Radically redefining the middle-class,the Government today presented the draft Direct Tax Code a set of sweeping reforms in tax laws that phase out exemptions,simplify rules on corporate mergers,help improve compliance.
The code,launched jointly by Finance Minister Pranab Mukherjee and Home Minister P Chidambaram Mukherjees predecessor who played a key role in its drafting proposes to impose 10 per cent income tax on income ranging between Rs 1,60,000 and Rs 10 lakh against the Rs 3 lakh limit set in the Finance Act 2009.
The 10 per cent tax rate will apply for womens annual incomes ranging from Rs 1,90,000 to Rs 10 lakh and senior citizens incomes between Rs 2,40,000 and Rs 10 lakh. Persons (including women and senior citizens) earning between Rs 10 lakh and up to Rs 25 lakh per annum will attract income tax at 20 per cent and those above the Rs 25 lakh income slab will be subject to an effective rate of taxation of 30 per cent.
This is a major relief as income between Rs 3 lakh and Rs 5 lakh is today taxed at 20 per cent while all annual income exceeding Rs 5 lakh is subject to 30 per cent income tax.
The code has been put in the public domain for feedback and comments and the finance minister is scheduled to hold a meeting with all stakeholders in the next few days. Mukherjee said the government would try to bring in a Bill in the winter session of Parliament expected to start in November with these changes. If approved,the Bill will become a law that will replace the Income Tax Act of 1961 and other related laws.
The code proposes to increase tax deduction on savings to Rs 3 lakh. Besides,the code suggests that all perquisites be included in salary income of the assessee for the purpose of income tax. It proposes that retirement benefits be exempted from tax,only if saved in Retirement Benefits Account.
All withdrawals from accounts will be taxed to encourage long-term savings,as per the proposals. So the government plans to tax all new contributions made after March 31,2011 to tax-saving instruments including the Public Provident Fund (PPF). Contributions to the PPF,government provident fund (GPF) and other recognised provident funds (RPFs) will be subject to exempt,exempt,tax (EET) regime once the tax code is enforced. Currently,withdrawal from these three instruments is not taxed and contributions thereof come under the exempt-exempt-exempt (EEE) tax model.
Chidambaram,who announced simpler direct tax laws in the Budget 2005-06,said today that the Income Tax Act had become a hunting ground for tax lawyers with numerous amendments coming every year. The new code proposes to keep the plethora of exemptions to a minimum and eliminate the scope of litigation to the extent possible, Mukherjee said.
Chidambaram said that the underlying philosophy behind the code is the philosophy of the government,which is wedded to a well-regulated free market system. He said probably the code will become law by 2011,which will be the golden jubilee of the Income Tax Act.
In his Budget speech on July 6,Mukherjee had promised to bring the draft code within 45 days for public comment.