Model Direct Tax Code: Taxation Simplified

The Govt. recently unveiled the 'Model Direct Tax Code', which is likely to replace the Income Tax Act 1961, by 2011. This signals simplification of the tax system, improving efficiency of the system and expansion of the tax base. It is a step towards tax reforms in India and may grant independence to tax payers after 50 years of introduction of IT Act. The main architects of this code are:

• Pranab Mukherjee, Finance Minister, who has fulfilled his budget promise.
• P. Chidambaram, former Finance Minister, considered to be the brain behind the code.
• Arvind Modi, Jt. Secretary, Tax Policy & Legislation, CBDT.
• Anita Kapoor, Jt. Secretary, Foreign Taxation, CBDT.

The salient features of the Direct Tax code are:

• Liberalisation of Tax slabs - Up to Rs.10 lacs (10%), Rs.10-25 lacs (20%), beyond Rs.25 lacs (30%). The basic exemption limits to continue.
• Classification of Tax payers - The separate categorisation of Resident but not ordinarily resident (RNOR) to be abolished. This will lead to increase in number of tax payers.
• Introduction of EET regime - The exempt-exempt-tax (EET) method would entail tax on withdrawal of savings including PF. The existing savings in the funds up to 2011 will not be taxed.
• Increase in deductions - The limit for deductions (currently at Rs.1 lac under sec 80C) will go up to Rs.3 lacs, but deductions on repayment of Home loans will not be available.
• Allowances will be taxable - Allowances such as HRA, LTA etc. will be added to income and will become taxable. Interest paid on Home loans will not be exempt from taxes.
• Removal of Surcharge - The tax system will be simplified by removal of surcharge
• Revamp of Wealth tax - The current exemption limit of Rs.30 lacs will be enhanced to a whopping Rs.50 crores. Thereafter, wealth tax will be levied at a fixed rate of 0.25%.
• Corporate tax reduction - It it proposed to levy a uniform tax of 25% on domestic as well as foreign companies.
• Computation of MAT to be simplified - Basis of levying Minimum Alternate tax (MAT) will be shifted from profits to assets. Even loss making companies will be liable for tax.
• Long term & Short term Gains: The distinction between the two stand removed, tax on capital gains will be charged at normal rates. It will result in higher cost of investment transactions.

The code promises to usher in an era of greater transparency in taxation matters, and hopefully will make the life of Tax payers hassle free.