The Union cabinet on Thursday approved a legislation to usher in a new direct taxes code (DTC) where the tax incidence for individuals was lowered marginally, but raised for companies.
At the same time, DTC has also imparted greater predictability about the tax regime by writing tax rates into schedules accompanying the legislation that will require parliamentary consent.
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The text of the entire legislation was unavailable, but people privy to it said the Bill was largely in line with the revised draft DTC introduced in June this year.
DTC is expected to be tabled in Parliament on Monday, a minister present at the cabinet meeting, said. Once it is tabled in Parliament, the speaker is expected to refer it to a multi-party standing committee of lawmakers to suggest changes after providing all stakeholders a hearing, the minister added.
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Finance minister Pranab Mukherjee told television channels after the cabinet meeting that DTC’s aim was to “provide predictability”.
According to another minister, also present at the cabinet meeting, DTC has enhanced the threshold income to levy tax from the current level of Rs160,001 for individuals to Rs2lakh. For women and senior citizens, the threshold income has been fixed at Rs2.5 lakh.
The tax slabs have also been tweaked and the ceiling for the slab where 20% tax is levied has been enhanced from Rs8 lakh to Rs10 lakh.
The outcome of the changes in individual income tax would be a reduction in the tax liability of an individual with an income of Rs10 lakh by about 16% from the current level. For an income of Rs5 lakh, the tax liability will come down by about 12% from the present level.
DTC has enhanced the overall tax liability on companies. According to one of the ministers, DTC has retained the corporate tax rate at the current level of 30%. However, the effective tax rate for domestic companies today is higher at 33.22% on account of cesses. DTC’s position on cesses was unavailable.
Overseas companies today have a higher tax rate. The rate recommended in DTC for overseas companies was not available.
DTC has enhanced the effective tax rate for the universe of Indian companies by increasing the minimum alternate tax (MAT) to 20% on book profits from the prevailing 18%, which is effectively at 19.93% after taking into account the cesses.
MAT was the focus of significant lobbying by industry in its open-house discussions with the income-tax department last year after the original DTC draft was placed in the public domain in August 2009. The draft DTC had wanted to levy MAT on gross assets instead of book profits to push companies to allocate capital more efficiently.
Another significant change in DTC is that tax rates, unlike the prevailing system, have been written into the schedules accompanying the legislation, said a minister who attended the cabinet meeting.
The implication of writing the rates into the schedules is that eventually Parliament would have to sanction any change in rates, but a change does not have to confined to the annual budget.
“Currently, change is done by the mechanism of the Finance Act,” said Tarun Gulati, partner at law firm Economic Laws Practice. “That is why the budget has become such an important exercise.”
“Schedules are a part of the statute,” Gulati said. The consequence of writing rates into the schedule is that the government can change rates at any time, but Parliament will exercise oversight, he added.
DTC has strengthened the anti-avoidance regime, the minister said. The tax code, both in its draft version and diluted, revised version, was designed to short-circuit attempts to sidestep tax in the course of international transactions.
As internationalization of the Indian economy has increased, DTC in all its versions tried to plug loopholes, which could be used to avoid tax in the event of cross-border acquisitions or regular transactions.
Liz Mathew contributed to this story.