The direct tax code seeks to consolidate and amend the law relating to all direct taxes, namely,

income-
tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically
effective, efficient, and equitable direct tax system which will facilitate voluntary compliance and help
increase the tax-GDP ratio. Another objective is to reduce the scope for disputes and minimize litigation.
It is designed to provide stability in the tax regime as it is based on well accepted principles of taxation
and best international practices. It will finally pave the way for a single unified taxpayer reporting
system.

Direct Tax code, 2010, India

Nowadays, Government of India published its revised discussion paper on direct tax for restructuring of
charges in personal and corporate income tax structures and sought views and vision to tailor the final
tax rules. The discussion paper signifies that monetary limits, tax rates, tax slabs deductions proposed in
the direct tax code will be marked with a scale of readings during finalizing the legislation. It is expected
that the Indian Government will introduce the direct tax code in parliament in next session. Under the
future norms income tax would be charged at 10 per cent tax for income between Rs 1.6 lakh and Rs 10
lakh, 20 per cent between Rs 10 lakh and Rs 25 lakh and 30 per cent beyond Rs 25 lakh. The direct tax
code proposes to bring down the corporate income tax rate to 25 per cent from the present 34 per cent.
The new structure of Direct tax code will help those companies who are in loss the new direct tax code
will exempt them from paying such taxes. The direct tax code also includes the calibration of securities
transaction tax on the foundation of new structures for capital gains and flow of funds to capital
markets. The securities transaction tax will be levied on the base of stock trading.

The salient features of the code are :

 Single Code for direct taxes: All the direct taxes have been brought under a single Code
and compliance procedures unified. This will finally pave the way for a single unified
taxpayer reporting system.
 Use of simple language: with the expansion of the economy, the number of taxpayers
can be expected to increase extensively. The bulk of these taxpayers will be small, paying
moderate amounts of tax. So, it is essential to keep the cost of compliance low by
facilitating voluntary compliance by them. This is sought to be achieved, inter alia, by
using simple language in drafting so as to convey, with clarity, the intent, scope and
amplitude of the provision of law. Each sub-section is a short sentence intended to
convey only one point. All directions and mandates, to the extent possible, have been
conveyed in active voice. In the same way, the explanations and provisos have been
eliminated since they are incomprehensible to non-experts. The various conditions
embedded in a provision have also been nested. More importantly, keeping in view the
fact that a tax law is essentially a commercial law, extensive use of formulae and tables
has been made.
 Reducing the scope for litigation: wherever possible, an attempt has been made to avoid
ambiguity in the provisions that invariably give rise to rival interpretations. The objective
is that the tax administrator and the tax payer are ad idem on the provisions of the law
and the assessment results in a finality to the tax liability of the tax payer. To further this
 objective, power has also been delegated to the Central Government/Board to avoid
protracted litigation on procedural issues.
 Flexibility: the structure of the statute has been developed in a manner which is capable
of accommodating the changes in the structure of a growing economy without resorting
to frequent amendments. Therefore, to the extent possible, the essential and general
principles have been reflected in the statute and the matters of detail are contained in the
rules/schedules.
 Ensure that the law can be reflected in a Form: for most taxpayers, particularly the small
and marginal category, the tax law is what is reflected in the Form. Therefore, the
structure of the tax law has been designed so that it is capable of being logically
reproduced in a Form.
 Consolidation of provisions: in order to facilitate a better understanding of tax legislation,
provisions relating to definitions, incentives, procedure and rates of taxes have been
consolidated. Further, the various provisions have also been rearranged to make it
consistent with the general scheme of the Act.
 Elimination of regulatory functions: Usually, the taxing statute has also been used as a
regulatory tool. However, with authoritarian authorities being established in various
sectors of the economy, the regulatory function of the taxing statute has been withdrawn.
This has extensively contributed to the simplification exercise.
 Providing stability: at present, the rates of taxes are stipulated in the Finance Act of the
relevant year. So, there is a certain degree of instability and uncertainty in the prevailing
rates of taxes. Under the Code, all rates of taxes are proposed to be prescribed in the First
to the Fourth Schedule to the Code itself thereby obviating the need for an annual
Finance Bill. The changes in the rates, if any, will be done through appropriate
amendments to the Schedule brought before Parliament in the form of an Amendment
Bill.

