax free income – this has to be stopped.

Exemption of Rs 10 crores for individuals for wealth tax will result in a vibrant and economically strong middle class. 

A transparent wealth tax of 1% per annum is better than an inheritance tax that everyone is enticed to game.

Filing of tax return should be compulsory, if total asset holding exceeds Rs 10 lakh or total annual income exceeds Rs 10 lakh. A simple online tax return form can be used for all those who are not required to pay tax.

Trusts, charities, NGOs are known avenues for tax evasion. By applying the 1% asset rule and an 80% spend of income, the attractiveness of these as a tax free parking zone will be reduced. 

The above is a fair equitable system. It ensures that the top 10% of the population (in terms of financial assets) bear their share of the tax burden.

Sim Khirid
www.simforindia.in