The banking sector plays a vital
role in the economic development of any country. In India, the financial service sector is now
acknowledged as the next growth engine. It is therefore crucial that fiscal policies
recognize this role and through various measures support and strengthen
the sector. Despite the representation made on behalf of the financial
service sector after the first draft of the Direct Tax Code (DTC), the new DTC does
not seem to address some of the issues faced by the banking sector.
India has a better banking system in place, as compared to the other
developing countries, but there are several issues that need to be addressed in
order to ensure that these issues do not remain as hurdles in the sustained
economic development of the country.
The Indian Finance Minister tabled the Direct Taxes Code, 2010 in the
Parliament on August 30, 2010 for debate and discussion. It was the third
update post the introduction of the draft Direct Taxes Code in August 2009. A
number of stringent proposals were brought in the draft Direct Taxes Code,
2009. There were several areas of concern. Most of them, such as
asset-based Minimum Alternate Tax (MAT) and treaty override, were addressed by
the Finance Minister through the release of a Revised Discussion paper earlier
in June this year. The DTC will now be effective from April 1, 2012, and not
from April 1, 2011, as had been intended earlier. This gives time to companies
to understand the provisions, engage in a dialog with the government and,
more importantly, restructure their operations as they switch over to
taxation under the DTC. Also, this gives time to the government to gear up its
systems to accept and audit additional new compliance requirements imposed on
the taxpayers. In substance, the new set of proposals is, by and large, in line
with the provisions of the current Income-Tax Act, 1961 (the Act). This article
discusses the major impact of the DTC on the Indian banks.
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