We have lived with the current Income-Tax Act for nearly half a century, with periodic tinkering done by different finance ministers.

The rapid development of innovative financial products/technology, global integration of financial markets, and mobility of capital and consequential competition between nations, have rendered the tax code in its present form and content inadequate.< /p>

The philosophy of taxation has gone through major changes, as reflected in the rates of taxes going to as high as nearly cent per cent and then dropping to a third. But the underlying lack of mutual trust between the taxman and the taxpayer are vitiating the atmosphere and litigations are growing exponentially.

Now, the Finance Minister, Mr P. Chidambaram, has promised to turnout a credible tax code before the end of the current year Let us take a broad look at the the context in which the new tax code is being framed.

The essence of income-tax law is to tax income earned and, hence, it cannot tax what has not been earned. A closer look at todays tax structure will show that we have a plethora of taxes which are not a function of income earned fringe benefit tax, service tax, dividend distribution tax and VA, to name a few. One may say that these are not income taxes, but the truth is they have all spun off from income-tax for compliance and administrative reasons.

Corporate decisions are at least as elastic to changes in these non-income taxes as they are to changes in income-tax. This said, there is a subtle difference between income-driven taxes and non-income taxes, inasmuch as the corporate have specific relief in income-driven taxes and not so in the case of non-income taxes. The way companies anticipate and react to non-income taxes is different from how they react to income-driven taxes.

This change in the mix of income and non-income taxes and the typical corporate reactions warrant anticipation and accommodation of the departments and taxpayers views.

For some strange reason, taxpayers believe that it is within their right to arrange their tax affairs however logical or illogical they may be.. Similarly, the tax department sees a ghost and chases it even where there is none.

This cycle of lack of trust and tax avoidance has gone on far too long that there is a case for statutorily stopping blatant tax avoidance and restraining the administration in its wild goose chase. There is lot to be learnt from developed countries which have had anti-tax avoidance rules in their code books for sometime now.

In the last half a century or so we have seen that any concessions tend to continue beyond their useful time horizon. To deal with them becomes difficult once they get embedded. A new tax code is possibly an occasion to shed add-ons, and move to a low but flat tax, which will not distinguish income on the basis of its source, or any other administered/artificial difference.

Turn away from the actual shareholding pattern of companies for a minute and look at the claimants on the pre-tax cash flow of the corporate, as measure of ownership.

The Revenue with a claim of 34 per cent is possibly the largest shareholder in most cases.

There are three groups competing for a share of the corporate value: the controlling group, which also appoints key managers, the small outside shareholders, and the state.

In many cases corporate value is shifted towards controlling shareholders by reducing the tax paid; this benefits small shareholders too but in a much smaller way.

This typical principle-agent problem has taken a freighting dimension due to (a) proliferation of tax shelters; and (b) the silent shareholders (both the small shareholders and the state) not paying enough attention to corporate governance in tax-related issues.

More than the small shareholder, who neither has access nor the ability to track diversion of corporate value through questionable strategies, the blame rests with the state which should play a more pro-active role.

Today corporate governance is regarded as guarded disclosures and disclaimers made by public limited corporate. The agent-principle problem is much more glaring in privately held companies. The new tax code has to rediscover this vital link.

The world of corporate finance has changed dramatically. Capital has become mobile as evidenced by the FDI/FII levels and the outbound investments. There is competition between nations for attracting this mobile capital and, at times, it degenerates to globally unacceptable levels of incentives. Fortunately, we have now reached a stage when we want to regulate the inflow.

The last few decades have seen greater financial innovation. The development of synthetics makes it possible to mimic any product/process combination without actually going through the process. The low transaction costs and evolution of advanced computing/communicating technologies have added to the ease of such transactions.

And, with the global markets getting increasingly interlinked, we are no more insulated from what happens in any other part of the world, and in any other market.

A combination of the above leads to complex transactions, parts of which are not in the purview of the local tax administrator.

The tax code, as it exists, is not designed to deal with these kinds of complex situations. The new code has an unenviable task of anticipating the evolution, balancing self-interest with global requirements and dynamically rebalancing, with a view to ensure that growth and integration with the global economy are not hindered, even as we move ahead with further liberalisation. It has to be more than a tax code. It must be able to dynamically rebalance.

Having looked at some of the structural issues, the main challenge before the Finance Minister is not about turning out a brand new tax code but in making it tick.

The task becomes complex because of distrust, corruption and the tendency to exploit are inherent in the system.

The context for renewal will have to be built on discipline, trust, learning and compliance. We need a mature administration which demonstrates its willingness to learn from the taxpayer and move forward in unison.

It is about institution building, and soft infrastructure development, and not so much about working overtime or churning a new tax code.