New Direct Tax Code for India

The Indian Government this week, unveiled the draft of a brand new direct tax law, which will replace the four-decade Income-Tax Act. If the bill gets passed in the Lower and Upper Houses of the Parliament, the government is hoping to implement the new code for 2011, after getting the bill passed in this year's winter session. According to Finance Minister, Pranab Mukherjee, the new tax will, "Improve efficiency
and equity of the Indian tax system by eliminating distortions in tax structure." Let's see what the tax code proposes for an Individual, Corporate, Stock Market etc.

Individual Taxation

• Lower the income tax but reintroduce wealth and capital gains tax at lower levels.
  

  (Wealth tax – Currently, Wealth tax is imposed on income of more than Rs. 30, 00,000 at the rate of _____.According to the new tax law, net wealth, which would include all wealth of an individual in excess of Rs 50 crore, will be chargeable to wealth tax at the rate of 0.25%.)
  

  Income Tax slabs
  

Income Tax Rate		Current Tax slab	Proposed Tax slab
Exempt	Upto Rs. 1,60,000 a year	Upto Rs. 1,60,000 a year
10%	Upto Rs. 3,00,000 a year	Upto Rs. 10,00,000 a year
20%	Upto Rs. 5,00,000 a year	Upto Rs. 25,00,000 a year
30%	Beyond Rs. 5,00,000 a year	Beyond Rs. 25,00,000 a year

• Now, an individual's gross salary would also include perquisites such as value of rent-free accommodation, medical reimbursements and leave travel encashment, which are currently taxable.
  
• Taxpayers will also not be able to claim tax benefit on interest repayment on housing loans. However, the benefit would be available if the house is rented. 
  
• Bring a uniform pattern of taxation on all long-term savings in the form of EET—exempt at the stage of contribution, exempt during accumulation and taxed during withdrawal. 
  

  ( This means that all the long term savings, will not be taxed when you are investing in them, will not be taxed when you are earning interest on it but not withdrawing it, and will only be taxed once when you are withdrawing it.)
  

 

Corporate

• Cutting down the corporate tax rate to 25% from current rate of 30% plus 10% surcharge if turnover is more than Rs. 1crore plus education cess (For Indian companies).
  
• Current profit-linked tax incentives for businesses will be replaced with investment-linked incentives. 
  

  (This means that current tax incentives given to corporate according to the profits they make should be given according to the investments they make.)
  

• It also proposes rationalization of tax provisions for amalgamations and demerger so that tax remains neutral when businesses reorganize. 
  
• Dividend distributed by companies would be taxed at the rate of 15%. From current rate of 12.5%.
  
• Currently, if there is a conflict between the tax treaty that India has with another country and the Indian tax law, the non resident Indian entity has the choice to opt for the treaty benefits and domestic law. According to the new code, this choice will be withdrawn and in case of conflict which ever has been framed later will be followed. So if a double taxation treaty has been signed later, the Indian tax law will be superseded by the Treaty provisions.
  

 

Stock Market

• Proposes abolition of Security Transaction Tax. Capital gains on shares and securities have been proposed to be taxed as income.
  

  (Security Transaction Tax that was introduced in Budget 2004-05, and is levied every time you buy or sell a security like shares. The rate differs according to the nature of the security and whether it is a purchase or sell. )