DIRECT AND INDIRECT TAX-GDP RATIO  

 
 
 

FINANCIAL YEAR   2003-04 2004-05 2005-06 2006-07 2007-08

NET COLLECTIONS (Rs.
105088 132771 165208 230184 314468*
OF DIRECT TAXES Crore)
GDP AT CURRENT (Rs.
2755000 3149000 3580344 4145810 4713148
MARKET PRICES Crore)
GDP GROWTH
  12.08% 14.30% 13.70% 15.79% 13.68%
RATE
DIRECT TAX GDP
  3.81% 4.22% 4.61% 5.55% 6.67%
RATIO
DIRECT TAX
  26.48% 26.34% 24.43% 39.33% 36.62%
GROWH RATE
NET COLLECTIONS
(Rs.
OF INDIRECT 148600 170936 199348 241538 276696*
Crore)
TAXES
INDIRECT TAX-GDP   5.39% 5.43% 5.57% 5.83% 5.87%
 RATIO
INDIRECT TAX
    15.03% 16.62% 21.16% 14.56%
GROWTH RATE
TOTAL
COLLECTION
  253688 303707 364556 471722 591164
(DIRECT &
INDIRECT TAXES)
TOTAL TAX (DIRECT
&
  - 19.72% 20.04% 29.40% 25.32%
INDIRECT)GROWTH
RATE
TOTAL TAX (DIRECT
& INDIRECT) GDP   9.21% 9.64% 10.18% 11.38% 12.54%
RATIO
 
 
    *Figures for 2007-08 are provisional
 
          
Connecting the Dots for Personal Income Taxes and GDP

What will be the effect of a tax hike? What will be the effect of a
tax cut? Regardless of which way the Congress might go, how much can the government expect
to rake into its coffers through personal income taxes?

We can now answer these questions!

When we last took up the topic of taxes, we wondered if U.S. President John F. Kennedy's claim
that lower tax rates would lead to higher federal tax revenues was true. In our back of the
envelope analysis, we compared the tax revenue generating performance of the steeply
progressive tax rates of 1954 (with top rates and income brackets similar to those during
President Kennedy's tenure) to the much flatter progressive tax rates of 2006, and found evidence
that yes, lower tax rates have led to higher collections from personal income taxes over time.

But these are snapshots in time that suggest that lower tax rates lead to higher personal income
tax collections. We wondered what we would find if we connected the dots for the entire post-
World War 2 era.

So that's what we did. The chart below shows the percentage share of U.S. GDP represented by
personal income taxes collected by the U.S. government from 1946 through 2006:
Analyzing the data presented on this chart, we make the following observations:

1. The average percentage of GDP represented by U.S. federal personal income tax revenues from
1946 through 2006 is 8.0%. The percentage share of personal income tax revenues with respect
to GDP is normally distributed, with a standard deviation of 0.8%. This defines the typical range
for the personal income tax share of GDP of 7.2% to 8.8%.
2. Recessions (shown by the vertical red bands) often coincide with decreased revenue for the
federal government from personal income taxes. This is exactly what we should expect to see,
as the total level of income earned falls with employment levels during recessions.
3. There are unique circumstances that coincide with percentage shares greater than 8.8%:
o In 1968, the Democratic U.S. Congress and President Lyndon Johnson passed a 10%
income surtax that took effect in mid-year. Coupled with a spike in inflation, for which
personal income taxes were not adjusted to compensate, this tax hike led to outsize
income tax collections in that year.
o The sustained high inflation of 1978 (7.62%), 1979 (11.22%), 1980 (13.58%) and 1981
(10.35%) led to higher tax collections through bracket creep, as income tax brackets in
the U.S. were not adjusted for inflation until 1985 as part of President Ronald Reagan's
first term Economic Recovery Tax Act.
o Beginning in April 1997, the Dot Com Stock Market Bubble created an excessive number
of new millionaires as investors swarmed to participate in Internet and "tech" company
initial public offerings or private capital ventures, which in turn, inflated personal
income tax collections. Unfortunately, like the vaporware produced by many of the
companies that sprang up to exploit the investor buying frenzy, the illusion of prosperity
could not be sustained and tax collections crashed with the incomes of the Internet
titans in the bursting of the bubble, leading to the recession that followed.
4. Unique circumstances also apply to the one period in which the percentage share of personal
income taxes dipped below the lower level of 7.2%.
o The recession of 1948 is generally considered to be an "inventory recession." Here,
inventories soared as consumers had initially satisfied their pent-up demand for
consumer products following the end of World War 2, as companies of the era lacked
sufficient feedback to be able to better meter their production levels. The rate of
 unemployment doubled from 1948's level to 7.9% in October 1949, which in turn,
sharply decreased personal income tax collections.
o This surplus of inventory came at a time when many large companies completed their
full transition from wartime employment levels to "peacetime" levels, which aggravated
the employment situation.
5. Years in which tax rate cuts took effect (1964, 1970, 1971, 1982, 1987, 1988, 1991 and 2003) all
saw government collections of personal income taxes dip initially, then begin to rise afterward,
with the total of personal income tax collections always falling in the range between 7.2% and
8.8% of GDP.

