Big tax cut

The new direct taxes code, which is proposed to be implemented from April 2011, aims to moderate effective tax rates in the hope that this will encourage more people to pay up. SLABS TO BE DRASTICALLY CHANGED The Gains • Tax deduction on investments to be hiked from Rs 1 lakh to Rs 3 lakh • Wealth tax exemption up from Rs 30L to Rs 50cr • Base year for capital gains tax calculation shifted from 1981 to 2000 • Corporate tax rates to be cut to 25% from 30% And The Pains • Tax benefit of up to Rs 1.50L against home loan interest payment to go • EET (exempt, exempt, tax) to apply on savings under Section 80C (mainly PPF). Such savings will be taxed on withdrawal, but only on sums accruing on or after April 1, 2011 • Financial assets like stocks and FDs to be part of wealth and taxed Shares, fixed deposits will be included in tax calculation: FM New Delhi: The Centre on Wednesday unveiled a brand new code for direct taxes which offered many sops to the salaried class and senior citizens. The exemption limit at which taxes kick in will continue to be higher for women and senior citizens under the draft proposals. For women, their tax meter will start ticking when their income exceeds Rs 1.9 lakh per annum, whereas senior citizens will have to pay tax only if they earn more than Rs 2.4 lakh a year. A change that could be problematic for many individuals is in the treatment of post-retirement benefits like provident fund. The adoption of the EET (exempt-exempttax) method will mean that any withdrawal of money from you PF account, for whatever reason, will attract a tax since the amount withdrawn will be treated as part of your income for that year. This will, however, apply only to amounts that accrue from April 2011 onwards. Like personal taxes, the corporate tax rate too is to be cut from the existing 30% (excluding cesses and surcharges) for domestic firms to 25%. Also, companies can carry forward losses for as long as they like, while earlier a loss in one year could be set off against profits only in next eight years. In the case of foreign companies, however, in addition to this 25% tax there will be a 15% tax on “branch profits’’. Branch profits, the code explains, are defined as total income minus corporate tax. This seems to suggest that the effective tax rate for foreign firms could actually be slightly higher than the current 35%. Another big change is including financial assets—like shares and deposits— in the calculation of wealth tax. The whammy is sought to be offset by a reduction in the wealth tax rate from 1% to 0.25% and an increase in the threshold limit to Rs 50 crore. It’s also proposed to do away with the securities transaction tax, and change the manner in which tax holidays for infrastructure industries is given. Explaining the rationale behind these changes, finance minister Pranab Mukherjee said: “The aim ... is better compliance and realisation with likely expansion in the tax base.’’ He added, “All direct tax laws have been brought under one umbrella and laid down in a manner that it will eliminate the scope of litigation.’’ Former FM P Chidambaram who had began the process of rewriting the tax laws after Budget 2005-06 said: “It underlines the philosophy of the government, that is, a regulated free market system.’’ He also said, “The new direct tax code will promote economic activity and entrepreneurship.’’ The code was put up on the ministry’s website and the government has invited suggestions. Source: Times of India