New Direct Tax Code unveiled

Finance minister Pranab Mukherjee stuck to his Budget promise, releasing the draft Direct Taxes Code aimed at rationalising and simplifying India's obtuse tax regime, while expanding the base and moderating rates. The exercise has taken over a year. The new code proposes a slew of radical reform measures-lower income and corporate tax rates, abolition of securities transaction tax and an increase in the annual deduction on savings to Rs 3 lakh--and brings all pension schemes under a common tax system.
Mukherjee said the government would have "informed discussion with stakeholders" on the code, which rewrites the Income-Tax Act of 1961. While he was hopeful of tabling it in Parliament in the winter session, the finance minister cautioned that it would come into force only from April 2011. Along with the introduction of a goods & services tax in April 2010, which will hugely simplify the indirect tax system in the country, this will be the largest revamp of India's fiscal structure. "Tax reform is a process, not an event. To moderate tax rates and simplify tax laws, all direct taxes--including FBT, wealth tax and income tax-would be brought under one code," the finance minister said while releasing the draft.
Home minister P Chidambaram, who initiated work on the code during his term as finance minister, said it would be a huge improvement over existing law. "It is a brand new code, written from scratch. It is not an amendment, but a replacement of the I-T Act," he said, adding that it would promote entrepreneurship and a "well-regulated, free-market system".
The changes are meant to create a rule-based, long-term tax structure for industry . For individuals, it eliminates the opportunity to split a salary into taxable and non-taxable portions, while at the same time moderating the tax slabs.
To this end, the code seeks to rework the slabs by keeping the threshold at Rs 1.6 lakh for individual assessees. A 10% tax would be levied on income between Rs 1.6 lakh and Rs 10 lakh, while a 20% tax plus Rs 84,000 would be levied on income between Rs 10 lakh and Rs 25 lakh. On an annual income of over Rs 25 lakh, individual assessees would pay 30% tax plus Rs 3.84 lakh. Significantly, it seeks to include all perquisites in salary income.
For individual taxpayers, the code also proposes to hike the deduction on savings to Rs 3 lakh annually . But at the same time, it would ensure that all types of retirement funds like the Public Provident Fund are taxed at withdrawal, thus providing uniform treatment with the new pension schemes.
In a welcome relief to India Inc, the draft proposes a uniform corporate tax rate of 25% for both domestic and foreign companies, which would be almost the same as that levied by China. Foreign companies, however, would pay an additional 15% branch profit tax on the difference between their total income and corporate tax liability.
As a sweetener, it provides for advance agreements that would allow such companies to determine arms-length pricing before launching operations in India.
:A smarter regime To be tabled in House in winter session, come into force from April 2011 .
Moderates tax slabs for individual assessees; threshold at Rs 1.6 lakh
To include all perks in salary income, Rs 3 lakh deduction on savings
Proposes a uniform 25% tax rate for both domestic and foreign companies
Wants STT scrapped, tax on long-term cap gains on securities trading
Under the minimum alternate tax, it proposes that instead of book profits, asset-based valuation be used for alternate taxation.
Bringing good news to Dalal Street, the code proposes abolition of the controversial STT, but suggests reintroducing a tax on long-term capital gains on securities trading.
It also seeks to rationalise capital gains tax and remove the distinction between long term and short-term capital gains tax.
To combat tax avoidance, it seeks to introduce a general anti- avoidance rule, although it has spelt out a number of penalties for tax evaders as well.
Significantly, the code also calls for a halt to profit-linked incentives or tax exemptions, calling them "inherently inefficient" and suggests an investment-linked incentive for special economic zones, exploration of production of mineral oil and natural gas, cold chain facilities, etc.
Further, it also proposes to rationalise amalgamation and de-merger provisions to allow for tax-neutral business reorganisation in a move expected to promote investments in the country . MFs,venture capital funds and life insurance firms would be given pass-through status for tax purposes.

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