New Delhi: Income-tax rates will no longer run the risk of changing every year. With tax revenue soaring, the finance minister is willing to give up one of his powers: to change income-tax rates in the annual Finance Act, as the Union budget is officially called after it is approved by Parliament.
The finance ministry is keen to freeze the three basic rates of tax at 10%, 20% and 30%, depending on an individual’s income, and make them part of the new Income-tax Act which will be called the Direct Tax Code.
Tax experts also believe that the government could simplify the corporate tax regime which includes several components: fringe benefit tax targeting some perks and expenses incurred by companies on behalf of their employees; minimum alternative tax; and surcharge on tax.
“The finance ministry is considering a single corporate tax rate that would include all other taxes in it,” a tax expert familiar with the process said.
Once the tax rates are part of the code, the finance minister no longer has the luxury of changing them in the budget; any change will require an amendment of the act which, in turn, would require Parliament’s approval. The budget, however, can stipulate a change in income slabs that dictate how much tax an individual pays. In developing economies such as India, these slabs usually move upwards.
If the minister and the ministry are willing to give up the power they currently enjoy to change tax rates, it is because tax collections have increased over the past few years. Income-tax revenue has increased from Rs49,268 crore in 2004-05 to Rs63,630 crore in 2005-06 and Rs57,990 crore in the first 10 months of 2006-07. This has prompted the finance ministry to leave tax rates unchanged since 1997.
Government officials say there is another reason for the ministry’s interest in codifying rates: tax can still be collected even if the budget for the year is delayed for some reason. “Under the present system, if the Finance Bill (the budget) is delayed beyond 28 (or 29) February, the government has to submit a supplementary bill in order to empower itself to levy and collect tax,” said a tax expert who did not wish to be identified. Finance minister P. Chidambaram is expected to introduce the Direct Tax Code Bill in the budget session. The bill incorporates provisions related to wealth tax; currently, there is a separate act dealing with wealth tax. The 600 sections of the existing Income-tax Act have been reduced to 360 in the new bill which, experts said, would use illustrative examples to explain the implications of a tax.
The bill, they added, also carries all information relating to a certain tax or rule at once place. For instance, the current act carries information on tax deduction at source (TDS) at various places and in various sections. The bill would have it all in one place.
The bill is also expected to do away with the term ‘previous year’ that has confused legions of taxpayers. It sticks to the widely accepted and understood ‘financial year’.