Thursday, August 26, 2010

New direct tax code: Major relief for salaried class

In a move that could leave more money in the hands of people, the government on Thursday proposed to raise exemption limit on income tax from the present Rs. 1.6 lakh to Rs. 2 lakh.The new Act would usher in reduced tax rates and exemptions that may come into effect from next fiscal.The bill also proposes income tax for Rs. 2- Rs. 5 lakh slab to be 10 per cent, and 20 per cent on income up to Rs. 5-Rs. 10 lakh, and 30 per cent on income beyond that.The bill has exempted senior citizens earning up to Rs. 2.5 lakh. The direct tax code bill also seeks to remove surcharge and cesses on corporate tax, which could provide relief to business houses.Highlights:Salaried persons exempt up to Rs. 2 lakhSenior citizen up to Rs. 2.5 lakh exemptTax for those earning Rs. 2 - Rs. 5 lakhs at 10 %Tax for those earning Rs. 5 - Rs. 10 lakhs at 20%Tax for those earning Over Rs. 10 lakhs at 30%Housing Loan exemption retained at Rs. 1.5 lakhCorporate tax to be 30%, including cess, surchargeCapt Gains tax remains unchangedMAT to be levied at 20% on book profits not gross assets"The whole objective is that a plethora of exemptions will be limited. (Income) tax slabs will be three. Rate of taxes will be taken in the schedule so that they need not be changed every year," Finance Minister Pranab Mukherjee said after the Cabinet meeting.According to sources, the DTC bill is likely to be tabled in Parliament on Monday. Thereafter, it will be referred to Parliamentary standing committee, they added.For senior citizens and females, the tax slabs are likely to be relaxed further, they addedWhen contacted, senior officials in the Finance Ministry declined to comment on the slabs.At present, income between Rs. 1.65 lakh and Rs. 5 lakh attracts 10 per cent tax, while the rate is 20 per cent for the Rs. 5-8 lakh bracket and 30 per cent for income above Rs. 8 lakh.The first draft of the bill had suggested 10 per cent tax on income between Rs. 1.60 lakh and Rs. 10 lakh, 20 per cent on income between Rs. 10 and Rs. 25 lakh and 30 per cent beyond that.However, finance ministry officials had later said those slabs were just illustrative.The Bill, approved by Cabinet today, also seeks to impose minimum alternate tax (MAT) at 20 per cent of the book profit, compared to 18 per cent at present.The first draft had proposed to impose MAT on assets, which drew strong criticism from the industry. The MAT on book profit has been maintained in the revised draft as well.The first draft had also proposed to tax long-term savings like provident funds at the time of withdrawal. However, the revised draft exempted them, after the first draft drew flak."Concerns were expressed for shifting from EEE (exempt, exempt, exempt) to EET (exempt, exempt, tax)," the Finance Minister said.This would also address the issue of taxing surplus funds of charitable institutions, he added.When enacted, the DTC will replace the archaic Income Tax Act and simplify the direct tax regime in the country.Finance Ministry officials exuded confidence that the Bill will come into force by the deadline of April 1, 2011.The code aims at reducing tax rates, but expanding the tax base by minimising exemptions."DTC will help in streamlining various tax exemptions, deductions and thereby bring in moderate tax rates. DTC would address most of the issues raised by corporate India, like, not imposing tax on gross assets, clarifying EEE, introducing graded deduction for capital gains among others," Ernst & Young Tax Market Leader Sudhir Kapadia said.