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The government initiated radical tax reforms through a draft code that aims at moderating income tax rates, abolishing Securities Transaction Tax and increasing deduction for savings up to Rs 3 lakh (Rs 300,000).

The new code will completely overhaul and simplify the existing tax proposals for not only individual tax payers, but also corporate houses and foreign residents.

The idea is to keep the provisions simple so that even an average taxpayer can understand the language, than having to go to chartered accountants and income tax practitioners. It will also introduce the concept of tax calculators.

The new code will also recast the powers of the Central Board of Direct Taxes, induce more transparency in decision-making and tune it to tax boards of countries like the US, Canada and Britain.

Releasing the Direct Taxes Code that will ultimately replace the over four-decades old Income Tax Act and bring all other direct taxes like wealth tax under its purview, said if reasonable level of discussion happens on the code, a bill could be placed in the Winter Session of Parliament.

The Code is proposed to come into effect from April 1, 2011. The Foreward to the Code clarifies that the Code is to eliminate distortions in the tax structure, introducing moderate levels of taxation, expanding the tax base and simplify the language.

Some of the key changes bought about by the Code are as under:

First and foremost, the Code proposes that the tax rate for companies (both domestic and foreign) can be substantially reduced to a uniform rate of 25 per cent. However, foreign companies would be required to supplement their corporate tax liability by a branch profits tax of 15 per cent on branch profits (that is, total income, as reduced by the corporate tax).

Further, for the individual taxpayers, the taxation continues to be on slab basis. However, the limits under the tax slab are proposed to be considerably increased as under:

1. Up to Rs 1.6 lakh: Nil; Rs 1.6 lakh to Rs 10 lakh: 10 per cent; Rs 10 lakh to Rs 25 lakh: per cent; above Rs 25 lakh: 30 per cent.

2. The Code now provides for the Minimum Alternate Tax calculated with reference to the “value of the gross assets”. This is on the premise that the shift in the MAT base from book profits to gross assets will encourage optimal utilisation of the assets and thereby increase efficiency. The rate of MAT will be 0.25 per cent of the value of gross assets in the case of banking companies and 2 per cent of the value of gross assets in the case of all other companies.

3. The present distinction between short-term investment asset and long-term investment asset on the basis of the length of holding of the asset is proposed to be eliminated. The Securities Transaction Tax, or STT, is proposed to be withdrawn.

4. One of the things on the simplification front is that the separate concepts of ‘previous year’ and ‘assessment year’ will be replaced by a unified concept of ‘financial year’.

5. Consistent with the international trend, the Code contains a specific section on general anti-avoidance rule saying that any ‘arrangement’ entered into by a person may be declared as an impermissible avoidance arrangement. It may be noted that such general anti-avoidance rule is non existent in the present statute.

6. Tax incentives for savings is proposed to be rationalised to an ‘Exempt-Exempt-Taxation’ method. Under this method, the contributions are exempt from tax, the accumulation/accretions are also exempt, however all withdrawals at any time are subject to tax at the applicable personal marginal rate of tax. It is proposed that the withdrawal of any amount of accumulated balance as on the March 31, 2011 from PPF and EPF will not be subject to tax. In other words, only new contributions after the Code commences will be subject to EET method of taxation.

7. The Code also substitutes profit-linked incentives by a new scheme. Under the new scheme, a person would be allowed to recover all capital and revenue expenditure (except expenditure on land, goodwill and financial instrument) and he would be liable to income-tax on profits made thereafter. The period consumed in recovering capital and revenue expenditure will be the period of tax holiday. The new scheme applies to developing, operating, maintaining of infrastructure facilities, power generation and distribution, exploration and production of mineral oil or natural gas, developing of SEZs, etc.

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