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Tax Code Set For Transformation

The changes to the tax laws may mean less taxes, but its benefits have far wider implications

The almost 50-year old tax laws in India are all set for a revolution that will usher its citizens into a much more modern era – in just about two years’ time. The existing Income Tax Act goes as far back as 1961.

Finance Minister Pranab Mukherjee released the new Direct Taxes Code into the public domain for debate on Wednesday. The intention is to improve efficiency as well as equity aside from getting rid of anomalies that distorted the structure. The main theme is to expand the tax base by making it much more worthwhile for all concerned to file their tax returns.

As former finance minister P. Chidambaram said, "The Code is not an amendment, but a replacement of the Income-Tax Act."

What the Code is suggesting to do is to significantly cut tax rates applicable to individuals as well as companies and to axe as many loopholes and exemptions as possible. In short, slash rates, ensure greater compliance by tax payers and get rid of the need for frequent changes in the tax laws. Among the goals cited for achievement through the new Direct Taxes Code are consolidation and amendment of all direct taxes starting from income tax, DDT, and wealth tax.

As the FM said, the net result expected is , “Better collection of taxes.”

At the moment just about 31 million people in India pay tax out of a population of more than 1 billion – even if you don’t account for children and other non-earners, this is quite a low count. You can even discount the fact that India is a poor country and still not be able to say that is an adequate number.

What we can immediately see is that the Code is looking to slip more money into your wallet – by making you pay less tax. The Code proposes to charge tax at the rate of 10 per cent on incomes that fall between Rs 1.6 lakh to Rs 10 lakh, 20 per cent on incomes that fall between Rs 10 lakh and Rs 25 lakh and 30 per cent on incomes above Rs 25 lakh.

For women the basic exemption limit will be higher at Rs 1.9 lakh, while that for senior citizens it will be Rs 2.4 lakh.

As such, a person earning a net income of Rs 5 lakh, who is currently paying an income tax of Rs 55,620, will end up paying Rs 35,020. A person earning Rs 15 lakh will see his tax payment fall from the current Rs 364,620 to Rs 189,520.

Adding to the smile factor is the proposal to hike the cap on investments in tax saving products/instruments from the current Rs 1 lakh per annum to Rs 3 lakh.

As far as pooling vehicles like mutual funds and provident funds are concerned, they will be given a pass-through status, which means that they will be paying no direct taxes.

Corporate income tax too is set for a revamp with the Code indicating a fall in income tax applicable to them. Form the current 35 per cent, the tax rate is recommended to fall to 25 per cent;

Extinction has been inked in for the Securities Transaction Tax (STT)

The FM said that the government intends to move the Bill in the winter session of Parliament and the Code is likely to come into effect from April 1, 2011.

However, it must be remembered that these are just initial figures, there are a lot of give-and-takes in the Code and there is the likelihood of these huge amounts of tilts not actually transpiring. But what it will most necessarily do is simplify the whole process and make sure individuals can plan even as much as 10 years ahead without having to keep tinkering with their investments after there is a change after every Budget day. But most of all, the Code promises to be "wedded to a well-regulated free market system", as per Chidambaram and consequently is tailor-made for individuals, investors and entrepreneurs, leaving nothing in the nebulous zone that has bedevilled the country's people for so long.

The Code of Gain

  • Securities transaction tax stopped
  • Tax losses can be carried forward indefinitely
  • Agricultural income stays out of the tax purview
  • Some co-operative societies can get exemptions
  • Wealth tax rate slashed from 1 per cent to 0.25 per cent
  • Exemption limit on net wealth tax raised from Rs 30 lakh to Rs 50 lakh
  • Corporate tax rates (also for foreign companies), slashed from 35 to 25 per cent
  • Base date for capital gains tax to apply from April 1, 2000 from the earlier one in 1981

The Code of Pain

  • Anti-avoidance provisions introduced
  • Rent-paid deduction slashed to Rs 2,000
  • LIC policy receipts taxable except for term policies
  • Govt employees rent-free accommodation made taxable
  • Capital Gains Tax to be re-introduced (mutual funds/stocks)
  • Income definition to consist of all accruals and receipts of revenue
  • No distinction will be made between long-term and short-term assets
  • Minimum Alternate Tax (MAT) will not be allowed to be carried forward for tax credit claims in coming years
  • Exempt-Exempt-Tax (EET) method to be applicable on all savings schemes (taxed at the time of withdrawal)
  • Tax breaks on home loans diluted – a) there will be no tax deduction available on interest paid on loans taken for self-occupied premises; b) Principal repayment deductions stand withdrawn
  • Capital gains rollover benefits for tax exemption reduced to one hous