Tax on gross assets is leviable on every company at 2 per cent of the value of the gross assets with 25 percentage points for banking companies. Gross assets will be computed on the basis of balance-sheet prepared under the Company Law subject to any modification that may be made by rules to be prescribed by the Board.

Sec. 97 of the Direct Taxes Code gives the formula for determination of gross assets, which will include the gross value of fixed assets and capital, work-in-progress, besides the book value of all the other assets of the company as reduced by the depreciation reserve, if any, and any carried forward debit balance in profit and loss account.

In the formula, what is referred is value of fixed assets and work-in-progress, while for the other assets, book value is indicated leading to the possible inference that the value of gross block and capital work may not be on the basis of book value, though there is no positive indication to this effect. Since tax is not confined to net worth of the company, borrowed capital and all other liabilities would be subject matter of such tax.

This tax will replace the present Minimum Alternate Tax (MAT), which, however, gives set off for such tax paid, when the base for tax is shifted from MAT basis to regular income. There is no such provision in this new tax. Annual tax on gross value of assets, though an alternate tax, is sought to be justified with reference to experience of some other countries, which have adopted this base.

The economic rationale as indicated in the discussion paper is the expectation of average return on gross assets, which is understood as a justifiable alternative base. In the light of the fact that capital inadequacy is the main cause for failures of many businesses starved of funds, this tax may well prove to be a regressive tax much worse than the present alternate tax.

Since the validity of wealth tax was upheld by the Supreme Court only because it was a tax on net wealth and not a direct tax on wealth (property) falling within States power of taxation, it may well be constitutionally vulnerable.

International taxation

International taxation has been rendered not only complex but also made more uncertain than the present law already complicated by transfer pricing rules and the manner in which such rules are administered. Expediting tax deduction at source almost from every payment has become oppressive in disallowing legitimate payments under Sec. 40(a)(i), where tax according to the assessing officer was required to be deducted, besides reimbursement of tax failed to be deducted, interest and possible penalty. These will continue under the Code as well.

The provision that subsequent legislation will override treaty obligations is retrogade in as much a bilateral agreements can now be easily nullified by unilateral amendments to domestic law.

This will make non-resident taxation uncertain.

Deeming of foreign company as a resident in India in the light of the inference of the new provision in the Code, that even partial control and management in India will merit the company to be treated as a resident would lead to litigation for all foreign companies having some activity or other in India, exposing them for incidence of tax on the foreign income of foreign company. This is a new provision under the Code. The treatment as a resident may well render the non-resident to be liable to gross assets tax as well.

Tax on branch profits confined to foreign companies is a redundant tax, since such branch profits to the extent to which the non-resident derives income from its operations is even otherwise taxable, unless they relate to purchase operations, which are spared both under the domestic law and the Double Tax Avoidance Agreements, but not under branch profits tax. The consolation offered is that the rate of tax will be concessionally at 15 per cent as against the normal rate of 30 per cent for foreign companies.

Both the substantive as well as procedural law on the non-residents would make the investments in India far less attractive. This law is required to be simplified and not made complicated as has been proposed in the Code.

Whither tax reform?

The present artificial disallowances by treating all transactions other than account payee cheques as suspect makes the law irrational with hardly any advantage for revenue, since these could be circumvented by exchange of cash for cheques in non-genuine transactions. Incentive deductions are made more complicated. Mere postponement of liability rather than outright deduction under EET Scheme, besides imposing hardship for taxpayers will not be easy for the Department to administer in monitoring liability when it arises on maturity.

Discontinuance of Securities Transaction Tax has the effect of making the investors liable for capital gains tax putting them almost on a par with dealers. No assistance was taken from recommendations of expert committees in the past like Wanchoo Committee, Raja Chelliah Committee, Kelkar Committee or even earlier H. P. Ranina Committee, which had brought out a draft bill. Issues which would arise on account of the new clauses of limited liability partnership have not been addressed in the Code.

There are no doubt cosmetic changes as in the system of indefinite carried forward of business losses, but it should have preferably permitted carry backward of losses to help rehabilitation of industries in distress as in the U.K. or the U.S. Clubbing provisions are made inapplicable for income from assets transferred to sons wife, a welcome change.

Revision of slabs would greatly unburden the taxpayers in the middle level. Enhancement of wealth tax limit will spare a large number of taxpayers at high-income bracket, but compliance would be necessary for all with taxable income requiring computation of wealth for wealth tax as part of the Code, which is totally unnecessary.

What is more relevant is wealth statement, which would help match the income disclosed by way of increase for wealth during the year. There has been no thought for taxpayer convenience or even for effective tax administration.