This last phenomenon suggests that the distribution of taxable income shifts in accordance with
changes in the tax rate structure of the income tax code to maintain a stable equilibrium with
respect to overall GDP, albeit with a small lagging effect. This level of equilibrium is given by a
level of personal income tax collections representing 8.0% of GDP, plus or minus 0.8%, which
holds in the absence of unique economic and fiscal policy factors.

Basically, this means that as tax rates change, people shift their level of economic production to
account for the change in the tax rate structure, and do so in a way that maintains this overall
level of equilibrium.

In the case of a steeply progressive tax rate structure, people act to reduce their economic output
(and income) or channel it in ways so as to avoid the increased level of taxation through personal
income taxes. In the case of a flatter tax rate structure, people act to increase their economic
output and income, dispense with tax avoidance strategies, and personal income tax collections
rise in the years following when the tax rate reduction is first implemented to levels consistent
with the natural level of equilibrium.

Where the economy is concerned, higher, more progressive tax rates would result in both lower
levels of GDP and personal income tax collections, while lower, flatter tax rates would result in
higher levels of GDP and personal income tax collections.

This latter point is driven home by our next chart, in which we've calculated the inflation-
adjusted level of personal tax collections from 1946 through 2006:
We confirm that beginning in 1964, with the first of a series of income tax rate reductions,
personal income tax collections have risen at a much faster pace than they did under the highly
progressive income tax rate structure that existed from 1946 through 1963, even after adjusting
for inflation.

We'll revisit this latter chart in the future, but for now, we'll observe that regardless of what it
might hope to achieve from changing the schedule of tax rates, the government isn't going to get
much more than 8.0% +/- 0.8% of the pie called GDP for the effort. The real question is whether
it will be 7.2%-8.8% of a growing pie that incents people to be more productive or 7.2%-8.8% of
a stagnant or shrinking pie that incents people to become really good at dodging personal income
taxes, or just taking it easier.

Where and How We Got the Numbers

The data from 1946 through 2003 was taken from this report produced by the left-leaning Center
on Budget and Policy Priorities.

Meanwhile, the we found the percentages for 2004 and 2005 using spreadsheets containing the
IRS' statistics of income data for those years. We obtained the figure for 2006 tax revenue
collected through personal income taxes from this Congressional Budget Office report. We
divided each of these personal income tax revenue figures by the nominal (non-inflation-
adjusted) GDP we obtained from the Measuring Worth economic history resource and then
converted to the percentage shown in the charts and used in our later calculations.

We found by repeating this exercise for the known percentage shares of 7.4% for 2003 given by
the CBPP report and the percentage share of 8.0% for 2006 given in the CBO report that our
figures for 2004 through 2006 may understate the actual percentages of personal income tax
revenue by 0.1% to 0.3%. We believe these small discrepancies may be fully accounted for by
the differences in the source GDP data used to calculate the percentages.
To find the inflation-adjusted personal income tax figures, we first converted the non-inflation
adjusted nominal GDP for each year to constant 2006 U.S. dollars, then multiplied those figures
by the percentage of GDP, again for each year.